How To Impress Your VC

We believe Trinidad offers many investment opportunities. In fact, we are getting to see some of them already; despite the fact that we are not yet fully operational. We expect that the quantity of proposals is not a problem. From what we have seen so far, however, there are issues with the quality of investment proposals in T&T. This article will provide hints on what you can do to make a more positive impression on VC firms you may approach for financing.

Of course, different VC firms have different investment styles, targets and constraints. For example, for VCCs registered under the Venture Capital Act you must meet limits and requirements for being a Qualifying Investee Company. To other VC firms, including us, those constraints are irrelevant but each firm still has its own investment preferences. The aspects described in this article, however, are probably sought after and evaluated by all VC firms. If you are looking to get VC financing you should show and explain them all.

Management

The first and the most important factor is management. It is a VC cliché that excellent management can probably make a success out of a mediocre business, but mediocre management will inevitably make a mess out of an excellent business. It’s a cliché because it’s true.

You will need to show that your company’s management has all the skills required for success. (Note that VC firms invest in companies. Unless they can create a business and build a company too, we are not looking for lone inventors.) At minimum you will need to show leadership, marketing, and sales capabilities. From our perspective we will also want to see strong financial management. Depending on your type of business, you may also need to show operations, customer service, and logistical management strengths.

This almost certainly means that you must have a management team. A brilliant maximum leader surrounded by a group of flunkeys or yes-men is unlikely to attract us. The team may be small, provided that it is well balanced and can work with each other. In other words, you do not need half a dozen Harvard MBAs. (Actually, they would probably just argue all day long.) You do need a group of complementary individuals that can jointly provide all the skills and experiences your business needs for its future success.

Note the emphasis here on future requirements. If you now sell widgets, but are trying to raise capital to expand into hyper turbo widgets, a VC firm will certainly want to see someone with hyper turbo widget expertise on your team.

If your team lacks some skills at present, you can still present proposals to VC firms but you will be at a disadvantage. The best thing you can do is clearly indicate the type of skills and type of people that you would like to add to your company. (It’s a lot more painful if we have to point it out.) In that case plans must be made to recruit and select such people, or obtain the required capabilities in another fashion.

Market

An obvious factor that must be evaluated is the market for your products or services. Unfortunately, this is often very difficult to do in T&T. Nevertheless, you must be able to show and explain why your market represents an attractive investment.

In an ideal world you should have information on the size and annual growth trends in your market, as well as market shares and trends of each major player. You should also explain profitability trends in your market (e.g. globally competitive supermarkets now survive on margins of a few percent) and market access characteristics (e.g. how you can get shelf space). In the real world all of these things may be very difficult to quantify, but they must still be understood.

Another cliché is that VC firms bet on markets, not on companies. It’s easy to make money in a booming market, and very difficult in a shrinking market. This is why so much VC money around the world goes into Internet companies. While each individual company may not be so great, VC firms know that the overall market has explosive growth and are placing their bets accordingly. While explosive growth in Trinidad may be harder to find (but don’t forget exports), you will need to explain why a VC firm should place a bet in your market.

Competitiveness

A major factor in assessing your attractiveness is your ability to compete. Only the most naive or ignorant companies believe they have no competition, and we would not invest in such companies. You need to clearly understand and explain who your competitors are likely to be (don’t forget potential new entrants and substitute products) and on what basis you compete against them.

In VC terms this is often called "the model". What is the business model that allows you to survive and grow in the face of competition? You need to have something unique that allows you to perform better than others. Ideally this should provide a sustainable competitive advantage, although many economists believe such a thing is impossible in the long run. In any case, you need something special for the immediate future, and you need to seriously explain your competitive strategy.

Financial Projections

Some people might have expected to see financial results placed earlier in the list of factors to consider. We delayed the discussion because financial projections are meaningless unless the other factors have been adequately covered first. Often projections may be very difficult to make, particularly when considering start-up businesses. Nevertheless, you will need to prepare and present a comprehensive set of financial projections.

Even if they are merely speculative, you should try to make the projections as realistic as possible. The exercise itself will enhance your insights into the break-even points and critical factors for your business. You may run different scenarios with different sets of assumptions. Do not delude yourself by just being fantastically optimistic on the sales projections while underestimating the expenses. A hard-nosed VC firm is unlikely to share your delusions and will not give you any positive marks for it.

To be considered for investment, of course, you do need to show high growth or high profits ultimately. Interestingly, however, you do not have to show both. VC firms may routinely invest into companies that are not projected to make any profit during the lifetime of the investment. Instead, the goal of the company is to grow as fast as it possibly can. The VC firms can still achieve a positive return on their investment at the time of exit, which is discussed below.

Exit

All VC firms need an exit. The capital invested in your company is usually permanent for you, but the VC firm must recover its investment at some point in time. This typically is expected to take place after several years and is referred to as the exit. It is achieved by letting the VC firm sell the shares which it holds in your company to other shareholders.

You can increase the attraction of your proposal to VC firms by clearly identifying potential exit opportunities up front. You can reduce the risk that VC firms have to take by showing realistic exit options and by clarifying the time frame when those options could be available. Of course, you have to be supportive of such options too. If the proposed exit is to have an Initial Public Offering (IPO) of your company’s shares on a stock exchange, for example, it helps if you have a plan and a time table for such an event.

Readiness

An additional factor to evaluate is your readiness for external investment. This partly relates to the business activities you already have. A well run and well established company seeking to expand is probably more ready for new investment than a fledgling start-up. However, it also relates to any skeletons in your closet. If you do have any, such as forgotten tax returns, you are strongly advised to deal with them first. As part of its due diligence investigations into your company, a VC firm will attempt to thoroughly go through all your closets prior to investment. You will need to be ready for that.

Intangibles

Finally, VC firms cannot help but evaluate the intangibles too. This relates to a host of tiny and not so tiny matters your mother should have taught you, or would have if she could today. Do use the spell checker on your business plan. Don’t put compulsive gamblers in charge of finance. Do make sure your numbers add up and are consistent. Don’t put habitual drug users in charge of hazardous operations. Do present your intentions clearly and openly. Don’t pollute your environment or endanger other people’s health. Do be honest and honourable. Demonstrate focus and integrity.

After making its investment, a VC firm will usually end up as a long-term minority shareholder in your company. In the reality of Trinidad & Tobago this is a vulnerable position to be in. Anything you can do to increase the level of comfort will help your cause.

Conclusion

From the above you may conclude that getting VC financing is easy. All you need is a superb management team, a booming market, an unbeatable competitive strategy, superior returns on investment, a clearly identified exit, readiness to rumble, combined with a delicate touch. If you can demonstrate all those aspects, VC firms will be falling over themselves to thrust money at you.

Of course, you may not yet have achieved this investor’s nirvana. At least this article may then have clarified the aspects that require more work. VC firms don’t really expect perfection on the first try. In fact, they may help you in striving for it over time. If you have a proposal for which you are seeking external equity financing we encourage you to contact a VC firm early. At worst, a VC firm should be able to give you a quick indication whether it is interested in pursuing the matter or not. At best, we may help you refine the proposal. You can improve the initial quality of your proposal by at least addressing all the aspects described in this article. Perfection may come later.

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