Improved Liquidity, Investment Flexibility, and Labor Arbitrage


 

There were some great responses to my post last week as to the poor returns experienced by venture capital fund investors.

Some suggested that the blame for this lied more with the very difficult market and deal conditions of the past decade than with the VC investment model itself.

Typical was this comment submitted by a San Diego VC: "I agree that the VC fund industry is guilty as charged when it comes to being opaque as to real returns data, but I challenge you to revisit your analysis in 24 to 36 months, when we all will have had time to benefit from today’s strong M&A and IPO markets."

One reader reference Gust Founder David Rose’s new book - “Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups” and to Rose’s main contention that to access the 25% IRR potential of the asset class one must hold positions in not less than 20 companies.

He asked, “Is this practical advice? I mean - who really has the time to find, diligence, and invest in dozens of companies? And for those that don’t, are there really any “Warren Buffet-types” to back in this asset class?”

This is the billion dollar question, is it not?

And while of course anyone will be very hard-pressed to even approach Warren Buffett’s other-worldly track record, there are some powerful forces right now driving the timeliness of venture investing via the “Berkshire Model.”

These forces fall into three main categories – Improved Liquidity, Investment Flexibility, and what let’s call “Labor Arbitrage.”

Improved Liquidity. Illiquidity is a huge elephant in the room when it comes to startup and emerging company investing. Most startups and early stage companies that seek outside investors are years away from investor liquidity – either via sale to a strategic or financial acquirer, or far more rarely via a Public Offering of the Company’s stock.

Now Berkshire Model companies, as entities with fundamentally investment vs. operating mindsets more naturally position, language, and network their businesses in finance contexts.

While doing so by no means assures successful outcomes, it does create the far more likely possibility of secondary market liquidity alternatives for investors that “want out” in the interim before the final exit.

Investment Flexibility. Investment companies in the Berkshire mold have great flexibility to structure investments of various types: traditional straight cash-for-equity, warrants, contingent warrants, revenue certificates, convertibles, in exchange for professional services, on project-by project bases, and more.

This flexibility is a game changer, as when done right it can provide managed, diversified exposure to a portfolio of deals and opportunities inaccessible via more “traditional” means.

Labor Arbitrage. A wise man once said that all businesses fundamentally do is “bridge the gap” between markets for labor and those for products and services.

Relatedly, one of the best advantages of the Berkshire model is the ability it affords to "Mark Up" the labor involved in effecting deals and transactions.

Let’s explain this by example.

Say a finance or advisory services professional is paid a salary of $80,000 per year, plus bonuses and incentives based on deals, transaction closings, and successful exits (not atypical terms).

Let’s then utilize a 20% load factor and assume that this worker’s fully loaded cost is $100,000 per year. Let’s then assume a 2,000 hour work year (we hope they work harder than this, as this is such an opportunity filled industry!).

Then, on a hourly basis, this professional’s fixed cost is approximately $50 per hour.

Now it is neither unusual nor unreasonable for even midlevel management consultants and investment bankers to bill out at $250 an hour and more on a cash basis, and much more than this on a cash equivalent basis when services are performed in exchange for contingent and / or equity compensation pay structures.

The critical point here is that when services are performed in exchange for equity compensation , even with average deal “picking” there is a natural Deal Arbitrage Effect that can easily create positive expected value on each and every deal.

A massive advantage.

Like everything associated with startup and emerging company investing, a lot of hard and smart work is needed to do it right.

But when done so, the payoffs can be enormous.

Just ask any Early Berkshire investor for confirmation.

To Your Success,

P.S. Like to learn how to apply these principles to your portfolio?   Then attend my webinar this Thursday, “What the Super Angels Know about Investing and What You Should Too.”  

Click Here to learn more.

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The Big Secret to Raising Venture Capital


 

Years ago I served on a funding panel with Tom Clancy. At the time, Tom was a partner at Enterprise Partners Venture Capital in San Diego.

At the time (around 2003), many venture capital firms were licking their wounds. They had funded a ton of companies during the tech bubble phase, and most of them had failed.
 
This led Clancy to make an important decision. He said that going forward, Enterprise Partners would wait at least six months before funding any new company they met.

The rationale was solid. During the six months, he would see what the entrepreneur was able to accomplish. If the entrepreneur accomplished the milestones set forth in their business plan, than they were deemed worthy and would receive funding. If not, they would not.

