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2 Legal Notices All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic or mechanical including recording, photocopying or by any other information storage or retrieval system, without the written consent of the publisher. This publication is sold as an educational reference only. While all attempts have been made to verify information provided in this publication, neither the author nor the Publisher assumes any responsibility for errors, omissions or contrary interpretation of the subject matter herein. This publication is not intended for use as a source of legal or accounting advice. The Publisher wants to stress that the information contained herein may be subject to varying state and/or local laws or regulations. All users are advised to retain competent counsel to determine what state and/or local laws or regulations may apply to the user s particular business. The purchaser or reader of this publication assumes responsibility for the use of these materials and information. The author and Publisher assume no responsibility or liability whatsoever on the behalf of any purchaser or reader of these materials. We expressly do not guarantee any results you may or may not get as a result of following our recommendations. Growthink, Inc. All rights reserved.

3 Table of Contents Introduction to Funding...1 Overview...1 The #1 Myth About Raising Money...2 Growthink s Funding Pyramid : Why Most Companies FAIL To Raise Money...3 How to Protect Your Business Ideas When Raising Money...4 The Six Steps To Raising Money...5 Step 1: Developing Your Business Plan...6 Overview...6 The 10 Sections of Your Business Plan...7 Executive Summary...7 Company Analysis...9 Industry Analysis...10 Customer Analysis...13 Competitive Analysis...15 Marketing Plan...17 The Operations Plan...20 Management Team...23 The Financial Plan...24 Appendix...26 Step 2: Figuring Out the LEAST Amount of Money You Need To Achieve Milestones...28 Why Risk Management is Important...28 Establishing Your Risk Mitigating Milestones...29 Creating Your Milestone Chart & Funding Requirements...30 Step 3: Perfecting Your Pitch...32 The Importance of Your Pitch ) The High Concept Pitch ) The PTS Pitch (Problem Then Solution Pitch) ) The Traditional Elevator Pitch Formula...36 Step 4: Getting Involved in Your Affinity Network...38 Step 5: Getting Advisors...41 Why You Need Advisors...41 The Truth About Funding

4 Action Plan for Getting Advisors...42 Once You Get Advisors...44 Step 6: Figuring Out MULTIPLE Forms of Money To Raise...45 Raise MULTIPLE Forms of Money...45 The 3 Core Types of Capital...46 Growthink s Funding Pyramid - The 41 Best Sources of Business Funding Quick Loaners Crowdfunding Creative Funding Social Lending Financial Maneuvering Bank Lines & Loans Strategic Financing Grants Individual Equity Institutional Equity...79 Raising Individual & Institutional Equity...85 Introduction...85 Raising Angel Funding...86 What Do Angel Investors Look Like?...86 Why Angel Investors Invest...88 What Sectors Angels Invest In...89 What Angel Investors Look For in a Company...90 How to Find Individual Angel Investors...91 Re-Cap: Action Plan for Raising Angel Capital...95 Raising Venture Capital...96 What is Venture Capital?...96 The 5 Key Stages of Equity Investments...97 Strategic/Corporate Investors Private Equity Firms The Types of Companies That Venture Capital Firms Finance Market Sectors Where Venture Capital Firms Focus How Venture Capitalists Assess Companies Factors to Consider when Seeking a Venture Capital Firm How to Create Your List of Potential Venture Capital Firms Identifying the Right Partner at a Venture Capital Firm The Three Ways to Contact Venture Capitalists Conclusion The Truth About Funding

5 Introduction to Funding Overview Capital, funding, financing, or money (they all mean the same thing) is the fuel that allows businesses to grow. Without capital, businesses fail. With capital, early stage companies can begin to grow, and mature companies can achieve even greater scale. For early stage companies, particularly those with little or no track record of success, the challenge is to find the capital they need. Because the vast majority of new businesses fail, banks, venture capital firms and other lenders and investors are often highly skeptical and not willing to part with their dollars unless significant conditions are met. However, there are ways to attract this kind of capital, and there are tons of capital sources that are largely overlooked by entrepreneurs. This guide will teach you about the types of funding that are available to your business, and how to access them. The Truth About Funding Page 1

6 The #1 Myth About Raising Money Before we continue, I want to dispel the #1 myth about raising money. This myth is that someone, somewhere has a magical list of investors looking to fund companies like yours. Or that there is some online network of angel investors that are just waiting to meet you so they can fund you. This is just NOT TRUE. One of the main reasons why there is no magical investor list is due to the vast number of businesses seeking funding. I mean if there was this magical list, investors on that list would receive thousands of funding requests every day. And there would be no way to weed through them all to figure out which ones to fund. Sure, there are plenty of individuals and institutions that would love to fund your venture. But you ll have to proactively meet them and tell them about your venture. But don t worry, because in this guide I ll show you how to do just that. The Truth About Funding Page 2

