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  • December 21, 2014 9:34 AM | Anonymous

    The goal of a pitch, the presentation one makes to attract and secure an investment in one’s business, is to both inform and to excite.  Investing is an emotional decision.  If the investor candidate doesn’t get a good feeling or get their adrenaline pumping by your pitch, they will pick another business to invest in.

    Too many pitches are unintelligible descriptions of products or services, mind numbing cash flow projections and a perp walk of some good people who may or may not work together as a team.  Investors’ eyes glaze over at yet another pitch that sounds like all the other pitches and often does not answer the question:  Why should I invest in this business?

    Selling an investment is like selling a product.  The emphasis is on meeting the needs of the buyer, not on all the features and characteristics of the product, how or where it was built or other possibly interesting but not decisive information.  Does the product get the job done?  Does the business solve a problem, make customers happy, earn a profit and make a return on investment?

    Just claiming your business is a good investment may be viewed with skepticism unless you are an entrepreneurial icon with several successful businesses to your credit. 

    I have found that presenting a pitch as a story helps the investor follow the information and engages them positively.  Your business is the protagonist that is seeking to resolve a problem- a conflict in the market.  To succeed, a number of challenges must be overcome – the antagonist.   Sometime in the future the conflict is resolved.  A clever telling of the story incorporates the investor as a character who is aligned with the protagonist.

    I suggest using a fairy tale format.  Nearly everyone has heard fairy tales in their youth and can anticipate the story line.  There is problem – a dragon is rampaging the countryside destroying farms and villages.  There is a hero or heroine who seeks to slay the dragon and save the kingdom.  This person will battle the dragon, but lacks appropriate equipment – a sword and shield.  So, a request is made for backing to buy the sword and shield from the local blacksmith.  This source of backing is the investor – now a key character in the story.  With the backing, the sword and shield are purchased, the dragon is slain and the king awards the hero or heroine with a bag of gold.  The gold is shared within the investor.  End of story.

    Easy and quick to tell.  Easily understood.  Focused on the solution to the problem and receiving the reward.  Engaging.  Exciting. 

    You have the investor’s attention and possibly their investment.

  • December 19, 2014 9:05 PM | Anonymous

    When starting a new business and raising capital, a common challenge is to place a price on the equity of the business.  This challenge often is a point of dispute with investors that is never resolved and results in no investment.

    As a starting point, the value of a business is the total of the profits that the business will earn in the next few years.   Variables in setting a price will be the number of years to be counted into the future and the projection of the profits that will be earned during that time.  For example, if a business generates $5 million in revenue each year with a 20% profit margin that earns $1 million dollars, the price of the business may range from $3 million (3 years) to $7 million (7 years).

    For purposes of this analysis, it is assumed that the business will be sold at the date in the future in order to create an exit for the investor where the investor can get back their capital and realize any return on their investment.

    This approach is straight forward if the business is mature, is not growing and the future is expected to look a lot like the past.

    This approach is difficult for a startup business because it has no earnings history, its future earnings are uncertain and are likely to change greatly during the first years of operation.

    To create a price, it is first necessary to do a cash flow and profits projection going forward three to five years.  The price is not based upon today, but is based upon the future.  For example, if at the end of the first five years of operation, the business generates $5 million in revenue with a 20% profit margin that earns $1 million dollars, the price of the business may range from $3 million (3 years of future profits) to $7 million (7 years of future profits).  However, if it is expected that the business will continue to grow rapidly in future years, the price of the business will be substantially higher.  Prices may go as high as 20 times to 100 times the amount of profits earned during the last year of the projection.

    The price of the stock and the percentage of the company that needs to be sold is determined by the rate of return desired by an investor on their investment.  It is not the same for every investor.

    For example, if the business needs $100,000 in investment and the projected value at the end of five years is $5 million dollars, then the business will need to sell:

    ·         4% of the business if the investor needs a rate of return of 20% per year – 2% of the business at the end of year 5 equals $200,000 – return of investment of $100,000 plus a return on investment of $100,000

    ·         12% of the business if the investor needs a rate of return of 100% per year – 12% of the business at the end of year 5 equals $600,000 – return of capital of $100,000 plus a return on investment of $500,000

    The rate of return needed by an investor is directly related to their perception of the level of risk.  Lower risks are matched with lower rates of return.  Higher risks are matched with higher rates of return.