So what is the entrepreneur to do during the six months in order to get the investor to write them a check?

Obviously they need to achieve milestones... But what else?

Before I give you an answer, I want you to know how crucially important this is, not only in raising capital, but in securing key partnership and gaining key customers.

Let me give you an example of an entrepreneur who successfully used this technique in order to get a key partner. This entrepreneur’s name was Chet Holmes. And one of the key reasons that Mr. Holmes achieved success was through his partnership with marketing guru Jay Abraham.

How did Holmes get the partnership with Abraham? Like many people, he tried to reach him by phone, fax and mail. But Holmes did it every other week...

...FOR TWO YEARS!!!

Then, he finally got a call from Abraham's business manager for a lunch appointment, flew to Los Angeles for lunch, and established a very profitable partnership.

So, what's the answer to the question of how to woo investors, customers, partners, advisors, key hires, and more over six months?

Effective and persistent communications. In other words...

FOLLOW UP.

You must consistently, over a period of time, hammer home your message to investors, key customers and others.

What exactly does this mean? For investors, once you meet them, you should follow-up with them at least twice per month to update them on your progress. For prospective customers, you should contact them on an ongoing basis to continually give them value and convince them of the benefits of working with you. And of course, don't forget to follow-up with your existing customers.

And a key here is that this follow-up should NEVER END unless or until the costs of the follow-up clearly outweigh the benefits.

Remember that people invest in, buy from, and partner with other people. So, who would you rather work with? Someone who has been contacting you for two years with quality messages regarding why you should partner with them, buy their product or invest in them? Or someone who you just met yesterday and tells you how great they are?

The answer is clear.

Don't stop at the first contact. Choose the appropriate frequency (i.e., you don't want to be perceived as too obnoxious or pushy to potential investors), craft quality messages, achieve your milestones, and convince investors and others to work with you over time.

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Are You a Business Contender or Pretender?


 

One of the great joys of my work is the unique opportunity it affords to meet and to learn from talented, committed, and effective executives - working hard and long on their entrepreneurial journeys.

Men and women like Mike Kovaleski and Carrie Kessel of Mahar Tool, a Michigan-based, mid-sized automotive technology distributor that is reinventing how vendor partnerships are structured and maintained in the global, high-tech, and oh-so competitive modern car business.

And as they do, they are creating both good jobs and an inspiring culture that's reflected in both the great longevity of their company (68 years young and counting!) and in the average tenure of their executive team (12+ years and increasing daily!).

Leaders like Dr. Ezat Parnia - President of Pacific Oaks - a small and fast growing Pasadena-based college that under his leadership is merging traditional offline educational values with the promise and power of online learning.

And as he does so, everyday demonstrating his fierce commitment to his students, mostly adults going back to school mid-life to earn training and degrees in early childhood education…

…who armed with their Pacific Oaks’ educations go out into the world and effect the school’s mission of seeing every child - no matter race, gender, or economic circumstance - be treated as a unique, special, and able learner.

And leaders like Good Samaritan Hospital’s CEO Andy Leeka, with his so articulate commitment to seeing his 1,400 employee strong, inner city Los Angeles Hospital become both a leader in care giving and a place that shows that even budget and regulatory-strained hospitals can be places of high staff camaraderie, great patient care, and dare we say, even a little fun, too.

What do these executives all have in common?

Well, first of all, in spite of them all leading very different organizations, with different reasons for being, competing in very different marketplaces, with very different sets of challenges and opportunities, they all think and act fundamentally the same.

Entrepreneurially.

Recognizing that even though they lead organizations that are on average more than 80 years old, that their fundamental business reality today is constant, unrelenting, everlasting, and fundamental change.

And that their job as leaders is to respond, pivot, profit, and win in the midst of all of it.

Second, they all "get" strategy.

Not as some academic or consultant’s exercise, but strategy as at the core of why their organizations exist and what their mandates are to lead them.

Strategies that are big, as in where do they want their organizations to be 5, 10, 20 years hence? (And how to best utilize data and Business Intelligence to get there).

And strategies that are “small,” as in grappling with what is the best CRM, the best eCommerce platform, the best project management software for their organizations.

And yes, they are all definitely contenders.

They just don't talk about reaching for the brass ring, they sacrifice every day to actually do so.

They plan their work.

And then they work their plans.

They (and everyone around them) know that it is not about them. Their glory, their rewards.

