Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs: Your Executive Summary Sets the Tone For Your Potential Venture Investors

Your start-up company’s executive summary is typically the first document potential venture investors review when considering your start-up company as an investment opportunity. The quality of this document therefore sets the tone for these same venture investors (e.g. individual angels, angel groups and venture capitalists). A quality executive summary may be the difference between securing a meeting in front of potential venture investors or not receiving a call back.  Therefore, by considering the executive summary as their “door opener”, entrepreneurs need to focus on developing an “investor quality” document to put their best foot forward when introducing themselves and their start-up company to potential venture investors. This article outlines some of the things that entrepreneurs need to consider before they provide their start-up company’s executive summary to their potential venture investors.

Does Your Executive Summary Have the Appropriate Content?

The executive summary is a key element of the road show process. This document is used as the “entry” vehicle to secure the attention of venture investors. A well-written executive summary is necessary to securing a follow-up phone call and subsequent meetings with the venture investment community. The executive summary provides a two- to three-page overview of the company’s business plan. This document is to include an overview of the company, its technology, product, or service offering, as well as its management team and the financial requirements and expected return on investment. The executive summary must be a well-written, succinct document that describes all the essential points that are of interest to venture investors. Content to be included in an executive summary includes the following:

  • Company Overview
  • Background and Milestone
  • The Problem/Value Proposition
  • The Technology, Product, or Service Offering
  • Target Customers
  • Market Size
  • Market Strategy, Tactics and Execution
  • Competition Summary
  • Financial Projections
  • Management Overview
  • Funds Requirements and Use of Funds
  • Exit Strategy

 It should be noted that an “investor-quality” executive summary is very difficult to write and takes many hours of work by the whole management team of your start-up company.  But, given the importance of this document to securing your first meeting with potential investors, it is well worth the effort.

 Is Your Executive Summary Succinctly Written?

It needs to be emphasized that a considerable amount of time and effort should be spent by the management team of your start-up company to develop an “investor-quality” executive summary. This often requires that the management team to write, and then rewrite and rework the executive summary document many times, in different formats or layouts to get a succinctly written document having the proper flow, content, and message.

As previously mentioned, this document sets the tone by providing the proper introduction of your start-up company and its technology, product, or service offering that will determine whether you receive a call back and are able to arrange a first meeting with venture investors. So, the importance of this document can not be underestimated.  Your executive summary is the document that will make the difference between receiving and not receiving a call back.

To ease the process of developing an “investor-quality” executive summary, there are several items to adhere to during the development of your start-up company’s executive summary, including:

  • Length: 2-3 pages – The ideal length of an executive summary is two pages. Often, executive summaries are three to five pages in length. It should be noted that venture capitalists have a limited amount of time to review your executive summary and, as such, the shorter the better and the more likely it will be read. 
  • Font: 10 point or larger – Typical font size for an executive summary is 10 to 12 font. Anything smaller is not readable and will generally deter your target audience from reading your executive summary.
  • Sub-heading and bullets – The use sub-headings and bullet points to enhance the story is recommended in the development and presentation of your executive summary. This does two things: 1) It provides the reader with a format that is easy to read; and 2) It allows the venture investor to identify the “key” elements of interest in an executive summary at a simple glance.

Therefore, having a succinctly written, executive summary, based on the tenants outlined above, and at the same time providing the appropriate content and message is a big step toward receiving a call back from potential venture investors.

Does Your Executive Summary Contain Financial Pro Forma Statements?

Many times I receive executive summaries from start-up companies that do not contain any financial pro forma information. This is like buying a car without a steering wheel and an engine.  Without providing the appropriate financial pro forma statements in your start-up company’s executive summary, investors will not know where you are going or how fast you will get there.  Since your potential venture investors are financial managers, they are primarily reviewing your start-up company based on the potential return on investment it can provide them in a reasonable time frame.  They are not really concerned on how “cool” your technology is or by how “neat” of a product offering you are developing for your target customers. Potential investors, first and foremost, review your start-up company based upon its projected financial performance.  Therefore, you must spend a considerable amount of time putting together financial projections that are:

  • Defendable,
  • Have the appropriate back up details, and
  • Reflect industry standard financial statements.

 By not providing financial pro forma projections or by providing financial statements (e.g., income statements, balance sheet cash flow statements) that are inaccurate, un-defendable, or do not reflect typical industry financial standards, your executive summary is by definition an incomplete document.  Therefore, it is very important to include financial projections in your executive summary to ensure that you receive a call back from potential venture investors.

Have Your Executive Summary Reviewed By Third Parties.

All start-up companies should have their executive summaries reviewed by independent third parties that have experience securing funding from the venture funding community.  This review process will ensure you do not miss something and will provide the appropriate type of critique that will add value and quality to your executive summary.  You should have several colleagues review your executive summary. This will allow you to consider multiple input sources and at the same time provide you with many difference perspectives on this summary document.  Remember having originally generated your executive summary, you are too “close” to it and need an unemotional third party to review your document from an objective point of view.  This will enhance the quality of your start-up company’s executive summary and often, at the same time, improve the end product.

