Raising capital for emerging growth companies has never been easy. Most entrepreneurs truly believe they have the next “big idea” and at first believe that venture capitalists (“VC’s”) will beat a path to their door. They soon find out it is very difficult to get someone to listen to them, never mind fund them. After several failed attempts they then realize they have to adjust their thinking when it comes to raising their initial capital. Most new business ideas today are initially funded with “seed capital” by friends and family. Contrary to popular belief VC’s are not lining up to fund start ups. They see 100 deals a week. Their freshly minted MBA’s review those deals and may pick 5 out of 100 that they want to pursue. Out of the 5 maybe one will get funded. Not very good odds, I sit? The only guys that get preferential treatment are those individuals who have a proven track record. In other words, they had a previous VC funded deal that was a huge success so the VC’s are “all ears” when they come back with another billion dollar idea.

VC’s have this “I want to invest in the next Google” syndrome. They all search for the next billion dollar baby. Most have a very simple approach. If I invest $10MM in ten companies and one of them gets a multi billion dollar valuation they have made probably 50X to 100X their money. With those kinds of home runs they can afford to take complete losses on 9 out of 10 investments.

The problem is most companies don’t have billion dollar market cap potential. In most cases they have a proven business model that, with enough capital pumped into it, can expand either nationwide or globally. There business model is for slow, steady growth. It is not the 0 to 100 miles an hour in six seconds that the VC’s are always searching for. Therefore VC’s are not a viable option for most entrepreneurs seeking capital, especially if they are seeking to go public through a reverse merger.

And, if you think for a minute you are going to go to some conference and meet the right VC and get your deal funded – think again. Unless you are represented by someone who has a relationship with the VC community you are not going to be able to get their attention. The VC’s want someone they know to do most of the heavy lifting by sifting through possible candidates and bringing them the cream of the crop.

By the way, did I mention that regardless of the valuation of your company or how much money you need the VC’s will always ask for 50% of your company? So, if you’re smart you will increase the value of your company and ask for 50% of the value in funding.

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Investment Bankers are individuals who represent a company when they are seeking to raise money in the public or private marketplace. Keep in mind investment bankers are working on as many as a dozen different deals at any given time. Many of these firms specialize in certain industries or types of deals they will consider. The average investment banking firm sees over a 100 deals a week.

Their job is to present your deal to a variety of funding sources. Most of their funding sources have very rigid criteria as to the terms and conditions of their financings and the minimum and maximum amounts they will fund.

Because the investment bankers do see too many deals it is imperative that you have a business consultant representing you that has previous contacts or relationships with these firms. If you don’t have representation your deal will never get an opportunity to be reviewed. The investment bankers look to the consultants they trust to show them only the deals that meet their criteria for funding. Most of the firms are particular about which company’s they accept, but they do a very good job at getting their deals funded because if the deal doesn’t get funded, they don’t get paid.

Just because an investment banker takes you on as a client is no guarantee that your deal will get funded. As it states in the mutual fund brochures “past performance is not an indication or guarantee of future performance”. However, if you can find an investment banking firm that previously funded a company in your industry and the company’s stock performed well after the funding you have a good shot at having them be successful in raising you the capital you seek.

The average fee for raising capital today is usually a combination of 10% cash compensation plus 10% warrant coverage. A warrant gives the investment bankers an opportunity to cash in on the company’s stock if it appreciates in value after the company goes public.

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There are a multitude of different types of financial structures to fund a deal but, for the most part, today’s deals for OTCBB companies get funded through what is commonly referred to as a PIPE (Private Investment in Public Equity) transaction. There are two common types of PIPE financings. Straight equity (preferable) or Convertible Debenture. In Part IV and Part V of this series we will take a closer look at how these two very different types of financings can either make or break your company.

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Straight equity is easy enough to figure out. Your company sells restricted common shares of stock at a stated price, usually at a discount to the market, and the investors either get registration rights to sell those shares in 90 to 120 days or they wait the required 12 months to sell their restricted shares if you do not register them. The advantages of the equity financing is that you know exactly how many shares you sold and at what price. Provided you have sold your shares at a price that is close to the current market price you will not have to worry about large price fluctuations in your stock.

Many companies today also include a warrant attached to their equity financing. The warrant is usually priced anywhere from 25% to 100% about the initial price of the equity shares but gives the investors a period of three to five years to exercise their warrants.

For example, let’s say you sold shares in a $1,000,000 equity placement at $1.00 per share and you included a three year warrant exercisable @ $1.50 a share. This is usually referred to as a “Unit”. Now each investor who purchased 100,000 shares for $100,000 would also get an opportunity to buy an additional 100,000 shares for $150,000 anytime in the next three years regardless of how high the stock price went.

