Archive for June, 2010

Funding Readiness – Findings from HIFin Assessments

Friday, June 11th, 2010

For an early stage high-tech entrepreneur, fund raising is always an interesting topic.  For some (especially in the current environment) just the mention of the topic raises the blood pressure and invokes lots of difficult questions.  How disruptive will it be on operations?  Venture funding or Angel?   Will investors take control?  What should I cover in my pitch?

The list goes on and on…most important, you should be asking – what are the typical shortcomings and how do I improve my odds of success?

So, the partners at DaggerBoard took it upon ourselves to develop a standard framework to improve the entrepreneurs readiness and to avoid the common shortcomings in an institutional funding pitch.  We call the methodology the Hierarchy of Institutional Financing (HIFin™).   The framework is based on 6 critical dimensions essential for a funding pitch and it was developed in concert with our experience along with advice from leading angel investors, venture capital professionals and feedback from CEO’s that have been through the process.

To date we have analyzed hundreds of investor pitches since we began the practice and wanted to share some of our aggregate findings across the primary 6 dimensions that illustrate where many pitch decks are doing well and where others are falling short.

Highest Scoring Categories:

  • Market Size & Value Proposition – the addressable market being targeted, trends that impact the company, and applicability and power of the value proposition
  • Leadership & Team – the experience and completeness of the management team, board and advisors, as well as CEO’s compatibility with an outside investment

In general entrepreneurs do a good job sizing the addressable market and discussing their unique value proposition.  It’s also no surprise that describing the executive team and advisors comes in with one of the highest rating.

Moderate Scoring  Categories:

  • Product & Go To Market Strategy – the completeness of the product offering, technical validity, customer adoption, go forward roadmap and go to market approach
  • Competition & Ecosystem – the company’s ability to establish, defend and differntiate its selling proposition and IP versus competitors and adjacent players and clearly define partnership opportunities and threats

Its important to point out that the assessment model deliberately couples Product & Go To Market Strategy.  Too often a pitch deck is filled with details on the product but has little on the GTM strategy.  These two dimensions are critically linked and without a solid GTM strategy the product falls short in far too many funding pitches.  It is critical for entrepreneurs to clearly describe how the product will get to the buyers in the product portion of the investor pitch.

With respect to Competition & Ecosystem, entrepreneurs normally do well in dissing the competition and almost always include the competitive grid showing superiority.  However, they normally fall short in describing the ecosystem.  The ecosystem being the “related sectors” where potential competitors, acquirers, partners or alliances exist.  This is especially important new markets (versus disruptive replacements) where investors may be struggle to understand the market domain.  An illustrative landscape diagram of the adjacent sectors and companies in them is ideal.

Lowest Scoring  Categories

  • Terms & Valuations – the valuation expectations relative to industry trends/norms, the suitability of the existing and future capital structure as well as the likelihood for a liquidity event with tangible return
  • Financials – the detailed assumptions and validation behind the revenue models and financial projections as well as the match between funding expectations and requirements.

We generally recommend that valuation be done verbally and not included in the deck.  However, the entrepreneur must be ready to discuss and support valuation expectations with solid arguments.  By the way, one outlandish exit transaction is not adequate support.  Too often we find the entrepreneur poorly equipped to support their valuation position.  As this category is the pinnacle of the HIFin model,  strong arguments in each the five earlier dimension will drive optimal valuation results.

The most surprising part of our findings is that financials scored the lowest!  In our experience, far too many of the entrepreneurs are not properly prepared to discuss and support the financial expectations of an institutional investor.  You need a well thought out financial model that includes 3-5 year revenue projections, quarterly projected P&L statements and projected balance sheets – no exceptions.

Bottom line – when you make the commitment to raising institutional also make the commitment to score High on the HIFin model and your odds of success will greatly improve!