    The level of risk represented by the business – the probability that it will achieve the projected valuation – is the key variable in setting the price of the stock.  Since different investor candidates will perceive the risk differently, the business should shop for the investor who accepts the projected value of the business.

    If an investor candidate projects a different, lower valuation at the end of the 5 years, then the amount of stock needed to be purchased to attain the desired rate of return will be increased.

    For example, if the business needs $100,000 in investment and the projected value of the business at the end of five years is only $3 million dollars, then the business will need to sell:

    ·         7% of the business if the investor needs a rate of return of 20% per year – 2% of the business at the end of year 5 equals $200,000 – return of investment of $100,000 plus a return on investment of $100,000

    ·         20% of the business if the investor needs a rate of return of 100% per year – 12% of the business at the end of year 5 equals $600,000 – return of capital of $100,000 plus a return on investment of $500,000

    In each example, the business needs to raise $100,000, but the rate of return needed by the investor and the projected value at the end of the projection directly impact how much of a percentage of ownership that the business must sell to obtain the $100,000.

    So, in addition to shopping for an investor, the business should do everything possible to reduce the perception of risk that the business will not attain the projected valuation.  This combination of activities will result in the founders of the business retaining the greatest possible percentage of ownership after a sale of stock.

  • December 18, 2014 9:34 PM | Anonymous

    In my business I am frequently asked, “Do you know any investors?”  On some occasions when I answer yes, I receive the appropriate follow on question of “Would they be interested in my deal?”  However, more often than not the questions stop.  In this case, investors are viewed as a commodity like wheat or corn – they are all alike.

    To the contrary, investors are all different.  Even though the money that everyone seeks from investors all spends the same, the decisions leading to the investment of that money are as different as the investors themselves.  And, in cases of investor groups, the dynamics of the group may create changes as frequent as the weather.

    To successfully complete a capital transaction, there must be a match between the organization seeking capital and the investor.  No match, no deal.  So, a significant cause of receiving a no from the investor is nothing more than a failure to meet the investor’s criteria.  It’s not the innovation, the market or the management team, although all of these may have been weighed and found wanting.

    Investors typically are seeking (1) a return on their investment, (2) a legacy, and/or (3) to advance a social cause.   These outcomes can vary widely from one investment opportunity to the next.  Anyone seeking investment should determine in advance what the investor candidate wants. 

    The act of selling a security is the act of selling a business as a product.  The product must produce the benefit sought by the buyer – the investor.  The buyer is always right.

    These basics sales principals are not always followed by organizations seeking capital.  More commonly a ‘spray and pray’ or ‘throw it against the wall and see what sticks’ is the strategy of the organization seeing capital.  They will stand up in front of any angel group, mass mail offering documents to any capital source listed in any directory or enter any entrepreneur competition: all without considering whether or not there is anyone in the audience who may actually care enough to consider investing.

    The result is a major waste of time – both by the organization seeking capital and by the investor in conducting due diligence.  Investors commonly review hundreds of business plans before making a single investment. 

    Anyone seeking capital should first profile an optimal investor.  This is an investor who matches up with the innovation, the market, the industry, the progression through the business life cycle, the amount of cash flow and the round of funding.  In addition, the investor should share personal values with the management team. 

    But that is only the starting point.  The optimal investor will be in the industry into which the organization is entering, is an icon in the industry, has a database of contacts and is not only willing to share those contacts but stand on a soapbox and proclaim to the public their full endorsement of the business.   The investor is an advocate, a mentor, a cheerleader and shoulder to lean on.

    Better yet, the investor stands to gain by the success of the business without making an investment – a ‘stakeholder’.  They are incentivized to support the business.  This is because the operation of the business and its achievement of success is supporting the goals of the investor.  These goals may be to sell products and services to the business or to be a reseller of the business’ products and services.

