Startups need to be able to effectively communicate their strengths and immediate execution plans in order to maximize their chances of securing funding for their ideas, market watchers note.
This is especially timely advice given the upturn in investor confidence would result in more startups entering the market, noted Peter Tan, CEO of Double Arrow Ventures. Citing the latest the Silicon Valley Venture Capitalist Confidence Index, he noted that confidence has rebounded from its slide over the past three quarters of 2011 to hit its highest point in more than a year. The index measures the confidence level of venture capitalists on a quarterly basis regarding the venture environment in the San Francisco Bay Area over the next 6 to 18 months.
1. Showcase conviction, quality of team
Entrepreneurs should prepare to highlight the strengths of the team members, because this is the most important consideration for angel investors, according to Michiel Wind, CEO of Crystal Horse Investments.
He pointed out that one of the key areas startups have to emphasize on is to show they had the right work and education background, and that they are fully committed to the project. "[The company will also have to be] knowledgeable, passionate regarding their business, focused, and available fulltime," he added.
One "no-no" for his investment firm is founders allocating high wages for themselves. "Founders have a big chunk of equity and should keep the monthly burn-rate low," Wind stated.
2. Attention-grabbing elevator pitch
A startup should have an attention-grabbing elevator pitch, noted Desai Arcot Narasimhalu, director of the institute of innovation and entrepreneurship at Singapore Management University (SMU). "This should be a concise description of the innovation or company in 15 words, preferably in 10," he explained.
Willson Cuaca, co-founder and managing partner at venture capital firm East Ventures, added that for pitching, companies should "just explain the most important aspect of their product in a single line".
The SMU director also called on entrepreneurs to be prepared to back up their elevator pitch with the information that potential investors might ask them. These could include questions on the market size, how it plans to scale up, profit margins, and ideas to handle future competition.
"Convince the investor why [your project] is worthy of his investment vis-a-vis the other proposals he may be considering," said Narasimhalu.
Cuaca added that some startups did not think their plans through. "Some of the founders have a big vision, and they explain too much of their long-term vision instead of the immediate execution plan," he said.
3. Clearly-articulated exit strategy
Startups will also need to be able to illustrate how and when investors can get their money back as a means to attract funding, pointed out Johnathan Lee, vice president of commercialization and ventures at Cradle Fund.
"A lot of startups just think of doing an initial public offering (IPO) as a way to exit. Realistically in my experience, that is not easy, and only about 1 out of 20 companies can achieve that," he said.
He added it would be more feasible for companies to position themselves as acquisition targets.
4. Be open to investors' suggestions
Startups should also be open to changes to their business models and accept that their ideas are not always perfect. "You need to be confident, but not arrogant," said Narasimhalu.
He added that he had encountered many startup founders in the past who were overly defensive and treated investors as enemies or vultures.
"Do not refute or belittle suggestions from a potential investor. He is investing his money into your company and whatever he says is in the interest of your company," the SMU director advised.
5. Research valuation and timing
A realistic valuation will be important as potential investors may lose interest if offered an unreasonable price, Cradle Fund's Lee advised.
Agreeing, Narashimalu noted that startups can consider several methods to evaluate a company's worth, such as value by proxy or using a price-to-earnings ratio.
He added that timing was also important, not only in terms of judging investor sentiment but also the company's own maturity. "Startups should consider other options such as going for debt in return for capital if they have collateral to raise the debt."
"It is wise to use either free government grants or some early capital from friends and family before transitioning into equity for capital. It is unwise to go for equity for capital too early, given that they would not have built up sufficient valuation of their company," Narasimhalu said.