7 Growthink s Funding Pyramid : Why Most Companies FAIL To Raise Money The image below is Growthink s Funding Pyramid. Later in this guide, I will go through all of the funding sources that are available to your business, and explain where each fits within the funding pyramid. But the key point I need you to understand is that some funding sources, like venture capital (which is a type of institutional equity capital), are very hard to raise (they can be raised, and I will show you how to raise them; but they require a significant amount of effort). Conversely, other types of capital, like credit card financing (which I include in the quick loaners category), are generally very easy to raise. And the reason why most companies fail to raise money is they go after the wrong (and typically the hardest to raise) sources of capital. The key, as you will learn later, is to start by raising money at the bottom of the pyramid, and then work upward! The Truth About Funding Page 3

8 How to Protect Your Business Ideas When Raising Money Many companies that are seeking investments have proprietary Intellectual Property (IP) or proprietary ideas. The challenge that many ventures face, however, is that most investors or lenders will not sign non-disclosure agreements (NDAs), and NDAs are critical to maintaining the proprietary nature of the IP. However, this issue can be overcome using the following techniques: 1. Focus on the Benefits of, Markets for, and Applications of the IP: The investor communication documents (e.g., business plan, slide presentation, etc.) should not discuss the confidential aspects of the IP. Rather, the documents should discuss the benefits of the IP, the customer need for the IP, the market size the IP can attract, and the IP s competitive differentiation and advantages. 2. Stage the divulgence of your IP: The process or raising several types of money often starts as a fishing expedition. At your first point of communication, the funding source is fishing to see if your venture might be of interest to them. As you progress through the process (e.g., second meeting), they take it more seriously. By they time the funding source is ready to conduct due diligence (to spend more time and energy into really scrutinizing the investment opportunity), they are extremely serious about funding your company. Most funding sources aren t in the business of stealing people s ideas. However, during your initial meeting, when funding sources might still be fishing, it is not a good idea to reveal proprietary information (just focus on benefits). However, when they get serious and start investing time into assessing your company, it The Truth About Funding Page 4

9 will be imperative for them to review your proprietary information in order to make an informed decision regarding whether or not to fund your company. The solution to your IP problem is thus to stage the divulgence of your IP. That is, during the first contact, you reveal little (just the benefits of the IP). During each point of contact, you divulge more and more information. When the funding source reaches a point that they are really serious about funding your company, they may sign a NDA and/or you may feel comfortable sharing more of your proprietary information with them. The Six Steps To Raising Money There are six steps you need to follow to raise money: 1. Develop your business plan 2. Figure out the least amount of money you need to achieve milestones 3. Perfect your pitch 4. Get involved in your affinity network 5. Get advisors 6. Figure out MULTIPLE forms of money to raise The following sections of this guide go through these six steps one by one. The Truth About Funding Page 5

10 Step 1: Developing Your Business Plan Overview A business plan is a roadmap for a growing company. It also serves to communicate your company's value proposition to employees, advisors, partners, customers and importantly investors and lenders. Business plans are the vehicle by which companies get in the door, and are the documents most heavily scrutinized by equity investors and bank lenders. It is critical that your company develop a strong business plan if you seek financing from these sources. Importantly, even though funding sources like Crowdfunding do not explicitly require you to create a business plan, you should develop your plan anyway. That s because your business plan will 1) force you to really think through the business opportunity, 2) confirm that your venture is viable, 3) help you assess your business game plan and 4) determine the financial resources you need. The latter, determining the financial resources you need, is absolutely critical as it will guide you in figuring out which funding sources to go after. The remainder of this section walks you through how to prepare a comprehensive business plan. Note that your plan does not need to be as thorough as this this is the gold standard. The Truth About Funding Page 6

11 The 10 Sections of Your Business Plan Your business plan should be organized into ten key sections as follows: 1. Executive Summary 2. Company Analysis 3. Industry Analysis 4. Customer Analysis 5. Competitive Analysis 6. Marketing Plan 7. Operations Plan 8. Management Team 9. Financial Plan 10. Appendix Executive Summary The Executive Summary precedes the full business plan. Its length should be short, typically only one to two pages and certainly no longer than three pages. This is because the Executive Summary is not meant to tell the whole story of the business opportunity. Rather, the summary must simply stimulate and motivate the lender to learn more about the company in the body of the plan. The Executive Summary must include the following critical elements: 1. A concise explanation of the business 2. A description of the market size and market need for the business 3. A discussion of how the company is uniquely qualified to fulfill this need The Truth About Funding Page 7