They’re in it for the mission. 

Because they are blessed to be given the opportunity, and now by golly they are going to strive and strain with every fiber of their being to make the most of it.

To contenders like them, I have only one thing to say: Thank You.

For making all of our lives healthier, smarter, richer, and all in all just better.

Oh, and maybe a quick word of advice for these business and organizational heroes: Every now and again do come up for air and give yourself a pat on the back. 

Because you've earned it and more.

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The Greatest Steal Ever


 

I grew up watching Larry Bird. My dad was a huge Boston Celtics fan (which is relatively odd considering he grew up in New York City). So, I became a huge Celtics fan too. And I was a big fan of the heart of the Celtics’ Larry Bird.
 
This guy never gave up.

In fact, if you watch this 40 second video - https://www.youtube.com/watch?v=H_RJ5XN8TK8 - you’ll see what I consider the greatest steal ever...

The Celtics were losing by 1 point with only 5 seconds left. And the other team had the ball. The game was essentially lost. But then Larry Bird intercepted the inbound pass and passed the ball to Dennis Johnson. Johnson scored the basket and they won the game.

While Larry Bird’s steal was phenomenal, if his teammate Dennis Johnson wasn’t in the right place and didn’t execute on his layup, Larry Bird’s efforts wouldn’t have resulted in a win.

As an entrepreneur, you also need great teammates. Since you can’t possibly build a great company by yourself.
 
In fact, great entrepreneurs are more like Larry Bird the coach (who “hired” and coached his players into being the best they could be) than Larry Bird the player (who performed key tasks and made his co-players better).
 
The key is this -- you need to find, hire and then train and coach the best people. Because there are TONS of bad people. I learned this very early on at Growthink. Years ago, I generally gave people the benefit of the doubt. If they said they could do something, I figured they could. And then I quickly realized that some people “have it” and some people don’t.
 
I think “having it” is the quality of people who “do what they say and say what they do” and always try to do their best. You want people who “have it” and at the same time people who are qualified and uniquely skilled at the position you need to fill. For example, while I believe I “have it,” there’s a whole bunch of positions that I’m not qualified to fulfill or which wouldn’t inspire me to do my best work.
 
So, how do you find these great people who “have it” and possess the skills you need. Here are my recommendations:
 
1. Event Networking:
great people have several common traits, one of which is their dedication to ongoing education. That’s why great people generally go to events and conferences. You also need to go to these events, where you’ll find some very talented individuals.
 
2. Being Sociable:
I’ve heard lots of stories of people meeting people at sports events, supermarkets, on a plane, etc., and striking up conversations that results in great hiring decisions. I must admit that I’m not the most sociable person outside of work; but I’m getting better at this.
 
3. LinkedIn:
LinkedIn is a great online network to find qualified people to come work for you. Join relevant LinkedIn groups to find folks with similar interests and who are looking to further their careers. And reach out to the best ones.
 
4. Recommendations & Referrals:
Oftentimes the best hires are the ones that were recommended to you by friends and colleagues. Send emails out to your network and advisors asking if they know someone with the skills you need. People generally only recommend people that they believe are competent, since their own reputations are on the line.
 
5. Executive Recruiters:
while this will cost more money in the short-term, executive recruiters (also known as “headhunters”) can find you great candidates. This is what they do. Importantly, they will often find you people who aren’t actively looking for a new job. These are often the best folks. I mean, would you rather hire an unemployed person looking for any company that will take them, or someone who’s thriving at a company but sees great opportunity in helping you grow your venture?
 
Importantly, in its relative infancy, eBay used executive recruiting firm Kindred Partners to find and hire Meg Whitman. Whitman turned eBay into a multi-billion dollar company and herself into a billionaire.
 
Using one or more of these five tactics will get you qualified job candidates. But, before you hire any, I highly suggest you give them two tests as follows:
 
1. A skills test:
whenever possible, you should test the skills of the job candidate. If you are hiring someone for a research job, give them a research assignment. If you are hiring someone to be a receptionist, do mock calls with them. Etc. I realize that for some jobs, it may be harder to test, but get creative since you want to make sure they will be able to perform.
 
2. A culture test:
if someone comes highly recommended and passes a skills test, it still doesn’t mean they’re the right hire. They MUST match with your company’s culture. For instance, if they’re a stiff, and your company thrives on fun and creativity, then they’re not the right match. Your company culture is critical, so don’t ignore this key test.
 
