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By Marielle VokseppRingsThink of your relationship with a VC as a marriage

At last week’s Entrepreneurship 101 lecture on raising money, leading venture capitalists divulged the secrets of successfully pitching to an investor. The secret is in the relationship.

The panel discussion, led by Barry Gekiere, Managing Director of the Investment Accelerator Fund (IAF), featured high profile folks from the VC industry:

And what advice did these top investors have?

When preparing to approach an investor, speak to advisors and other entrepreneurs who have worked with them to find out as much as you can.  Still don’t know where to look for an investor? Read: How to identify an investor for your business.

It takes five minutes for an investor to decide if they are interested in you. Once you have chosen someone to approach with your pitch, make sure you have the right tools. (What tools, you ask? Read: Tools you need to raise money.)

Watch the rest of the lecture video on “Raising Money” to learn more from this Q&A session and hear it first-hand from leading venture capitalists.

Downloads and Resources:

Reposted from MaRS

Marielle works as part of the education team at MaRS. She helps entrepreneurs get access to business resources both online and in-person.

The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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By  Joseph Wilson

What do cleantech investors want?Cleantech investment: Where is the money going?

Recently, we kicked off the MaRS Best Practices Special Valuation series with experts talking about investor interest in the biotech industry.

The message: the economy is pretty quiet these days, and cash is not flowing like it once was, especially for R&D companies in the biotech or life sciences fields.

Rupert Merer, a Director of Equity Research at National Bank Financial, will join Tim Babcock from the TSX Venture Exchange, where he will issue a similar warning for the cleantech field in Canada.

“It’s a tough market for IPOs these days, but there’s always money for good companies,” says Merer. “The market doesn’t have much patience for companies burning too much cash. They’re looking at companies that are better at bootstrapping.”

One of the things that cleantech start-ups want to know is how investors determine how much their company is worth. “Investors value a company based on its potential to generate cash,” says Merer. “There are lots of different metrics to evaluate.”

One of the key metrics to look at is the company’s potential for global competitiveness. “It’s really an international market these days,” he says. “We market Canadian equities to the global investment community.”

A bright side to the state of venture capital in Canada is that we don’t suffer from the same extremes of boom and bust as in cash-rich Silicon Valley. “There are a number of US companies that are moving to Canada,” he says. “They are attracted by the conservatism that fits Canada’s culture of investment. In this kind of economy the Silicon Valley model suffers more.”

Merer and his team at National Bank Financial have broadened the scope of their portfolio. Instead of just focusing on technology that generates clean power, they look carefully at anything that could be considered a “clean environmental technology.” Merer’s team is looking at water technologies, alternative fuels, waste management, recycling technologies and energy efficiency.

All this work has paid off. Recently, Merer was named by Brendan Wood International as the top analyst in the country in the alternative energy category. “It really is a group effort,” he says about the award. “We have a whole sales desk working in this space.”

Merer has worked both at start-ups and at large companies such as Enbridge, so is well placed to examine opportunities in the market of environmental entrepreneurship. “I track the industry and make recommendations to investors on where to put their money in the industry,” he says. Rupert Merer is the guy you want on your side.

Reposted from MaRS

JosephWilson is currently an education advisor at MaRS. He also writes on issues of technology and culture for NOW Magazine, the Globe and Mail, Spacing and Yonge Street. He is the Executive Director of the Treehouse Group, dedicated to fostering innovation by hosting cross-disciplinary events.

The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers pro vide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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By Andrew Maxwell

I constantly review the early version of business plans drawn up by potential Canadian entrepreneurs.

While the innovative ideas and opportunities are always fascinating, I am frustrated by most plans’ lack of ambition. As a result, I  am left feeling why get excited, or even why bother. I am sure this is a reaction shared by many, and often results in limiting the opportunity’s potential.

As opportunities need to create a certain critical mass before they can generate enough revenue to pay the entrepreneur a salary – this limits the potential for creating the venture in the first place.

For example, entrepreneurs often identify a market opportunity in the local geographic region or in a specific application. Yet with a little imagination and a willingness to leverage external resources, they could expand the business to be much more substantial.

An example of this was a recent plan to develop a technology for the bar industry. In the plan, the entrepreneur proposed selling 50 devices a year in the Canadian market, each with a selling price of $5,000. The market opportunity and proposed technology seemed novel, but there was no reason why the entrepreneur should limit the size of the market to 50, I think this under stated the market-size by at least a factor about 4. Clearly, an opportunity to sell 200 units starts to look interesting. But what makes this opportunity into a business is using the Canadian market as a pilot for the US (potential 2,000 units a year). This much larger number will stimulate interest among suppliers, employees and even investors.