12 In addition, a stand-alone Executive Summary should include summaries of each essential elements of the business plan. This includes paragraphs addressing each of the following: Customer Analysis: What specific customer segments the company is targeting and their demographic profiles Competition: Whom the company's direct competitors are and the company's key competitive advantages Marketing Plan: How the company will effectively penetrate its target market Financial Plan: A summary of the financial projections of the company Management Team: Biographies of key management team and Board members The Executive Summary is the most critical element of the business plan. If it does not grab the lender s attention, the lender will neither read nor request the full business plan. As such, spend time developing the best possible summary. As mentioned above, having a concise explanation of your business is critical. In fact, your Executive Summary must start with this explanation. In the Perfecting Your Pitch section of this report, you will learn techniques for creating the pitch that will best explain your business, and which you should include at the beginning of your Executive Summary. The Truth About Funding Page 8

13 Company Analysis The Company Analysis section of your business plan has three main goals, to give a brief profile of your company, detail your past accomplishments and specify your unique qualifications. 1. Company Profile Start with a detailed profile of your company including your: Date of formation Legal structure (LLC vs. C-Corp., etc.) Office location(s) Business stage (start-up vs. undergoing R&D vs. serving customers, etc.) 2. Past Accomplishments Include a chart (or bullets) of your company's past accomplishments, including descriptions and dates when: Prior funding rounds were received Products and services were launched Revenue milestones were reached (e.g., date when sales surpassed the million dollar mark) Key partnerships were executed Key customer contracts were secured Key employees were hired This information is critical to lenders as it indicates the company's ability to execute upon a previous game plan. Attaining milestones is an excellent The Truth About Funding Page 9

14 indicator for potential lenders that their money will eventually be repaid and for equity investors, that they will earn a return on their investment. 3. Unique Qualifications Finally, detail why your company is uniquely qualified to succeed. This is often referred to as the company's unfair competitive advantage. This advantage could include a world-class management team, proprietary technology, proven operational systems, key partnerships, long-term contracts with major customers, as well as other successes-to-date. Industry Analysis The Industry Analysis section of your business plan describes the market in which you will be completing, including the market size, dynamics and trends. In developing their business plans, companies of all sizes face the challenge of determining the size of their markets. To begin, companies must present the size of their relevant market in their plans. The relevant market equals the company's sales if it were to capture 100% of its specific niche of the market. Conversely, stating that you were competing in the $1 trillion U.S. healthcare market, for example, is a telltale sign of a poorly reasoned business plan, as there is no company that could reap $1 trillion in healthcare sales. Defining and communicating a credible relevant market size is far more powerful than presenting generic industry figures. The challenge that many firms face is their inability to size their relevant markets, particularly if they are competing in new or rapidly evolving markets. On one hand, the fact that the markets are new or evolving is the reason why there may be a large opportunity to establish them and become the market leader. Conversely, lenders, shareholders and senior management are often skeptical to The Truth About Funding Page 10

15 invest resources because, since the markets do not yet exist, the markets may be too small, or not really exist at all. Growthink has encountered the challenge of sizing emerging markets numerous times and has developed a proprietary methodology to solve the problem. To begin, it is critical to understand why traditional market sizing methodologies are ill equipped to size emerging markets. To illustrate, if a research firm were to use traditional methods to size a mature market such as the coffee market in the United States, it would consider demographic trends (e.g., aging baby boomers), psychographic trends (e.g., increased health consciousness), past sales trends and consumption rates, price movements, competitor brand shares and new product development, and channels/retailers among others. However, conducting such an analysis for emerging markets presents a challenge as several of these factors (e.g., past sales, demographics of the customer when there are no current customers) don't exist because the markets are presently untapped. Use two approaches The methodology required to size these new markets requires two approaches. Each approach will yield a different approximation of the potential market size, and often the figures will work together to provide a solid foundation for the market's potential. Growthink calls the first approach peeling back the onion. In this approach, we start with the generic market (e.g., the coffee market) that that company is trying to penetrate, and remove pieces of that market that it will not target. For instance, if the company created an ultra high-speed coffee maker that retailed for $600, it would initially reduce the market size by factors such as The Truth About Funding Page 11

16 retail channels (e.g., mass marketers would not carry the product), demographic factors (lower income customers would not purchase the product), etc. By peeling back the generic market, you eventually will be left with only the relevant portion of it. The second methodology requires assessing the market from several angles to approximate the potential market share, answering questions including: Competitors: who is competing for the customer that you will be serving; what is in their product pipeline; once you release a product/service, how long will it take them to enter the market, who else may enter the market, etc. Customers: what are the demographics and psychographics of the customers you will be targeting; what products are they currently using to fulfill a similar need (substitute products); how are they currently purchasing these products; what is their degree of loyalty to current providers, etc. Market factors: what other factors exist that will influence the market size -- government regulations; market consolidation in related markets, price changes for raw materials, etc. Case Studies: what other markets have experienced with similar transformations and what were the customer adoption rates in those markets, etc. While these methodologies are often more painstaking than traditional market research techniques, they can be the difference in determining whether your company has the next ipod or the next Edsel. Importantly, going through this exercise will better determine the financial viability of your venture. The Truth About Funding Page 12