Now your company has raised $1,000,000 but it also has positioned you to raise an additional $1,500,000 from investors exercising their warrants. This gives the investors an opportunity to make additional profits and the company an opportunity to raise additional funds without having to pay additional legal fees for a second Private Placement Memorandum (“PPM”). You can also provide provisions in the warrant coverage that allows your company to repurchase the warrants at a substantial discount if the investors do not exercise their warrants within a certain period of time after the stock surpasses a certain price target. This is sometimes referred to as a “use it or lose it” provision.

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Convertible Debentures are, in most cases, the kiss of death when it comes to financing for a new company seeking to raise capital. It is a financial structure that can destroy a company if the Officers and Directors do not pay attention to the terms and conditions of the financing. So, the devil is in the details so to speak. Many of the hedge funds specialize in this type of structure. They take the amount of money you are trying to raise and turn it into a convertible loan with an interest rate from anywhere from 8% to 12%. They then can convert the loan into shares of stock at a discount to the bid price. Sounds pretty good so far, doesn’t it. Here is the downside. Company CEO’s assume that as the price of the stock goes up the hedge fund will make money on the increase in the price of the stock from the preset strike or price they are paying, right? Well, yes and no. The hedge fund also puts in a protective devise that allows them to “adjust” the strike price of the stock if it takes a dive. So, what’s wrong with that you say? Wells let’s look at two very different scenario’s and how it could effect your company.

Company “A” has just received $10 million on a Convertible Debenture. The loan can be converted into shares at $1.00 per share (the “Strike Price”). Company A is the rage and the stock starts to take off and by the time the hedge fund gets their shares registered the stock is now trading at $3 per share. The hedge fund starts liquidating their shares @ $1.00 a share but there is enough interest in the company that the shares are absorbed in the marketplace and the shares continue to trade between $2 and $3 a share after the hedge fund has sold off all of their shares. The Company has issued the hedge fund its 10 million shares and everyone is happy.

Company “B” has just received a similar $10 million funding on a Convertible Debenture. The loan can also be converted into shares at $1.00 per share. Company B business plan is not going as scheduled and investors are starting to sell off the stock. The stock price falls to $.80 a share. The hedge fund gets their shares registered and they start selling the stock short until all of their shares are liquidated. There is no support for the stock so the stock price continues to drop until it reaches $.01 a share. The hedge fund now comes to Company B and converts all of their shares at less than a penny. The Company has to issue the hedge fund 1 BILLION shares because their stock dropped to one penny. The hedge fund doesn’t care because they were selling shares all the way down as the stock dropped. The hedge fund is constantly hitting the bid. Now I know you are going to say, “But selling an OTCBB stock short is illegal” and I will agree. But that is how these guys make their money.

The actual definition of a hedge fund is as follows:

“A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals.”

The bottom line is this. If the hedge fund can make more money off of you if the stock goes up and has momentum, they will. If they think they can make more money by shorting your stock, they will. So be very careful who you get in bed with. It can make or break your company.

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There is not an investment banker that will even consider looking at your deal unless you have three things:

1. Executive Summary

2. Business Plan

3. Power Point presentation

The first thing an investment banker will want to read is your Executive Summary. However, this is the last document you prepare after you have written your Business Plan. In essence an Executive Summary is a condensed two page version (plus a third page with resumes) that gives a potential investor a “snapshot” of your company, product and business model.

The Executive Summary should clearly describe what your company does in the first paragraph. If you can not peak a prospective investor’s interest or he does not understand what business you are in the first paragraph your Executive Summary will end up in the circular file. (waste basket)

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Writing an Executive Summary

Most guides to writing an executive summary miss the key point: The job of the executive summary is to sell, not to describe.

The executive summary is often your initial face to a potential investor, so it is critically important that you create the right first impression. Contrary to the advice in articles on the topic, you do not need to explain the entire business plan in 250 words. You need to convey its essence, and its energy. You have about 30 seconds to grab an investor’s interest. You want to be clear and compelling.

Forget what everyone else has been telling you. Here are the key components that should be part of your executive summary:

1. The Grab: You should lead with the most compelling statement of why you have a really big idea. This sentence (or two) sets the tone for the rest of the executive summary. Usually, this is a concise statement of the unique solution you have developed to a big problem. It should be direct and specific, not abstract and conceptual. If you can drop some impressive names in the first paragraph you should—world-class advisors, companies you are already working with, a brand name founding investor. Don’t expect an investor to discover that you have two Nobel laureates on your advisory board six paragraphs later. He or she may never get that far.

2. The Problem: You need to make it clear that there is a big, important problem (current or emerging) that you are going to solve. In this context you are establishing your Value Proposition—there is enormous pain out there, and you are going to increase revenues, reduce costs, increase speed, expand reach, eliminate inefficiency, increase effectiveness, whatever. Don’t confuse your statement of the problem with the size of the opportunity (see below).