Hiring the right players for your team is critical to your success. There are no wildly successful 1-person companies that I know of. Imagine for a moment if you had a dream team; a group of employees that were so talented your competitors would be in awe. How good would your company become? How much faster would you accomplish your goals? How great would it be to come to work every day? Think about your answers to these questions, and then start building a great team and a great company today.

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The Two P’s Behind Michael Jordan’s Success


 

Earlier this month, the Milwaukee Bucks basketball team was sold by Herb Kohl for $550 million. What’s interesting was that in 2003, Michael Jordan was interested in investing in both the Milwaukee Bucks and the Charlotte Bobcats. However, for his $50 million, neither organization would give him managerial control.
 
So, Jordan passed on the opportunity to invest in either. However, over the following seven years, the Bobcats imploded and Jordan was able to purchase the entire team for $175 million in 2010. Since then, with full managerial control, Jordan has turned around the Bobcats team (the team made the playoffs this year for just the second time in history). As a result, the value of Jordan’s investment has gone way up. In fact, it’s most likely considerably higher than the $550 million just paid for the Bucks.
 
So what is it about Michael Jordan that’s made him succeed in both sports and business?
 
My answer: Preparation and Practice
 
According to the book "How To Be Like Mike: Life Lessons About Basketball's Best," as a player, Michael Jordan's practice habits and conditioning regimen amounted to an "almost alarming harshness."
 
In fact, many experts, such as Florida State University professor K. Anders Ericsson, argue that practice continually trumps talent.
 
Prominent examples of success attributed to continuous practice besides Michael Jordan include:
 

  • Bobby Fischer: While Fischer became a chess grandmaster at the young age of 16, he had nine years of intensive study and practice beforehand.

  • Warren Buffet: Buffet is known for his extreme discipline and the significant time he devotes to analyzing the financial statements of organizations in which he considers investing.

  • Winston Churchill: Churchill is widely considered one of the 20th century's best speakers. Historians say he compulsively practiced his speeches.

  • Tiger Woods: Tiger developed rigorous practice routines from an extremely young age, and devoted hours upon hours each day to conditioning and practice in order to improve his performance.

 
As you can see, and as is pretty intuitive, preparation and practice are keys to success in sports. And in business, it’s the same.
 
Consider these examples that entrepreneurs often face:
 

  • Developing your business plan? Make sure you prepare the right information. Conduct solid market research to ensure your market opportunity and strategy are sound.

  • Giving a presentation to an investor or prospective client? Be sure to spend significant time preparing. Make sure you develop the right slides. Make sure you practice it and deliver it smoothly. Make sure you’ve anticipated the questions that might arise, and have answers for each.

  • Meeting with an employee to improve their performance? Make sure to prepare your list of items in which they are doing a good job, and a list for which they must improve. Practice delivering the information and prepare answers for questions they might ask.

  • Holding a company-wide meeting? Make certain you have a clear agenda. Prepare an outline to follow and a list of key points you need to get across. Practice delivering your presentation to get the greatest impact.

 
Importantly, for these and other business situations, think about your goals. What is the goal of developing your business plan? What is your goal of presenting to an investor or prospective customer? And so on. Having these goals clearly in mind when you prepare and practice ensures you prepare for the right outcomes.
 
Legendary football coach Vince Lombardi once said, “Practice does not make perfect. Only perfect practice makes perfect.” Perfect practice means you’ve done your preparation, for instance, learned what perfection is. And both on the sports field and in your business, doing the right preparation and practice will pay significant dividends. So, be sure to make preparation and practice a part of your daily routine.

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5 Characteristics of SaaS Companies with Breakout Potential [Webinar Invitation]


 

My Post last week on the fast funding and growth success of Domo (over $450 million in capital raised at a $2 billion valuation), generated a lot of great responses - some whimsical, some skeptical, but with the most interesting being variants of:

"How can the lessons of Domo (and those of the other Tech Unicorn's profiled), be best applied to my business and investment plans?

Friday 1:30 pm ET / 10:30 am PT Webinar

This is such an important and in so many ways misunderstood topic that I decided to share, via live Webinar, key insights from the business models and investment strategies of Unicorns like Domo, UberAirbnbDropbox, and Slack and why some of the smartest business and investment minds in the world today consider what these companies do so important and valuable.

