Further, your management team doesn't need to be full-time or actually drawing salaries. It's possible to bring in an adviser with a certain expertise to fill a hole on the management team -- say, a chief financial officer -- at least temporarily. If a start-up can't afford to make certain prospective hires -- who are still employed at other jobs -- until after the funding comes in, it's acceptable to submit blind rÉsumÉs in the business plan, says Jeff Gonyo of Wind Point Partners, a private-equity investment firm in Chicago. Spero notes that one company in his incubator has several top managers who are moonlighting from day jobs. Do the investors mind? Not terribly, says Spero. They like the fact that the company's burn rate is only $15,000 a month. And although stock options aren't the carrot that they once were, VCs still want to see that management teams are getting equity as an incentive, Abramson says.
"We used to say that you could raise money if you had an A idea and a B team, or a B idea and an A team," Abramson adds. "Now you need A's for both."
The Financials
As potential investors leaf through your business plan, the biggest questions in their minds will be, How soon does this company get to breakeven? When will it be profitable? Are the numbers real?
"One thing venture capitalists are doing that we didn't do before is really getting under the covers," says Abramson. She looks hard at gross margins, as does Spero. Cash flow is equally important. Gonyo wants to see detailed monthly projections "that demonstrate a well-thought-out way to get to cash-flow break-even level."
The path to profitability has to be both clear and short -- a year to 18 months. As a rule of thumb, angel Cal Simmons, coauthor of Every Business Needs an Angel, advises that entrepreneurs should plan to reach profitability within half as much time as they're raising money to cover: six months if they're raising a year's worth of funding, for example. Company founders can no longer count on another round of financing to get to breakeven, as they once did. At the same time, with valuations scraping the floor, raising too much money may mean giving away the store.
Savvy entrepreneurs will also want to include the slowing economy in their assumptions. Sales cycles, especially when selling to large companies, have always run longer than entrepreneurs assume, says Abramson, and they're running even longer now. Pricing is tricky. Some investors say they don't like to see prices at or above industry norms. On the other hand, Spero warns against trying to compete on price, even though that route is tempting for a start-up. "A business that is forced to compete on price is a commodity business, and commodity businesses usually don't do well in a downturn, and don't do well as venture investments," he says.
One thing hasn't changed since the boom: investors still want to cash out in five to seven years. IPOs are out and acquisitions are in. Investors like to see potential acquirers named in the business plan because it shows knowledge of the market.
In short, today's investors are looking for experience and profitability, with an emphasis on profitability. Those are exactly the same things that investors were looking for five years ago, before dot-com mania changed the rules. But now, because so many angels and venture funds have lost serious money in the past 18 months, the basics count more than ever.
Emily Barker is a senior staff writer at Inc.
Hands On
And What Can I Do for You Today? In a business in which simply selling boxes is the norm, Digital Photo Imaging Inc. (DPI) distinguishes itself by offering ridiculous levels of service. Director of sales Mark Oster says things like, "We'll stand on our heads and wiggle our ears for our clients," which makes him sound like a Crazy Eddie commercial. But he's the genuine article: the digital-imaging-system company sends a support person along with equipment rentals, offers unlimited phone support, and provides same-day swap-outs for misbehaving cameras. Purchase premium service, and DPI will send a technician to visit you two to three times a year. Those visits also serve as what Oster calls "warm sales calls," giving DPI a chance to sell add-on products. The approach seems to work: seven-year-old DPI had sales last year of about $3.8 million and has recently more than doubled its staff. --Peter Krass
The Whole New Business Catalog
Will Work for Paycheck
The Right Fit
The Innovator's Dilemma
Inside Information
The Bulletproof Business Plan
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