17 Customer Analysis The Customer Analysis section of the business plan assesses the customer segments that the company serves. In it, the company must: 1. Identify its target customers 2. Convey the needs of these customers 3. Show how its products and services satisfy these needs Precisely Define Your Customers The first step of the Customer Analysis is to define exactly which customers the company is serving. This requires specificity. It is not adequate to say the company is targeting small businesses, for example, because there are several million of these types of customers. Rather, the plan must identify precisely the customers it is serving, such as small businesses with 10 to 50 employees based in large metropolitan cities on the West Coast. Once the plan has clearly identified and defined the company's target customers, it is necessary to explain the demographics of these customers. Questions to be answered include: 1. How many potential customers fit the given definition and is this customer base growing or decreasing? 2. What is the average revenues/income of these customers? 3. Where are these customers geographically based? The Truth About Funding Page 13

18 Detail the Needs of Your Customers & Show How You Satisfy Them After explaining customer demographics, the plan must detail the needs of these customers. Conveying customer needs could take the form of past actions (X% have purchased a similar product in the past), future projections (when interviewed, X% said that they would purchase product/service Y) and/or implications (because X% use a product/service which our product/service enhances/replaces, then X% need our product/service). The business plan must also detail the drivers of customer decision-making. Sample questions to answer include: 1. Do customers find price to be more important than the quality of the product or service? 2. Are customers looking for the highest level of reliability, or will they have their own support and just seek a basic level of service? Show An Understanding of How Customers Make Decisions There is one last critical step in the Customer Analysis -- showing an understanding of the actual decision-making process. Examples of questions to be answered here include: 1. Will the customer consult others in their organization/family before making a decision? 2. Will the customer seek multiple bids? 3. Will the product/service require significant operational changes (e.g., will the customer have to invest time to learn new technologies and will the The Truth About Funding Page 14

19 product/service cause other members within the organization to lose their jobs? etc.) It is essential to truly understand customers to develop a successful business and marketing strategy. As such, sophisticated lenders require comprehensive profiles of a company's target customers. By spending the time to research and analyze your target customers, you will develop both enhance your business strategy and funding success. Competitive Analysis When developing the competition section of your business plan, companies must define competition correctly, select the appropriate competitors to analyze, and explain its competitive advantages. Who are your competitors? To start, companies must align their definition of competition with lenders. Lenders define competition as any service or product that a customer can use to fulfill the same need(s) as the company fulfills. This includes firms that offer similar products, substitute products and other customer options (such as performing the service or building the product themselves). Under this broad definition, any business plan that claims there are no competitors greatly undermines the credibility of the management team. In identifying competitors, companies often find themselves in a difficult position. On one hand, they want to show that they are unique (even under the lender s broad definition) and list no or few competitors. However, this has a negative connotation. If no or few companies are in a market space, it implies that there may not be a large enough customer need to support the company's products and/or services. The Truth About Funding Page 15

20 Direct and Indirect Competitors Business plans must detail direct and, when applicable, indirect competitors. Direct competitors are those that serve the same target market with similar products and services. Indirect competitors are those that serve the same target market with different products and services, or a different target market with similar products and services. After identifying competitors, the business plan must describe them. In doing so, the plan must also objectively analyze each competitor's strengths and weaknesses and the key drivers of competitive differentiation in the marketplace. Perhaps most importantly, the competition section must describe the company's competitive advantages over the other firms, and ideally how the company's business model creates barriers to entry. Barriers to entry are reasons why customers will not leave once acquired. In summary, too many business plans want to show how unique their venture is and, as such, list no or few competitors. However, this often has a negative connotation. If no or few companies are in a market space, it implies that there may not be a large enough customer need to support the venture's products and/or services. In fact, when positioned properly, including successful and/or public companies in a competitive space can be a positive sign since it implies that the market size is big. It also gives lenders the assurance that if management executes well, the venture has substantial profit and liquidity potential. The Truth About Funding Page 16