I was always skeptical when potential investors asked entrepreneurs the question –what would you do if you had more money than you are currently asking for? I thought that at best they were just testing the entrepreneur’s ability to think outside the box. At worst, I thought they were simply trying to get the entrepreneur to accept more money and in turn give up more equity in the venture.  In reality, they were asking the question, does this investment create a big enough opportunity for potential acquirers to be worth taking over?  This reinforces the importance of developing a strong exit strategy when making a pitch to investors.

While potential investors will probably continue to ask this question, I think it’s worthwhile that entrepreneurs find ways to challenge themselves to ask the same questions. One way to do this is to work with mentors and outside advisers whose experience help raise strategic questions. I noticed that one of the reasons US firms tend to be more aggressive is because of the influence of peer pressure or experienced investors on the ambitions of the next generation of entrepreneurs. In the US, it is always acceptable to develop an ambitious business plan. In Canada, less so.

In addition it is important to ask yourself, is it worth it? Creating a business plan for an opportunity that is only going to create  $300 – $400,000  of revenue is not a worthwhile exercise. At this level of revenue, most entrepreneurs cannot afford to even draw a reasonable salary themselves, never mind provide an interesting return to a potential investor.

Don’t get me wrong, this does not mean that a business at this size is not worthwhile, it is simply means that developing a business plan is not worthwhile as  there is limited ability to use the plan to bring in additional stakeholders or investors. In many cases, the effort required by the entrepreneur to create a $500,000 business may be that required to create a $5,000,000 business (although, there may be additional stakeholders).

I hope these short thoughts challenge you to think about scaling up and set lofty goals!

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.

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By Andrew Maxwell

In my last blog, The Goldilocks Sydrome,  I talked about how specific entrepreneurial characteristics are linked to venture success and to an entrepreneur’s ability to attract money.

In this blog, I will try and explain another factor investors consider when making their investment decision – company valuation.

It often surprises entrepreneurs that experienced investors can make rapid investment decisions with very limited information.  This is because experienced investors develop simple routines (known as heuristics) that leverage their previous experience. The case of an entrepreneur’s valuation of their own company provides interesting insights for entrepreneurs seeking finance.  It also shows the importance of the information exchanges between investor and entrepreneur and how specific actions and comments provide a rich data source that influences an investor’s decision.

For example, an entrepreneur decides to ask for $300,000 in return for 30% of their company. It is interesting to understand what an investor can tell from this about the venture and specifically the entrepreneur.

First,  the investor will want to know why the entrepreneur needs $300,000 and whether the money is being used wisely. Will it allow the entrepreneur to reach an important milestone in the venture and attract  additional funds or revenues?

Next, the investor will assess whether the company might need less money at this stage (giving up less equity) or perhaps more money (giving up more equity).  Importantly, the investor will also evaluate if giving up equity is the best approach, sometimes debt is a more appropriate instrument (for example if you are buying a building or inventory, debt might be better).

The investor will analyze the request in the context of the whole venture. It is commonly assumed that an entrepreneur providing 30% of the company’s equity for $300,000 values the company after investment at $1 million. This assumes that the valuation before the investment is $700,000 (known as the pre-money value).  While this is a simplified approach, it is a good first approximation.

If an  investor considers $700,000 to be a reasonable pre-money valuation, then the investor will be interested, and have confidence in the ability and judgment of the entrepreneur. If this value is much too high or too low, an investor may doubt the competence of the entrepreneur and be less likely to invest.

Importantly, while there is a link between equity percentage and valuation, there is also a link between equity percentage and control. An investor will construe important information about the entrepreneur’s view of future investment rounds from the percentage offered.  There are two reasons for this. First, an investor working with an inexperienced entrepreneur might want to own 50% of the equity to control the venture and avoid foolish mistakes. Second, if the company is on a high growth path, it will likely need to attract future funding. Giving up equity now can cause a problem, as there will be less to give up in the future. Alternatively, a willingness to surrender equity can be viewed as a positive sign that the entrepreneur recognizes the need to dilute their equity position in the long term (for example in companies making an Initial Public Offering founders typically have only 4% of the companies equity at that time).

