Venture Capitalism 101: Show Me The MONEY!
By Dante Vitoria May 2, 2017
Sit in on any discussion, chatroom, investment club or attend any entrepreneur seminar and you will hear many things being said. One, far more often than all of the others…”I need Capital to grow my “BUSINESS”. And that may be the most misunderstood, and the most detrimental statement to any new business and its owner. I know you’re thinking, “Vitoria, you make your living funding companies, how can you say that?” That is EXACTLY why I can and DO say that. I have been on Wall Street since 1984….yes, a long time, (and NO, I did NOT carpool with Fred and Barney, so knock it off.) But, there is the POINT. I finance companies. I see, on average 75-80 business plans per month. And less than 5% make the SAME MISTAKE, and that is the BIGGEST reason as to why they do not receive funding.
OK, ready to get a glimpse behind the curtain? Want the recipe for the “Secret Sauce”? Come on, you KNOW you do…so here it is: They spend time, money and effort in creating a Shakespearian Epic, AKA a business plan. Pictures, charts, graphs, projections, ideas, action plans…And NONE of it is reality. Venture Capitalists want to know the TRUTH as it is, not as the Entrepreneur WANTS it to be. And MOST of the time, the founder of the company was told (by a CPA or worse an attorney) to create this “Epic”. Honest to goodness TRUTH, NO VC reads them. Don’t feel bad, Offering Plans or Offering Statements aren’t read either!
Don’t believe me? Take a look at a company named “Carvana”. On April 28, 2017, they did their IPO (initial public offering) on the NYSE. The front of the exchange had their sign on it, they had THOUSANDS of investors, friends, fans, groupies, IPO junkies, etc. hovering in front of the Exchange (blocking yours truly from getting my Friday morning manicure (yes MAN –ic-ure). Guess what they saw, other than the outside of the New York Stock Exchange (which is there every day)?
They saw Carvana open at $15.00 and close at $11.14…DOWN 26%! Does that mean it is a bad deal? NOT at all! However, it does mean the “street” doesn’t believe in the company.
This happens often. The IPO is based upon a “STORY” as opposed to the fundamentals of the company; what it does, the underlying strength of the company, the long and short demand in the market not only for the stock but on the consumer side for the actual product/service itself. The VC got paid, the brokers, traders, clerks, etc. got paid and the company was VERY WELL PAID. Notice I did not mention the purchasers of the IPO? Hmm.
Why does this happen? Companies tell the “ideal” not the reality. And as I eluded to, not always intentionally. So, WHAT SHOULD a company do to increase their chances of being funded? Glad, you asked (I love the fact that you guys are so smart!) Scrap the Business Plan that looks like an Encyclopedia (remember those?) and focus on these few points:
#1: Who are the principals and WHY you are qualified to run this business. Entrepreneurs often get this point confused and ALWAYS get insulted when they are told: “I like your idea, but we need to hire someone to RUN the company”. When you meet a VC, bring your resume and EXPLAIN it. Tell them WHAT you did/do, not your job description. This will give insight into not only how you came up with the idea, but IT may explain why you can be involved in an integral part of the company.
#2: What EXACTLY your idea is! DON’T say, “I have a great idea that will make a lot of money”. That will get you a small coffee and shown the door at The Vitoria Group. I have a GREAT IDEA that will SAVE me a lot of money, and it is NOT financing YOUR GREAT IDEA! Explain your idea, uses, users, and WHY there is a need for “it”. And for you “tech” folks…use the term “Disruptive Technology”. That simply means, your idea, if implemented properly will CHANGE the industry you are entering, in a POSITIVE and PRODUCTIVE manor.
#3: Where will you:
A. Manufacture your product
B. Operate from (the company HQ)
C. Market your product (advertising, etc.)
D. Start your sales efforts and to WHOM
I know it seems basic, but if not articulated properly and CLEARLY, you are “Dead in the Water”.
#4: When can you begin IF you are funded? HUGE HINT…READY? “Mr. Vitoria, we are already in production and we are here to have you invest in us to take us to the NEXT LEVEL and beyond”. That is what I want to hear, and also SEE, and be prepared to SHOW ME. Explain how you are manufacturing your product. And use the proper terms. You do not MAKE your product, you manufacture your product. You MAKE your bed!
#5: HOW, as in how much of an investment do you need. NEVER ask me for money, ask me to INVEST in your company. AND NEVER ASK ME to “make an investment in YOU”. Think it through, what part of YOU am I getting for my investment? Your legs, a kidney, an ear and 5 teeth? (Now, IF you have a FULL head of hair…) I do not ever want to hear anyone say, “I’m the HARDEST WORKING PERSON you have ever met”. How could that possibly be TRUE? Do you KNOW every person I have ever met? And you are IMPLYING you work harder than I do? MAJOR MISTAKE.
Talk to me about the following:
How much of an investment do you need?
What are you going to use the investment (do not say MONEY, say INVESTMENT) for?
What are your plans to “GROW” the company?
What is your EXIT STRATEGY? (What do YOU see happening with the company 12, 24, 36 months from the moment I make my investment?)
IF you say, “I want this to be my legacy and have my Great Grandchildren run this company …DEAD MAN WALKING
The correct answer is:
A. Merger with a competitor/complimentary company
B. Acquisition with a competitor/complimentary company
Simply, the reason I ask this is because I want to know how I will get my money back. There are a few more things but this is a GREAT start for ANY Entrepreneur to keep in their back pocket when they begin to explore the Venture Capital world.
And one more IMPORTANT thing to remember, there is a cost of entry into this world. IF you expect to sit with a REAL VC firm and ask for an investment of “X” dollars, without having put any dollars into your company (or be willing to) once again…DEAD MAN WALKING.
If someone offers to help you for FREE…free means “0”, right? And that is EXACTLY what their help is worth …”0″. Good Luck, perhaps you will find your way to 14 Wall Street one day, if you do, remember these words of wisdom… “Maybe you will be my NEXT Success Story!”
Dante Vitoria is the Founder and CEO of The Vitoria Group in New York City.