3. The Solution: What specifically are you offering to whom? Software, hardware, service, combination? Use commonly used terms to state concretely what you have, or what you do, that solves the problem you’ve identified. Avoid acronyms and don’t try to use this opportunity to create and trademark a bunch of terms that won’t mean anything to most people. You might need to clarify where you fit in the value chain or distribution channels—who do you work with in the ecosystem of your sector, and why will they be eager to work with you. If you have customers and revenues, make it clear. If not, tell the investor when you will.

4. The Opportunity: Spend a few more sentences providing the basic market segmentation, size, growth and dynamics—how many people or companies, how many dollars, how fast the growth, and what is driving the segment. You will be better off targeting a meaningful percentage of a well-defined, growing market than claiming a microscopic percentage of a huge, mature market. Don’t claim you are addressing the $24 billion widget market, when you are really addressing the $85 million market for specialized arc-widgets used in the emerging wocket sector.

5. Your Competitive Advantage: No matter what you might think, you have competition. At a minimum, you compete with the current way of doing business. Most likely, there is a near competitor, or a direct competitor that is about to emerge (are you sufficiently paranoid yet??). So, understand what your real, sustainable competitive advantage is, and state it clearly. Do not try to convince investors that your only competitive asset is your “first mover advantage.” Here is where you can articulate your unique benefits and advantages. Believe it or not, in most cases, you should be able to make this point in one or two sentences.

6. The Model: How specifically are you going to generate revenues, and from whom? Why is your model leverageable and scaleable? Why will it be capital efficient? What are the critical metrics on which you will be evaluated—customers, licenses, units, revenues, margin? Whatever it is, what impressive levels will you reach within three to five years?

7. The Team: Why is your team uniquely qualified to win? Don’t tell us you have 48 combined years of expertise in widget development; tell us your CTO was the lead widget developer for Intel, and she was on the original IEEE standards committee for arc-widgets. Don’t just regurgitate a shortened form of each founder’s resume; explain why the background of each team member fits. If you can, state the names of brand name companies your team has worked for. Don’t drop a name if it’s an unknown name, and don’t drop a name if you aren’t happy to give the contact as a reference at a later date.

8. The Promise ($$): When you are pitching to investors, your fundamental promise is that you are going to make them a boatload of money. The only way you can do that is if you can achieve a level of success that far exceeds the capital required to do that. Your Summary Financial Projections should clearly show that. But if they are not believable, then all of your work is for naught. You should show five years of revenues, expenses, losses/profits, cash and headcount. It might also make sense to show a key driver, such as number of customers or units shipped.

9. The Ask: This is the amount of funding you are asking for now. This should generally be the minimum amount of equity you need to reach the next major milestone. You can always take more if investors are willing to make more available, but it is hard to take less. If you expect to be raising another round of financing later, make that clear, and state the expected amount.

You should be able to do all this in six to eight paragraphs, possibly a few more if there is a particular point that needs emphasis. You should be able to make each point in just two or three simple, clear, specific sentences.

This means your executive summary should be about two pages, maybe three. Some people say it should be one page. They’re wrong. (The only reason investors ask for one page summaries is that they are usually so bad the investors just want the suffering to be over sooner.) Most investors find that there is not enough information in one page to understand and evaluate a company.

Please remember that the outline above should not be applied rigidly or religiously. There is no template that fits all companies, but make sure you touch in each key issue. You need to think through what points are most important in your particular case, what points are irrelevant, what points need emphasis, and what points require no elaboration.

Some other general points:

• Do not lead with broad, sweeping statements about the market opportunity. What matters is not market size, but rather compelling pain. Investors would rather invest in a company solving a desperate problem for a small growing market, than a company providing an incremental improvement for a large established market.

• Don’t acronym your own name. Sun Microsystems did not build its brand by calling itself “SMI.” (Of course, if you know where the name Sun came from, you understand this is an inside joke.)

• Drop names, if they are real; don’t drop names if they are smoke. If you have a real partnership with a brand name company, don’t hide your lantern under a bushel basket. If you consulted for Cisco’s HR department one week, don’t say you worked for Cisco.

• Avoid “purple farts”—adjectives that sound impressive but carry no substance. “Next generation” and “dynamic” probably don’t mean anything to your readers (unless you are talking about DRAM). Everybody thinks their software is “intelligent” and “easyto- use,” and everyone thinks their financial projections are “conservative.” Explain your company the way you would to a friend at a cocktail party (after one drink, not five).