    The exercise of profiling the optimal investor will improve identification and qualification of investor candidates who are most likely to invest.   Your profile should be so precise, that you can walk into any room and quickly identify them.

  • December 16, 2014 7:17 AM | Anonymous

    I often hear suggestions for improving access to capital that call for the creation of a single, monolithic something or other.  “If we only had a mega [fill in the blank], then we would have all the capital we need!”

    There is certainly an appeal to be able to go to a one stop shop and find everything you want.  This is the premise of the giant shopping malls and stores. 

    In certain cases, economies of scale dictate this centralized concentration of economic activity.  Without scale, the costs of operations are so high that many individuals and businesses would not be able to participate.

    However, there are often consequences of such monopolies.  Often there becomes a limited selection in choice.  Why have 10 varieties when one will do.  There is often a tendency to stick with status quo.  This is good enough.  To some extent, this is one of the greatest problems facing our capital market – not enough variety and not enough innovation.  Between the impact of market forces and government regulations, we have seen a concentration of the capital markets on Wall Street that represents a microscopic percentage of the total businesses in the world.  By definition, a new startup cannot qualify for listing on the stock exchanges without already having a great deal of capital.  Innovation and startups need not apply.

    We now live in the Internet age and the term economies of scale often does not apply.  With a single computer and access to the Internet, it is possible for one person to be their own business empire.  The Colorado Capital Congress is seeking to do the same thing for members of Colorado’s capital industry.  We believe that the Internet can be leveraged to provide customized capital, precisely fitted to the circumstance with no limitation of variety and always open to innovation.

    The best capital industry will have multiple solutions to every capital need.  A recent blog post in Dreamstake describes the large variety of options for funding in the United Kingdom.  Private money, public money, public/private partnerships and crowdfunding are all working together to fill all the gaps so that there is a capital solution to every problem. 

    We need to so the same thing here in Colorado.  We already have a far larger selection of capital solutions than most people know.  So, part of our solution will be public awareness and education.  More solutions are needed.  Let’s build them.  What solutions?  Let’s find out.  The Colorado Capital Congress is conducting the Colorado Capital Survey.  When gaps are identified, we can work with existing individuals and groups or create new ones to fill the gaps.

    If only there was a single source of information on the Colorado capital industry.  Well, there is – the Colorado Capital Congress.  But, now we are engaging in circular arguments.  J

  • December 14, 2014 11:30 AM | Anonymous

    The Colorado Capital Congress has been created to improve the capital ecosystem in Colorado.  Capital is the energy that drives innovation, entrepreneurship and economic growth.  Without capital, the ideas that may solve the problems and challenges of our world will not advance to become products and services.  The State of Colorado’s Blueprint identified access to capital as the third most important challenge to economic development.   

    We offer mentoring, education, networking, industry information, a membership directory and a catalog of capital sources, services and programs.  We will hold an annual conference – ‘The Congress’ on initiatives, host Member groups, build Capital Communities and coordinate meetings and testimony on legislative and regulatory matters.  We support business, professional, civic, charitable and economic organizations on all things ‘capital’.

    As a membership organization and a voice on access to capital, we invite anyone to join us who is seeking capital, investing capital, providing services in support of capital transactions or improving local economic development.  http://www.coloradocapitalcongress.com

  • December 01, 2014 9:43 AM | Deleted user
    Governor Hickenlooper signed into law HB 14 - 1079 which raises from $1 million to $5 million the amount of money that can be raised through a Colorado Limited Registration Public Offering.

    The bill was originated and sponsored in the House by Representative Pete Lee and sponsored in the Senate by Senator Rachel Zenzinger.

    A Limited Registration Public Offering is a little known vehicle for raising capital for a small business through sale of securities.  It has been described as "Colorado's version of crowdfunding"  A business may complete Form RL and pay a $50 fee to the Colorado Division of Securities along with their offering documents and promotional documents.  The application is reviewed within 14 days.  If approved, the Colorado business may sell to Colorado citizens.  There is no limit on the number of sales to non-accredited investors.  However, 80% of the money raised must be spent in Colorado.

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