21 Marketing Plan The Marketing Plan section of the business plan demonstrates to lenders how a company will penetrate the market with its products and services. The Marketing Plan should include the four P's -- Product, Promotions, Price, and Place. Products and/or Services The first P stands for Product, but includes all products and services that the company offers. This section of the business plan should detail all the features of the products and services, how they work, their unique/proprietary attributes, etc. For products that are patented and/or technical in nature, drawings and backup materials should be presented in the Appendix. Most growing companies offer certain products and services today but expect to offer more in the future. It is important to mention both current and future products/services here, but to focus primarily on the short-to-intermediate term horizon. Promotions Promotions include each of the activities that induce a customer to buy the company's products and services. Promotional activities could include advertising, public relations (PR), free samples, discounts, direct mail, telemarketing, partnerships, etc. This section of the business plan discusses which promotions will be used and how they will be used. For instance, if partnerships will be used to secure new customers, the plan must explain which companies are partners, how they will be able to provide new customers, how the partnership will work (from operational/ financial standpoints), etc. The Truth About Funding Page 17

22 This section must be as specific as possible, particularly as it relates to discussing future promotions. To say that a company is going to generate PR in trade magazines is simply too vague. Rather, the plan must explain the type of article/feature that may be written about the firm and why, which specific trade journals that will be targeted and/or the projected publication dates. In discussing how the company will promote itself, it is important to discuss how the company will position itself. This positioning statement details the attributes that customers will assign to the company, its products and services. The choice of promotional activities must support this positioning. For example, discounts might not be consistent with a desire to be considered an upscale brand. Price This section of the plan should detail the price point(s) at which the company's products and services will be sold. If the products/ services are sold as bundles, these should be detailed in this section. Rationale for the pricing should be given when applicable (e.g., why the company has chosen an initiation fee plus monthly membership fees versus a one-time lifetime membership fee). Place The final P refers to Place or Distribution and explains how a company's products and/or services will be delivered to customers. This section is crucial because if customers cannot access products and services, they cannot purchase them. This section is especially critical for high-growth, capital-constrained companies. Attaining profit-effective distribution channels is often the most vexing challenge The Truth About Funding Page 18

23 for these businesses. Examples of distribution methods include retail locations, website, distributors, wholesalers, direct mail catalogs, etc. Many companies have multiple distribution methods to deliver their products and services to customers and each should be detailed here. Detailing the the four P's in the marketing plan is critical in proving to lenders that your company will be able to efficiently and effectively penetrate its market. Partnerships Forging partnerships to improve market penetration has become commonplace, particularly for new economy businesses. And, most companies proudly mention their many partnerships in their business plans. It's the TERMS of the Partnership that Are Really Important The fact is that, regardless of whom the partnership is with, partnerships by themselves are meaningless. What are meaningful are the terms of the partnership. For instance, while it sounds great to have a partnership with a Fortune 500 company, the details of the partnership are what lenders find important. For instance, lenders will look poorly upon a partnership in which the Fortune 500 Company earns 90% commissions on customers it refers. On the other hand, lenders would look favorably upon a more equitable partnership. As such, be sure to detail the specifics of the partnerships. This includes factors such as how the partnership will work, payment terms, contract length, minimum and/or maximum guarantees, the type of customer leads expected from each partner, timing of payments, etc. In addition, if partnerships are a key part of the business plan, expect prudent lenders to interview the partners and scrutinize partnership contracts. The Truth About Funding Page 19

24 Partnerships can be a major factor in the success of growing companies, providing leads, sales, capital and/or other critical benefits. However, ventures should be careful not to place too much emphasis on any one partner in their business plan. Partnership agreements, like other legal agreements, can be breached, and if the venture positions any one partner as critical to its success, this will become a risk factor to lenders. Explain the VALUE of Your Partnerships in Your Business Plan Overall, partners can provide a great boost to growing ventures. Business plans should not only discuss who the partners are, but detail the terms of the partnerships and how they will benefit the company. Finally, the business plan must not place too much emphasis on any one partner in order to convince lenders that the business is capable of success even without it. The Operations Plan The Operations Plan is a critical component of any business plan as it presents the Company's action plan for executing its vision. The Operations Plan must detail 1. The processes that are performed to serve customers every day (short-term processes) and 2. The overall business milestones that the company must attain to be successful (long-term processes). The Truth About Funding Page 20

25 Everyday Processes (Short-Term Processes) Every company has processes to provide its customers with products and services. For instance, Wal-Mart has a unique distribution system to effectively move products from its warehouses to its stores, and finally to its customers' homes. Technology products manufacturers have processes to convert raw materials into finished products. And service-oriented businesses have processes to identify new areas of customer interest, to continually update service features, etc. The processes that a company uses to serve its customers are what transform a business plan from concept to reality. Anyone can have a concept. And more importantly, lenders do not invest in concepts -- they invest in reality. Reality is proving that the management team can execute the concept better than anyone else, and the Operations Plan is where the plan proves this by detailing key operational processes. Business Milestones (Long-Term Processes) The second piece of the Operations Plan is proving that the team will execute the long-term company vision. This is best presented as a chart. On the left side, there should be a list of the key milestones that the Company must reach, and on the right, the target date for achieving them. Sample milestones include expected dates when: New products and services will be introduced to the marketplace Revenue milestones will be attained (e.g., date when sales will surpass million dollar mark) Key partnerships will be executed Key customer contracts will be secured The Truth About Funding Page 21