• State your value proposition and competitive advantage in positive terms, not negative terms. It is what you can do that is important, not what others cannot do. With the one or two most obvious competitors, however, you may need to be very explicit: “Unlike Cisco’s firewall solution, our software can operate ….”

• Use simple sentences, not multi-tiered compound sentences.

• Use analogs, as long as you are clarifying rather than hyping. You can say you are using the Google model for generating revenues, as long as you don’t say you expect to be the next Google.

• Go back and reread each sentence when you’re done: Are they clear, concise and compelling?

Finally, one of the most important sentences you write will not even be in the executive summary—it is the sentence that introduces your company in the email that you or a friend uses to send the executive summary. Your summary might not even get read if this sentence is not well-crafted. Again, it should be specific and compelling. It should sell your company, not just describe it.

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The first thing that a Company must do prior to raising capital is preparing a comprehensive business plan. Most entrepreneurs loath the time and effort it will take to prepare a proper business plan. But just because you believe you know your business inside and out it does not excuse you from putting it in writing. A business plan clarifies exactly what you want to do and how you are going to get there. It is time consuming and you will be constantly tweaking it but in the end you have a much clearer vision of business and the costs associated with moving it forward.

If you do not know how to construct comprehensive business plan then hire a professional to assist you. If you are too dam lazy to spend the time to write one or don’t think you need one then you have no business trying to take your company public in the first place.

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PowerPoint Presentations (“PP”) have become the defacto standard for company’s to present their story to investment bankers, venture capitalists and other funding sources. The reason that funding sources had switched to reading PP is it gives them the ability to review more deals at a quicker pace.

If you want to get a funding sources attention there is no better way than providing a killer PP. The PP should have no less than 10 and no more than 15 slides. Twelve is the perfect number. Each slide of the PP should contain short key bullet points. Try to limit bullet points to four a page. The old saying that a picture is worth a thousand words is especially true when it comes to PP. If a graph, illustration, etc can get the message across by all means use it.

Here are the top 8 areas that a venture capitalist is looking for in your presentation

1. Clarity Be clear, concise and succinct. Don’t blather on about a subject. It makes you look as though you are not practiced, articulate about your business or considerate of your audience’s time.

2. Bullet Points Venture capitalists think in terms of bullet points. (You can easily imagine this as you catch them looking at their watches before you are even 5 minutes into your presentation). So try to place the most important information/message that you want them to retain in bullet point fashion.

3. Communicate Like the Executive Summary to your Business Plan, your presentation must clearly communicate:

Product or Service
Business Objective
Target Market
Market Size and Opportunity
Sustainable Competitive Advantage
Management Team
What You Will Need to Succeed

4. Be Honest & Direct Don’t be inhibited when asking for what you will need from a venture capitalist to move your company forward. Venture capitalists can offer a great deal of help and guidance in finance and management. It is important that you have a realistic perspective of your strengths and weaknesses and are willing to ask for help.

5. Use Demos, Graphs & Illustrations Demos of your product/services are good. Make sure that your demo paints a picture of how a customer will use your product. This will help the VC visualize your product’s application in the market, and confirms your knowledge of the target market. Don’t get lost in the ‘gee-whiz’ technology. Stay focused on the application and end benefit to your product. The demo’s objective is to illustrate who, how and why a customer will use your product. Finally, make sure the demo works well. Practice incorporating it into your presentation a lot.

6. Substantiate the Marketplace Present a complete picture of your market opportunity. Nothing will excite a VC audience more than substantiating why a large market will demand your product or service.

7. Be Passionate & Enthusiastic Investors love to work with entrepreneurs because they are excited about their product, passionate about meeting a customer need and talented visionaries. Don’t hold back when presenting. Enthusiasm is contagious.

8. Presentation Timing You are typically granted 60 minutes in your initial presentation meeting. Keep the presentation to 20 – 30 minutes allowing plenty of time for Q & A. Also remember to use the 1-Slide-Per-2-Minute rule.

Some individuals are just ‘naturals’ at presenting. Other individuals would rather have a root canal performed on them. No matter what your level of expertise, chances are you can benefit from brushing up on this valuable skill and I strongly recommend Mandel Communications as a source for training. (mandelcom.com).

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As we have seen getting prepared for presenting your company to the financial community is no small task. There are a multitude of decisions to make prior to assembling the information and providing a proper format for your presentation.

Keep in mind you will be spending close to $1,000,000 for the OTCBB shell and associated costs prior to raising any capital for your company. If you do not hire a competent, experienced business consultant to guide you through the shark invested waters then you are penny wise and dollar foolish. A good consultant will more than pay for himself through the associates he can bring to the table: i.e. attorneys, accountants, investor relations and public relations professionals. This is over and above his main focus which is to show your deal to the right people within the investment banking community and negotiate the best deal for you and your company.

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