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Part I
The Investor-Courting Process
Court investors who have a history of investing in your type of businessconcept by proving to them that your business concept will work.
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Chapter 1
The Investor-Courting Process
āI'm trying to decide as I'm listening to you guys whether I'm falling in love with your energy and enthusiasm and business savvy for your age, or if I'm falling in love with the idea.ā
āDragon to Pitchers
THE INVESTOR-COURTING PROCESS
Courting is a process that starts long before you actually meet an investor to make a pitch. It begins with an idea you have for a business that you believe is viable. The next stage is building a business model and proving that it works. This takes you to the step of obtaining face time with investors to make your pitch and get a deal that makes sense for your business.
Long before launching her fashion empire in 1909, Coco Chanel learned how to sew in a small town in France in the orphanage where she grew up. Before Frank C. Mars started his confectionery business in 1911, his mom taught him how to hand-dip chocolate at home. When EstƩe Lauder launched her cosmetics empire in 1946, she was able to draw on the experience she gained watching her uncle produce skin creams in their family kitchen. Harry Rosen worked in a clothing factory, where he learned the art of designing andmaking clothes, before he launched his men's clothing retail chain in 1954. Michael Dell sold newspaper subscriptions years before he used a $1,000 investment to launch his direct-sales computer company out of his dorm room in 1984. And Sara Blakely of Spanx probably had no idea that the sales skills she learned as a fax machine salesperson would help launch an undergarment company that would lead her to become America's youngest female billionaire. The list of entrepreneurs who have used a skill set and past experience to launch their businesses goes on and on.
But when they launched their operations, most of these individuals didn't achievesuccess by simply sitting down and writing out a business plan. They got it from their ability to meet the needs of a paying customer using the skills they already had. What enabled these people to prosper was their ability to find a market for a product or service that they had built. They developed their skills first, and a sound business plan followed.
Once you prove your business concept, it is time to put a strategy in place to sustain your competitive advantage over the long haul. You have to assume that if your business becomes profitable, somebody somewhere is going to enter your space and compete for market share. Your business plan must have a long-term strategy and address assumptions about facing competitors. Oh, and while you're at it, make sure it's investor ready, just in case you need capital to grow.
When Scott Sigvaldason, owner of Cavena Nuda, visited the Dragons' Den with his rice substitute, he had a concept that was more than investor ready. He had $1.5 million in sales the previous year from selling his product as animal feed, but now wanted to sell it as a food product to restaurant chefs across the country. Convincing the Dragons to invest was easier said than done. Fortunately, one Dragon with deep restaurant experience was aware that the price of rice worldwide had gone through the roof, so he decided to seed the company with $250,000 of his own cash.
CAVENA NUDA
Pitcher: Scott Sigvaldason, Season 4, Episode 3
āPitcher to Dragons
PRODUCT DESCRIPTION
An oat grain substitute for rice.
Dragons' DEN BY THE NUMBERS
- The Ask: $250,000 for 20% of the business
- Company Valuation: $1.25 million
- The Deal: $250,000 for 50% of the business
- 106: The age of Scott's farm
- $1,500,000: Sales last year when Scott packaged his product as animal feed
- 40: The number of years of restaurant experience that one Dragon brought to the deal
Scott Sigvaldason of Cavena Nuda pitching his rice substitute to the Dragons.
The Warm-Up: Investor-Courting Process Defined
This book is about making sure that you have a fundable business concept. You can create a properly formatted business plan for just about any business idea you can come up with. But the business-planning process will do nothing to enhance a weak business concept. That's why this book, and its companion, The Dragons' Den Guide to Assessing Your Business Concept, go hand in hand to help you focus on first proving your concept, and then creating your business plan. In fact, if you have a proven business concept with customers and the right connections, you might just get funded without a business plan. But don't count on it. Business plans are a critical due diligence tool that most investors request at some point during the investor-courting process.
The investor-courting process is a fundraising process that brings entrepreneurs and investors together to achieve their shared goals of return on investment. The purpose of the investor-courting process is to match entrepreneurs who have fundable business concepts with investors who have funds, who can provide guidance, and who ultimately profit from the relationship. The following are two areas of the investor-courting process that are important to understand:
- Milestone: An achievement in the development of your business that the investor will use to measure your performance.
- Stages of Investment: A growth stage of your business that will attract different kinds of investors at different times.
Milestones: What Investors Expect
Make no mistake about it, investor capital is provided so that you can achieve business milestones, not so that you can reach the next round of funding. While investor capital can certainlybe provided as a precursor to future funding rounds, don't lose sight of what really matters: revenue, profitability, and satisfied customers. Because if you fail to achieve those, you won't need an angel investor anymoreāyou'll need a white knight to save your business from the abyss!
The initial excitement of a fledgling business concept will quickly disappear if you don't turn your concept into a real business fast. Some key milestones that investors look forāand often help entrepreneurs achieveāare:
- building a working prototype
- acquiring intellectual property, such as patents
- conducting a successful beta (or pilot) test with actual customers
- achieving s...