What Will Be Covered

On the webinar, I will reveal:


•    Why the valuations for SaaS companies have grown so exponentially
•    What aspects of their business models can be ported to virtually any business in any industry
•   Why emulating what Tech Unicorns do and how they do it can be so high ROI for virtually any business
•    Where companies with Unicorn Potential can be found in today's markets
•    And much, much more!

Who Should Attend

I have designed the webinar with two main audiences in mind:

1. Entrepreneurs and Business Owners seeking transformational ideas to quickly increase the growth and value of their companies.

2. Investors interested in aggregating positions in Disruptive Technology Companies at their most opportune moments: after the highly unpredictable Startup stage, but before they become widely known and priced to market.

Participant Limitation

To preserve the intimacy of the presentation, we are limiting attendees to the first 35 registrants, so Reserve Your Seat today!

Sign up here:
 

https://attendee.gotowebinar.com/register/346963354431820033

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Tech is Booming: Time to Invest in a VC Fund?


 

This is clearly one of the great boom times in the history of Venture Capital, with more than $29 billion in fresh capital being raised by more than 250 funds over the past year. This represents a 70% jump from the comparable, previous year’s period, and more than a 225% jump from the “nadir” numbers of 2009-2010 (all stats here from the NVCA).

And VCs have seen a lot of successful exits, too (hooray!), with in 2014 more than 115 venture backed companies going public and more than 455 exits via M&A.

Probably most importantly, long term (3, 5, 10, and 20 year) VC returns continue to significantly out-perform the major public equity indices (DJIA, NASDAQ, S&P 500).

All very, very good and exciting stuff, but for the individual investor, is investing in a VC fund a good idea?

It can be, as the return examples above attest, but because of regulatory and technology changes, there are now far better ways to deploy capital into high potential, privately held companies (i.e. the VC investment sweet spot). Here’s why and how:

Market Efficiency. With now over twelve hundred active U.S. venture funds - and in general with them pursuing mostly the same deal sourcing strategies and approaches - it has become extremely difficult for VCs to consistently find and secure high potential, well priced deals.

The result has been a “regression to the mean” - with alpha performance by fund managers being driven as much by randomness and luck (as it has been with public market mutual funds for decades) as by coherent design.

Fees. The world of low and no load management fees that so transformed mutual fund investing for in the 80's and 90's is far from being on the VC radar.

In fact, as opposed going down, venture fund fees have been going in the other direction, with a number of higher profile funds upping their annual fees to 3% (along with asking for a greater share of the returns) versus the standard 2-2.5%.

These high fees obviously eat away at return, and more profoundly are in contrast to the “disintermediation spirit” so at the heart of modern investing.

Friction. Little discussed in most venture fund models are the high costs of deal sourcing, diligence, and oversight.

It is not unusual for a venture fund to sort through thousands of possible investments, deeply diligence a few hundred, prepare and submit term sheets on a few dozen, and then do zero deals.

This all costs money.

And all this doesn’t even begin to measure the management and oversight costs on the deals that are done – which at their barest minimum range from quarterly board meeting attendance to monthly, weekly, and sometimes daily calls and meetings with portfolio companies.

All this work is necessary to do VC investing right, but is also expense and friction filled.

Now, funds do work to charge some of these costs back to their portfolio companies, but usually these offsets flow to the fund’s General and not its Limited Partners.

So what to do?

Well, for those that want access to the unique returns of the asset class, but are reluctant to either a) put all of their eggs in one basket via investing in one particular startup directly and / or b) get the problems with the current VC model per the above, here are two ideas:

    1.    Explore peer-to-peer lending sites like Prosper.com and LendingClub, all of which offer various forms of fractionalized and securitized investing into the asset class.

And, with the SEC greenlighting equity-based crowdfunding last week, keep a careful eye on crowdfunding sites like Crowdfunder.com that will now be able to directly process smaller-denomination private company investments over the Net.

      2.   Do Like Warren Does. The Berkshire Hathaway Model of an “operating company owning other operating companies” can be a great gateway to the asset class, combining both diversification along with the the “pop” and fast liquidity potential that a single company investments allows. Well-run companies like this that focus on the startup space are hard to find, but when one does they are definitely worth a closer look.

In short, when it comes to this asset class, the advice here is to avoid the VCs and explore investment models – some new and some old – that provide access to it in a lower cost, higher expected return, and all-around more modern way.