26 Key financial events will occur (future funding rounds, IPO, etc.) Key employees will be hired Additional text should be used, where necessary, to support the projections laid out in the chart. The next section of this guide, Figuring Out the LEAST Amount of Money You Need To Achieve Your Milestones, will provide more guidance on determine the right milestones for your business. The milestone projections presented in the Operations Plan must be consistent with the projections in the Financial Plan. In both areas, it is important to be aggressive but credible. Presenting a plan in which the company grows too quickly will show the naiveté of the management team, while presenting too conservative a growth plan will often fail to excite the potential lender who will want to ensure that their capital will be repaid quickly. New products and services will be introduced to the marketplace Revenue milestones will be attained (e.g., date when sales will surpass million dollar mark) Key partnerships will be executed Key customer contracts will be secured Key financial events will occur (future funding rounds, IPO, etc.) Key employees will be hired The Truth About Funding Page 22

27 Management Team Even the best new concept or existing plan will fail if executed poorly. The Management Team section of the business plan must prove to the lender why the key company personnel are eminently qualified to execute on the business model. The Management Team section should include biographies of key team members and detail their responsibilities. It is important that these biographies are not merely resumes that include the educational backgrounds and previous job titles and responsibilities of the team members. Rather, biographies should highlight the most relevant past positions that the individuals have held and specific successes in each. These successes could include launching and growing new businesses or managing divisions of established companies. Tailor team bios to your growth stage. Team member biographies should be tailored to the company's growth stage. For instance, a start-up company should emphasize its management's success launching and growing companies. A more mature company should emphasize how team members have successfully operated within the framework of larger enterprises. Depending upon the stage of the company, key functional areas may be missing from the team. This is acceptable provided that the plan clearly defines the roles that these individuals will play and identifies the key characteristics of the individuals that will be hired. However, it is generally not favorable if personnel are missing for ultra-critical roles. For example, a plan that is fundamentally a marketing play should not seek financing without a stellar marketing team. The Truth About Funding Page 23

28 The Management Team section should also include biographies of the company's Advisory Board and/or Board of Directors. While having well-known advisors/board members adds credibility to the business plan, it is highly effective to explain how these advisors will directly impact the company through strategic advice and/or providing conduits to key clients, partners, suppliers, etc. Prove yourselves. In summary, the Management Team section of the business plan is an opportunity to prove to lenders that your company has the necessary talent to succeed. Rather than waste this opportunity by merely showing employee resumes, which could be included in the Appendix, the section should be used to explain precisely how the team is uniquely qualified to execute the venture in its present state. The Financial Plan The Financial Plan section of your business plan must explain how the execution of the company's vision will enable your company to repay the lender s principal and interest payments. As such, it is the section that lenders often spend the most time scrutinizing. There are four key elements to include in this section: 1. Detailed Revenue Streams The Financial Plan should verbally present the revenue model of the company including each area in which the company derives revenue. These revenue streams could include, among others: Sales of products/services Referral revenues Advertising sales The Truth About Funding Page 24

29 Licensing/royalty/commission fees Data sales 2. The Pro-Forma Financial Statements The Financial Plan must numerically detail the revenue model through past (if applicable) and pro-forma (projected) Income Statements, Balance Sheets and Cash Flow Statements. It is critical that the figures used in these statements flow from the analyses in every other section of the business plan. For instance, the relevant market size (Industry Analysis) should be reflected, as should competitors' operating margins (Competitive Analysis), customer acquisition costs (Marketing Plan), employee requirements (Operations Plan), etc. A summary of the financial projections should be presented in the text portion of the plan, while full projections should appear in the Appendix. For existing companies, the Financial Plan should note any significant deviations (e.g., increase in margins) between past and projected results. 3. Validating Assumptions and Projections The Financial Plan must also detail the key assumptions such as penetration rates, operating margins, headcount, etc. It is critical that these assumptions are feasible. For instance, if the company is categorized as a networking infrastructure firm, and the business plan projects 80% operating margins, lenders will raise a red flag. This is because lenders can readily access the operating margins of publicly-traded networking infrastructure firms and find that none have operating margins this high. The Truth About Funding Page 25