 Have You Done Your Due Diligence On Your Investors?

Many entrepreneurs do not spend the any time doing due diligence on their potential venture investors.  This is important, as you want to target only those investors that will have an interest in your start-up company and its technology, product or service offering. Therefore, doing the appropriate level of due diligence will ensure that you are targeting the appropriate investors for your start-up company and its technology product or service.  Several items to consider when doing your due diligence on your potential venture investors include the following:

  • Geographic focus,
  • Stage of development focus,
  •  Capital required,
  • Industry specialization, and
  • Deal leadership.

All of these items will affect whether a given venture investor will consider your start-up company as a potential investment opportunity. So, before you approach any venture investor, you should research their background, their past investments, as well as their strengths and weaknesses. This will more likely insure a positive experience with your target venture investors.

 Developing your executive summary is the important first step in securing a meeting with potential venture investors. The quality of your executive summary sets the tone with your potential venture investors and can be the difference between securing your first investor meeting or not receiving a call back.  It is important as an entrepreneur to understand the importance of your executive summary and create an “investor quality” document with the appropriate flow, content, and message to get your potential venture investor’s attention. By spending the appropriate amount of time an effort creating your start-up company’s executive summary you can ensure that you will get the attention of the venture funding community.

June 15, 2009 Posted by | angel investors, Executive Summary, Venture Capital, venture finance | , , , , , , | 4 Comments

Many Angel Groups Have “Cheapened” the Reputation of Traditional Angel Investors

Traditionally, a typical angel investor was a high net worth individual that had success as an entrepreneur, by starting their own company, being successful in the market, and then continuing their profitable private operations, going public or selling out to a third party.  These traditional angel investors had real entrepreneurial experience and the required insight to what it takes to develop an idea, bring it to market on their own, and fight through the trials and tribulations of a successful start-up company.  In addition, as a result of their own entrepreneurial business success, these same individuals often used their financial resources to help other entrepreneurs, by investing a significant amount of their own monies in early stage companies and mentoring the development of these same companies.  These traditional, entrepreneurial-based, angel investors were risk takers that had earned their stripes through the school of hard knocks by having gone through many of the same trials and tribulations of a typical entrepreneur and at the same time had real start-up experience to draw upon when mentoring their start-up company investments. 

During the last 20 years, a new angel investment structure called the “angel group” has developed across the United States and the world.  Here, bands of individuals, in many cases, with little or no entrepreneurial experience, invest small amounts of their individual members’ monies, aggregated as a group investment, into these same start-up companies.  In many cases, this angel group investment structure has “cheapened” the reputation of traditional angel investors – opening the door to many individuals with little or no start-up experience, who claim, by virtue of investing a small, insignificant amount of their own money, to be experts in mentoring entrepreneurs and their start-up companies. This article outlines my reasoning for this opinion and provides a basis for this discussion.

“Accredited Investors” – A Very Low Bar for Entry

Most angel groups, due to Security Exchange Commission investment rules, require their investors to be “accredited investors”. This accreditation has nothing to do with personal entrepreneurial experience; it is purely a financial measure providing a basic assurance that an individual has the financial resources to risk their own monies in a high risk type of investment.  At the same time, his accreditation is also used to protect this same angel group against future legal actions pertaining monies lost on these same high risk investments.  This SEC accreditation requirement, in its basic form, looks at the individual investors, their spouses, and their financial resources in determining if they can take realistically invest some of their monies in high risk investments, with a minimum peril to their overall financial well being. 

As defined under the R-501(a) of Regulation D of the Securities Act of 1933, an accredited individual investor must meet at least one of the following guidelines:

  • A natural person whose individual net worth or joint net worth with that persons spouse at the time of the purchase exceeds $1,000,000,
  • A natural person who had individual income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 in each of the two most recent years and has a reasonable expectation of reaching the same level of income in the current year.

To most entrepreneurs, the above criteria may seem like a high bar to pass for individuals looking to participate as investors within the structure of an angel group. But in fact, the first criterion, as outlined above, is a very “low bar” for many potential group-based angel investors. This individual net worth criterion includes an investor’s home, and therefore in states such as California, where home values often exceed $1,000,000, this criterion is easily met by many individuals who wish to become an angel investor within an angel group.  Therefore, many individuals with no entrepreneurial start-up experience have the financial capacity to be an “accredited investor”, as defined by the Securities Exchange Commission.

 $10,000 to $25,000 – An Insignificant Investment Often with Little Additional Value

Most angel groups require their angel investors to invest a minimum of between $10,000 and $25,000 per individual start-up company investment.  For start-up companies that are looking for up to $1,000,000, for their first round of third party investment, this is really an insignificant amount of money, as measured on an individual basis.  In addition, for these same individuals, who meet the above outlined SEC criteria, this investment, again is a small amount of their net worth (e.g. $10,000 is 1% of a $1.0M). So, the amount of risk that these individual angel investors are willing to incur, as part of an angel group, is insignificant.