To Your Success,

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Perfectly Executed Crowdfunding Campaign


 

In my Crowdfunding Formula program, I teach the 14 steps you must follow to successfully raise money from Crowdfunding.

It turns out that Jeremy Smith from Provo, Utah, not only followed these 14 steps to a "t", but really perfected them.

The result: while he set out to only raise $12,000 for his new night light product (the SnapRays Guidelight), he ended up raising over $430,000 (he raised the $12,000 he needed in just 2 hours).

You can see the Crowdfunding raise for yourself at Kickstarter here.

Here are the key reasons Jeremy and the SnapRays Guidelight were successful in their Crowdfunding raise. Make sure you keep these points in mind if/when you use this great new funding source.

Great Video

The video explaining the product and the Crowdfunding raise was excellent. It starts by explaining the problem (i.e., existing nightlights have lots of issues such as bulkiness, etc.). It goes on to explain the benefits of his solution (e.g., ease of install, energy efficient, etc.). It even does a side-by-side comparison versus an existing solution showing how much better it is.

Then, about 2 minutes into the 2:45 minute video, co-founder Sean appears and says “thanks for watching” and explains how he and his team has “poured their lives” into the project or years. This personalizes the video, makes you like him, and thus makes you want to fund the project more.

Finally, the video has inspiring music in the background. While it’s just “stock” music footage, it gets the viewer excited.

Solid Description

Beneath the video, there are tons of pictures of the product, a great description, and answers to all the frequently asked questions people have about it. Where did they uncover what frequently asked questions to answer? Well, from previously presenting to potential investors and partners they developed a list of all the key questions people have.

Variety of Reward Options

When doing a Crowdfunding raise, you offer rewards to those who back you. This company wisely created 11 different types of rewards based on contributions of just $12 to $120. By having this variety, they were essentially able to price discriminate. People who were only able to offer $12, spent that amount, while those with deeper pockets provided more support.

Quality Social Media Marketing

Everything I’ve mentioned so far about this Crowdfunding raise would have been a waste had the founders been unable to drive people to their page. And that’s just what they did. Via a very effective and concerted effort, they took to Facebook and Twitter and generated a big buzz for their raise. As a result, they drove a lot of people to their Crowdfunding page, and those people often funded the company and/or told even more people about it.

Like everything else, it’s all about execution. Having a great idea is one thing. But the magic is when you perfectly execute on it, and raise over $430,000 in under 30 days!

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The Story That Launched A Billion Dollar Business


 

The right story can grow your business into an amazing success. That being said, consider this great story:

    On a beautiful late spring afternoon, twenty-five years ago, two young men graduated from the same college. They were very much alike, these two young men. Both had been better than average students, both were personable and both - as young college graduates are - were filled with ambitious dreams for the future.

    Recently, these men returned to their college for their 25th reunion.

    They were still very much alike. Both were happily married. Both had three children. And both, it turned out, had gone to work for the same Midwestern manufacturing company after graduation, and were still there.

    But there was a difference. One of the men was manager of a small department of that company. The other was its president.

    Have you ever wondered, as I have, what makes this kind of difference in people’s lives? It isn’t a native intelligence or talent or dedication. It isn’t that one person wants success and the other doesn’t.

    The difference lies in what each person knows and how he or she makes use of that knowledge.

    And that is why I am writing to you and to people like you about The Wall Street Journal. For that is the whole purpose of The Journal: to give its readers knowledge - knowledge that they can use in business.


The above story/sales letter, written by Martin Conroy, was used by the Wall Street Journal for 25 years starting in 1974. Doing the math regarding how many people this letter was sent to, the percentage of orders that came from it, and the subscription prices, it is estimated that this story resulted in $1 billion in sales for the paper.

So, what’s the point?

The point is that stories are an extremely effective, but often overlooked, sales tool that can allow emerging ventures to compete with large established companies. Stories allow companies to get their prospects involved in their message. It gets them excited. And then they want to learn more.

Here's an example of another startup who crafted a great story...

    I’m about to tell you a true story. If you believe me, you will be well rewarded. If you don’t believe me, I will make it worth your while to change your mind. Let me explain.

    Lynn is a friend of mine who knows good products. One day he called excited about a pair of sunglasses he owns. “It’s so incredible!” he said. “When you first look through a pair you won’t believe it.” What will I see? I asked. What could be so incredible?

    Lynn continued. “When you put on these glasses your vision improves, objects appear sharper, more defined. Everything takes on an enhanced 3D effect and it’s not my imagination. I just want you to see for yourself.”


