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Sunday, 08 January 2017 15:35

Investors offer tips for startups seeking capital

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Investors offer tips for startups seeking capital Courtesy Photo. Illustration by Rachel Harper.

The first time Jason Mejeur pitched to a prospective venture capital investor, armed with his “crappy” PowerPoint presentation to explain his concept, he failed to secure any money.

What he got instead was good advice to keep working on his idea and his company. It turned out that he had approached investors too early, although they told him “we like your idea, just keep us up to date.”

He did just that. And when Mejeur returned months later, he had a better pitch and was able to report that his JMBP Ventures LLC was generating revenue on its Programax mobile application that it developed for high school and college athletic coaches to better engage with the current generation of student athletes.

The lessons learned from his first pitch helped JMBP Ventures, where Mejeur is co-founder and president, to close in early December on a $555,000 seed investment round. The company continues to pursue another $295,000 in early-stage capital.

With an MBA and knowledge of business and finance, Mejeur found that raising capital, pitching an idea and finally securing financing was the “biggest learning and the steepest curve for us.”

“You have to be able to tell them the story in a compelling way so they see the return on investment on the idea,” Mejeur said.

Investment professionals locally say Mejeur’s experience is common for entrepreneurs and startup companies seeking capital. Timing is everything and oftentimes a startup will come forward seeking an investment too early in its development, they say.

Investors acknowledge there’s no “silver bullet” or single criteria a startup can meet to garner the interest of a VC firm to land an investment. A combination of many factors investors consider  eventually leads them to an investment in a company, but high on the list are a potential for high growth and a clear path to generate an exit and a return on investment.

For entrepreneurs, that all starts with aiming high with an idea to build a business around, said area investors, whose advice illustrates that venture capital tends to steer toward big thinkers who can prove an ability to execute on their visions.

“We’re always looking for something with big potential,” said Tim Streit, a partner in the Grand Rapids office for Ann Arbor-based Huron River Ventures.

“I want to see a business that can be a $100 million business in three to five years,” Streit said. “I always encourage people to think big. Don’t think about what can put food on the table. Thinking ‘what can change the world’ is a good place to start. Try to be ambitious.”

Huron River Ventures invests in tech businesses. The firm has deployed about $16 million and presently holds positions in about 20 portfolio companies.

SEEKING SCALABILITY

At the onset, venture capital investors want to see ideas that solve existing problems in a marketplace.

“It’s just how early on to solving the problem you are,” said Ben Gott, entrepreneur-in-residence at Wakestream Ventures in Grand Rapids, a VC fund that spun out of Start Garden. “If you’re not solving a problem in the market then, of course, it’s a little tough.”

To build a “substantial business,” Streit added, “you have to go after a big problem in a big market.”

Additionally, entrepreneurs need to show passion for their ideas, a “very strong understanding” of the problem they’re solving, their market and their strategy to get to the marketplace, said Joe Lampen, finance director at Wakestream Ventures. They must demonstrate the ability to build and scale a business around their innovations and possess “some sort of unfair advantage” over potential competitors, he said.

“We’re trying to find out whether the founder has the ability to grow an organization, not just get a product off the ground — not just simply starting a business and running a small enterprise,” he said.

That includes identifying the competitive advantage for a new product or service, what’s different about it today, and how it will differentiate from competitors well into the future, said Paul D’Amato, managing director of Holland-based Grand Angels Venture Fund II.

“We’re interested in companies that have a barrier to entry or a barrier to competition and they’re able to maintain it,” D’Amato said.

Investors said they want to understand a founder’s willingness to surround himself with the talent the business needs or to step aside, if needed, when the business gets to a point it requires leadership with a different skill set. They also look at whether an entrepreneur is open to advice and coaching.

“I think pretty much every venture fund would say, ‘If they can’t be coached, then we just don’t want to work with them.’ We have other deals we’d rather do,” D’Amato said.

MORE THAN A CONCEPT

Securing financing is a lengthy process that starts with an initial introduction and parties on both sides taking time to get to know one another. Investors advise that entrepreneurs behind startups should start building relationships with VC firms early and spend a lot of time nurturing those connections.

Formal pitches to prospective investors “should be concise,” Streit advised. Presentations should take no more than a dozen slides and “start out with why there’s a big problem and why the market is really big and exciting,” he said.

“If it takes 20 slides to explain what you’re doing, then you either haven’t thought enough about it or it’s too complicated,” Streit said.

When pitching to investors, entrepreneurs need to know that venture capital funds tend to avoid investments in ideas or business plans. A company needs to have moved past the conceptual stage. 

A startup can help its cause if it has developed to the point that the company is generating sales. Investors like prospects to “show a little bit of traction or a little bit of consumers saying, ‘Not only do I think that’s a great idea, but I’d actually exchange some of my dollars or exchange my time for that solution you created,’” said Gott of Wakestream Ventures.

“There’s nothing like someone who’s pulled something together, and maybe it’s not the perfect solution to what they’re working on, but they have people to start using it or to start purchasing it,” he said. “And that shows the spark of what things can kind of look like going forward, instead of saying, ‘Once I have money, then I’ll be able to get people to buy it.’

“You’re going to get a lot further if you have customers and are showing that you’re continuing to accelerate the pace at which you’re getting customers.”

AVOIDING MISCONCEPTIONS

That was the case with JMBP Ventures and its Programax app. Working with capital invested by friends and family, Mejeur and his business partners beta-tested and brought the app to market. They had about 400 paid subscriptions when they returned to investors last year seeking capital to scale up the business.

“We knew we had a product that people were buying,” Mejeur said.

In considering an investment prospect, VC firms also want to know future capital needs and a clear exit strategy for a company toward generating a return.

Oftentimes investment prospects will have a misconception that a venture firm’s role is to create jobs or even that they’re a form of philanthropy, D’Amato said. Startups need to avoid a feeling of entitlement to an investment and remember that the VC firm is there to make a return for its investors.

“I represent investors and our goal is to invest in profitable companies, so we want to make a good investment in those companies,” D’Amato said.

It’s a rare company that meets all the criteria that a VC considers when scouting for deals, he said.

Streit at Huron River Ventures acknowledged that raising capital is a hard process and not for the fainthearted. However, he advises startups to continue working on their ideas and keep trying even if a venture capital firm opts against making an investment.

“Good businesses find capital, so I would encourage entrepreneurs to just keep grinding at it and working on the business,” Streit said. “If they really have a good idea, eventually they’ll find capital.”  

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Mark Sanchez

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