Beyond their financial commitment, in many cases, these angel group-based investors are often retired individuals who are looking for something to do to occupy their time, and at the same time, have something to discuss during cocktail parties or while they are out on the golf course.  With their individual investments being insignificant amount of their total net worth, if they make a return on this nominal amount of money, fine, if not, well they are not out much money anyway and they can write their investment off on their taxes. This type of angel group investing, while low risk for the investors, often yields little additional value, beyond the initial amount of cash for the entrepreneur and their start-up company, as many of these same investors are not really involved in their investments, do not know the market space, and as a result cannot add significant value beyond their individual minimum financial investment.

Where is Your Start-up Experience?

Many of these same individual, angel investors that participate as part of an angel group have little or no personal start-up experience.  These angel group members are not entrepreneurs by nature, or through personal experience. In many cases, these angel group investors are ex- corporate lawyers, bankers, accountants, etc. that have worked for large corporate enterprises their whole professional careers and have, through their safe career paths, accumulated enough assets to become an accredited investor members of a given angel group. These same individuals have never started a company, met a payroll, nor have they taken on any significant personal or financial risk in their whole lives.  They, more often than not, have lived within the protected “cocoon” of a corporate enterprise and have been successful in a very narrowly defined “job” scope.  But, often, it is these same individuals believe they have the necessary experience and business savvy to direct a start-up company through the trials and tribulations of their development. This does not make sense to me. With only their large corporate enterprise experience to draw upon, it is impossible for these same these angel group investors to provide real world based entrepreneurial advice to their start-up company investments. 

Entrepreneurs, Beware of the Angel Group “Dog Pile” Experience

 Many of these same angel groups are headed by individuals with strong personalities and opinions, but little real world entrepreneurial start-up experience.  In addition, many of these same individual angel investors, due to their lack of experience with start-up companies, are “followers” throughout the start-up company due diligence process and do not add any significant value.  These individuals often follow the lead of other strong personality members of these angel groups and as a result entrepreneurs often experience uninformed or undue criticism from individual investors within these same angel groups. The result is that, many times during due diligence review meetings, one of the lead members, with a strong personality, exposes a potential hole in the entrepreneur’s business plan and all of the follower investors “dog pile” on with more uninformed criticism. This results in an insulting experience for the entrepreneur and a resultant bad reputation for the angel group.  The lack of understanding of the difficulty of starting a company and personal real world entrepreneurial experience, from the individual angel members, can really expose the personality of an angel group and give entrepreneurs a “stay away” attitude toward a given angel group.

“Pay-to-Play” Angel Groups

Today, there are many “pay-to-play” angel groups out there. Here, the individual angel group members may or may not pay annual dues to become members of a given angel group. At the same time, the organizers of a “pay-to-play” angel group work to find investment opportunities for their angel group investors.  These investment opportunities are typically presented to the members of these same “pay-to-play” angel groups on a monthly basis.  Here, it is the entrepreneurs that pay $1,000 to $2,500 per angel group review meeting, in a given city, to present their company’s business plan in front of a group of potential angel investors.  More often than not, the entrepreneurs who are presenting do not know who, or how many potential investors are in the room.  In addition, the inherent problem with this “pay-to-play” angel group business model is that these same angel group investors do not get the best companies to present, only those that have the immediate financial means to “pay-to-present”. Therefore, by definition, they may not get the best start-up companies with the highest potential returns for their invested monies. This seems like an inappropriate angel group business model to me, and is, at the same time, very expensive for the entrepreneurs, with no guarantee of receiving any investment monies. That being said, there multiple angel groups in the market that use this business model.

 Many Angel Groups “Think” They are Venture Capitalists

One final problem with many angel groups is that, by virtue of their investment monies, they think they are venture capitalists and often treat the entrepreneurs very poorly.  With their limited financial resources, and more often than not limited network of contacts or experience in angel funding, they expect the respect, equity positions, and stock purchase agreements that the venture capitalists typically get for making much more significant financial investments.  They forget they are in reality inexperienced early stage investors that are looking invest in and then get their start-up companies ready to receive the next level of investment funding, from this same professional venture capital community.  Today, this venture capitalist mentality is too often prevalent among angel investment groups. This can make the angel group funding an unpleasant experience for these same entrepreneurs.

As outlined, angel groups in many cases provide an alternative for individuals, who make insignificant investments, incur minimal risk, and have little or no start-up experience to invest in early-stage, start-up companies. This type of group investment structure provides a funding avenue for entrepreneurs that was not available 20 years ago. This group angel investment structure, through its diverse membership, varied backgrounds and experience, deviates significantly from the traditional single angel investor, with a proven entrepreneurial background and significant real-world start-up experience.  As outlined, the result, in many cases, is that this angel group structure has “cheapened” the reputation of traditional angel individual investors and provided a funding experience that may be difficult at best for individual entrepreneurs.

May 18, 2009 Posted by | Angel Group, angel investors, Venture Capital, venture finance | 3 Comments