The story goes on to discuss all the benefits of Joe Sugarman’s BluBocker sunglasses… over 20 million pairs of which have now been sold!

Does your company have a great story? If you do, great. If not, create one.

And once you have a story, where should it go? To start, it should go in your business plan. Use your story to excite investors, and others like potential partners and employees. And use your story in your marketing like the Wall Street Journal and BluBocker sunglasses did.

Success can be a simple as crafting a great story (and then delivering on the story’s promise of course). So start crafting today!

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The One Thing Every Venture Capitalist Wants


 

A venture capital firm is a financial institution that focuses on providing capital, in the form of equity, to companies who offer them the prospects of significant growth. 

The partners and associates at venture capital firms are known as venture capitalists. The term "VC" or "VCs" applies to both venture capital firms and venture capitalists. 

Unlike angel investors, who invest their own money, VCs are professional institutions that invest other people's money. VC firms raise capital for their own funds from sources which primarily include pension funds, financial and insurance companies, endowments and foundations, individuals and families, and corporations.

The VCs are then charged with providing a solid return on investment on this money. This is the one thing that every VC wants. By providing a solid ROI to their investors, VCs earn bonuses and raise more funds so they can stay in business.

VCs earn returns for their investors by finding high growth companies, making investments in them at favorable terms, guiding and nurturing them, and enacting a liquidity event (e.g., selling the company or having it complete an initial public offering).

Because they are utilizing other people's money, and are judged and compensated by the performance of their investments, venture capitalists are extremely rigorous in their investment decision-making process.

Importantly, VCs tend to only invest in companies with significant market potential of $50 million, $100 million or more. This is because even with all their relevant experience, the average venture capital firm will lose money on half the companies they invest in and only break even on a third.

Where VCs make their money is on the approximately 20% of companies they invest in that see explosive growth and provide remarkable returns of 10 times to 100 times or more on their investment.

Industry insiders sometimes refer to the 2:6:2 rule. This rule is that an average portfolio of ten VC investments will include two losses (e.g., companies go bankrupt), six moderately performing companies (may break-even on the investment or lose a little) and two very successful returns.

In fact, an analysis by Bygrave and Timmons of VC funding found that just 6.8% of investments returned ten times or more on the invested capital (these "home runs" are what give VCs high overall returns). Conversely over 60% of investments lost money or failed to exceed the amount of money earned if the capital had been put in an interest-bearing bank account.

The result of this analysis is that typically a venture capitalist will want to see the ability to get 10X their money back or more from investing in your company (they are seeking "home run" investments which compensate for the 60% of their investments that don't pan out) . As such, for every $1 million you are seeking from VCs, you must show them a realistic scenario where you can turn it into $10 million.

So, importantly, when approaching venture capitalists, remember 1) their primary goal is to make significant money from investing in you; and 2) you need to show them how they can earn a 10X return.

Now, if your company can potentially give VCs a 10X return, then seeking venture capital might be right for you. However, raising it is virtually impossible if you don't know what you're doing and haven't done it before. So follow this plan:

1. Develop a list of VC firms.

Start by creating a list of venture capital firms.

2. Narrow your list.

Each venture capital firm invests based on particular characteristics (e.g., some only invest in software firms), so you need to make sure your list only includes VCs that are interested in your type of venture.

3. Make sure the VC is active.

Many VC firms that have websites aren't active. That is, they aren't making new investments. You don't want to waste your time contacting and talking with these firms.

4. Find the appropriate person to contact.

This is critical. Venture capital firms are comprised of individual partners and associates. If you contact the wrong one, you'll be dead in the water.

5. Send the VC partner or associate a "teaser" email.

You don't want to send the VC a full business plan or executive summary initially. Rather, you need to send them a "teaser" email to see if they are interested. You don't want to "over shop" your deal.

Once the VC "bites" on your teaser email, the next step is generally to send them your business plan. Following that you'll do an in-person presentation(s), receive and negotiate a term sheet, and then sign a formal agreement and receive your funding check.

The process is a lot of work, but once you receive their multi-million check with which you can dramatically grow your company, you'll agree it's worth the effort.

Suggested Resource: In Venture Capital Pitch Formula, you'll learn exactly how to find and contact venture capitalists, exactly what information to include in your presentations, and how to secure your financing. This video explains more.

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