30 A key point is that while every company is unique, each bears similarities to other companies. Accessing and basing financial projections on those of similar firms will greatly validate the realism and maturity of the financial projections. 4. Sources and Uses of Funds The Financial Plan should detail the sources and uses of funds. The sources of funds primarily include outside investments (e.g., equity investments, bank loans, etc.) and operating revenues. Uses of funds could include expenses involved with marketing, staffing, technology development, office space, etc. It is critical that you don t run out of money! As such, it is a good idea to be conservative regarding your revenues and expenses. Appendix The Appendix of your business plan is used to support the rest of the plan. Every business plan should have a full set of financial projections in the Appendix, with the summary of these financials in the Executive Summary and the Financial Plan. Other documentation that could appear in the Appendix include: Technology: Technical drawings, patent information, etc. Partnership and/or Customer Letters: Letters from partners and/or customers stating their interest in working with the company can add enormous credibility and validation. The Truth About Funding Page 26

31 Expanded Competitor Reviews: Most companies have several direct and/or indirect competitors. While the Competitive Analysis section of the plan reviews the most direct competitors, adding a more thorough list and description in the Appendix shows that management truly understands the players in the market. Customer Lists: Including a list of key customers that the company is serving in addition to their status and/or type or quantity of product/service being offered. The Truth About Funding Page 27

32 Step 2: Figuring Out the LEAST Amount of Money You Need To Achieve Milestones Why Risk Management is Important I wish I could just say do this and that, and you ll magically raise millions of dollars for your venture. But unfortunately, that s not how capital raising works. One key reason for this is that most sources of money, like banks and institutional equity investors (defined as institutions like venture capital firms, private equity firms and corporations that invest) are essentially professional risk managers. That is, they successfully invest or lend money by managing the risk that the money will be repaid or not. So, your job as the entrepreneur seeking capital is to reduce your risk profile to the investor or lender. For example, let s say that two entrepreneurs want to open a new restaurant. Which is the riskier investment? Entrepreneur A has put together a business plan for the new restaurant. Entrepreneur B has also put together a business plan for the restaurant. And, he has also done the following: put together the menu, secured a deal for leasing space, received a detailed contract with a design/build firm, signed an employment agreement with the head chef, etc. Clearly investing in Entrepreneur B is less risky. Because Entrepreneur B has already has already accomplished some of his "risk mitigating milestones." The Truth About Funding Page 28

33 Establishing Your Risk Mitigating Milestones A "risk mitigating milestone" is an event that when completed, makes your company more likely to succeed. For example, for a restaurant, some of the "risk mitigating milestones" would include: Finding the location Getting the permits and licenses Building out the restaurant Hiring and training the staff Opening the restaurant Reaching $20,000 in monthly sales Reaching $50,000 in monthly sales As you can see, each time the restaurant achieves a milestone, the risk to the investor or lender decreases significantly. And by the time the business reaches its last milestone, it has virtually no risk of failure. To give you another example, for a new software company, the risk mitigating milestones may be: Designing a prototype Getting successful beta testing results Getting the product to a point where it is market-ready Getting customers to purchase the product Securing distribution partnerships Reaching monthly revenue milestones The key point when it comes to raising money is this: you generally do NOT raise ALL the money you need for your venture upfront. You merely raise enough money to achieve your initial milestones. Then, you raise more money later to accomplish more milestones. The Truth About Funding Page 29

34 Yes, you are always raising money to get your company to the next level. Even Fortune 100 companies do this they raise money by issuing more stock in order to launch new initiatives. Creating Your Milestone Chart & Funding Requirements The key is to first create your detailed risk mitigating milestone chart. Not only is this helpful for funding, but it will serve as a great To Do list for you and make sure that you continue to achieve goals each day, week and month that progress your business. So create a detailed risk mitigating milestone chart right now (use the restaurant and software examples above as guides shoot for approximately six big milestones to achieve in the next year, five milestones to achieve next year, and so on for up to 5 years (so include two milestones to achieve in year 5). And alongside the milestones, include the time (expected completion date) and amount of funding you will need to attain them. After you create your milestone chart, you need to determine the milestones that you absolutely must accomplish with the initial funding. Ideally, these milestones will get you to point where you are generating revenues. This is because the ability to generate revenues significantly reduces the risk of your venture; as it proves to lenders and investors that customers want what you are offering. If however your venture will require millions of dollars in investment before generating revenues, consider these options (because raising millions of dollars for an unproven business is extremely challenging): 1. How can you modify your business plan and/or product and service offerings to generate revenues sooner (maybe create/offer a lesser product just to get a customer base and reduce risk)? The Truth About Funding Page 30