As you can see, experienced investors can learn a good deal from a single piece of information, and we have not even discussed the effect of alternate equity mechanisms or syndicated investors.  Understanding the importance of each of the signals provided should encourage entrepreneurs to think carefully about the implications of their initial valuation.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.

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Andrew MaxwellBy Andrew Maxwell

Part 2

Yesterday’s blog post dealt with four of eight critical factors that can help you identify and overcome fatal flaws in your business. Read Part 1 here.

There are two technology issues that an entrepreneur must consider – creating a barrier to entry and stage of technology development – both of which provide important information about the stage of the company and the likelihood of long-term commercial success.

Importantly, for a company to make money in the long term, it must be able to create a barrier to entry. If it cannot, competitors can enter the market and reduce the profit potential. Issues around technology development are related to the remaining level of technological risk and whether this is a research project or a commercial company. If there are still fundamental technology issues to be addressed, the company needs R and D funding, and is not a viable commercial enterprise yet; it may simply be a timing issue.

For investors, too long a time to market, and too much technology risk, means they will be unlikely to invest yet.

cash flowFinally, the most important issues the entrepreneur faces are related to their own ability to manage the business, and the resilience of the business model in its profit forecast. Both of these issues are very complex, and will be the subject of my next blog, however I will provide two simple insights.

The first is that an entrepreneur should have a certain level of relevant experience, or failing this find a partner they can work with who has. There are many examples of this pairing in technology companies (Think Mike Lazaridis and Jim Balsillie or Bill Gates and Steve Ballmer).

Second, the most important financial issue in developing a business is managing cash flow. The simple question to be addressed is does the company have enough cash, or can it raise it from external sources, to last until the business can generate positive cash flows. Understanding these numbers is critical both for the venture and the credibility of the entrepreneur.

I would be happy to answer any questions on fatal flaws or send you a copy of my recent paper in Journal of Business Venturing on the subject amaxwell@innovationcentre.ca.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.

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Andrew MaxwellBy Andrew Maxwell

Part 1

In working with many entrepreneurs and their innovative ideas, I have become exposed to the concept of fatal flaws. These fatal flaws, if not properly addressed, will likely doom an enterprise to failure.

It was not a surprise to me that based on more than 20,000 assessments of opportunities at the Canadian Innovation Centre over 30 years; the Centre had formally identified these same factors.

FailAcademics (particularly Tom Astebro) interested in predictive accuracy, confirmed the reliability of predicting both success (85% reliable) and failure (95% reliable).  In an effort to increase the ease of use of this tool, factor analysis extracted eight critical factors, which have now been used in a variety of applications, including my own research.

In this research, I found that the presence of a single negative factor, termed a fatal flaw, was indicative of failure, and would often be identified by investors as reasons for non-investment. However, in applying this approach to hundreds of ventures, I have found that the initial diagnosis of a problem does not mean that the venture is doomed; instead, there are a number of ways each fatal flaw can be addressed.

The first step in addressing a fatal flaw is identifying it.  I have identified the factors that lead to these flaws so that entrepreneurs can critically identify potential problems in their own business and work to address them.

The first factor is related to the market, and includes adoption, benefits, market size and route to market. The most common challenge facing a new venture is getting customers in the target market to be aware of the product or service and subsequently to purchase it. This is often based on whether the product or service meets a real need in the market “pain” or is just something that is nice to have “vitamin”.

The second factor, particularly for technology entrepreneurs is changing the concept of product or service features to benefits, and having real customers involved in specifying exactly what benefits they expect from the solution. On many occasions I note that the product is “feature rich” and thus too expensive, or  it doesn’t address the identified problem.  Having a customer involved in the development process can go a long way to addressing this.

The third factor is related to potential market size. Given that most ventures require some initial investment and will incur a level of fixed costs to stay in business, the entrepreneur must show that the market is large enough for forecast sales levels to be both realistic and enable the company to make a profit. This issue is particularly important when the company is looking for third party investment.

Finally, many entrepreneurs underestimate the challenges of getting their product to market. In some cases, the challenges can be overwhelming, for example, launching a new medical device. In many cases it is not cost-effective to launch you own sales organization and distributors are either hard to attract or their sales people already have a variety of well- known products to sell. Understanding and planning for these challenges are the key ingredients for success.

Tomorrow, I discuss technology issues, mangement and cash flow.

I would be happy to answer any questions on fatal flaws or send you a copy of my recent paper in Journal of Business Venturing on the subject amaxwell@innovationcentre.ca.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.

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