35 2. What else can you do to reduce risk (e.g., get letters of intent from customers that they will buy your product when available, get letters of intent from distributors that they will distribute your product, get industry executives to agree to serve on your board to show that they believe your venture will be successful, etc.). By setting up your milestones, you will figure out what you can accomplish for less money. And the key is the less money you need to raise, the easier it generally is to raise it (mainly because the easiest to raise money sources in Growthink s Funding Pyramid offer less dollars). The other good news is that if you raise less money now, you will give up less equity and incur less debt, which will eventually lead to more dollars in your pocket. Finally, when you eventually raise more money later (in a future funding round), because you have already achieved numerous milestones, you will raise it easier and secure better terms (e.g., higher valuation, lower interest rate, etc.). The Truth About Funding Page 31

36 Step 3: Perfecting Your Pitch The Importance of Your Pitch Any good public relations or advertising professional comes up with a pitch or an angle when promoting something. For example, they won t just shout out try this tube of toothpaste. Yet, that s what most entrepreneurs do when raising capital. They just blurt it out with zero marketing appeal. So, importantly, you must realize that you are marketing your company to investors and lenders. And all of your documentation and presentation materials (e.g., your business plan, investor presentation, crowdfunding pitch, etc.) must reflect this. As any Marketing 101 course will tell you, you must speak to the benefits your customers will receive. And no one cares until you give them a reason to care. So you must give funding sources a reason to care. Going back to the toothpaste example, marketers give customers a reason to care for example, with our toothpaste, you ll get whiter teeth, fresher breath, or you won t get cavities, etc. Likewise to access funding your company, you need to focus on what s in it for the funding source. For lenders like banks, it s confidence that they ll get their money back with interest. For professional equity investors, it s confidence that they ll earn a healthy return on investment (ROI). With angel or individual investors, it s often a mixture of ROI and ego -- the cool feeling that they are in at the ground level of an exciting venture. The Truth About Funding Page 32

37 Importantly, in order to get into a real conversation with any potential funding source, you have to quickly (60 seconds or less) get them excited. Once they re excited, they ll invest a critical resource in you their time. And if they don t invest time in you, they ll never invest dollars. In order to quickly excite funding sources and get them to invest time in you, you must perfect your pitch. Your pitch, often called an elevator pitch is a short summary that is used to quickly describe your business. It is typically less than 1 to 2 minutes, or the amount of time you would have together with the investor in an elevator. There are 3 key pitch formulas that you can use to develop your elevator pitch. You ONLY need to develop one pitch. But try the three formulas below and go with your favorite of the 3 pitches you develop. 1) The High Concept Pitch A high concept pitch distills a company s vision into a single sentence. Hollywood has perfected the art of the high concept pitch: It s Jaws in space! [Aliens] A bus with a bomb! [Speed] Here are some high concept pitches for companies. Friendster for dogs. [Dogster] Netflix for books [Bookswim] The high concept pitch is great in that it allows investors and others to quickly understand what your company is doing. Bookswim s Netflix for books is a great example. When you hear Netflix for books most people instantly realize The Truth About Funding Page 33

38 that Bookswim rents books over the Internet. Not only does the high concept pitch allow folks to quickly understand what the company is doing, but it allows them to easily spread the word. Investors will use the pitch when they tell their partners about your company. Customers can use the pitch when they rave about your product. The press can use the pitch when they cover your company. And so on. So, come up with a high concept pitch for your company. Use the following exercises to help: 1. What successful and well-known companies do you share similarities to? Company #1 Company #2 2. How are you similar to those companies? Company #1 Company #2 3. How do you differ? Company #1 Company #2 4. What is the long version of how you are similar to or better than these companies (e.g., we are just like Netflix except that we rent books instead of DVDs)? Company #1 Company #2 5. What is the condensed/concise version of how you are similar to one of these companies (e.g., Netflix for books)? Company #1 Company #2 The Truth About Funding Page 34

39 2) The PTS Pitch (Problem Then Solution Pitch) The Problem Then Solution (PTS) Pitch is really easy to create. Just fill in the blanks to this statement: Do you know how {insert problem here}, what I do is {insert solution here} Here are some examples: Do you know how it's hard to stay on a diet; what I do is help people stay on their diets by automatically sending them reminders twice/day. Do you know how it seems really hard for entrepreneurs to raise money, what I do is show entrepreneurs the right way to raise money so they can start and grow outrageously successful businesses. The PTS Pitch is extremely helpful in raising money as it allows investors to understand the venture and its value proposition to customers. For example, when I was raising venture capital for a company named XCom Wireless, I initially had a very hard time. That s because I was referring to the company as an RF MEMS technology company and few people knew what RF MEMS was. So I changed it to a PTS Pitch as follows: Do you know how in commercial and military communications you can t communicate at different frequencies with the same devices? What XCom Wireless does is allow single devices to communicate at multiple frequencies using our proprietary RF MEMS technology. With the PTS Pitch, investors quickly got what the company was doing it, and invested millions of dollars in it. The Truth About Funding Page 35