Adventures in venture capital - the perfect pitch

Could it be that the BBC’s Dragon’s Den has actually succeeded where so many other fly-on-the-wall documentaries have failed? For once, it’s a reality TV show that actually mirrors real life, giving the public an intriguing peek behind the scenes of one of the commercial world’s most difficult pitches – finding capital.

Making the move from drawing board to boardroom is often a nightmare journey. In the fictional Dragons’ Den, the vast majority of contestants get the thumbs down from the panel of successful business people. But, as experienced accountants will know, it’s a similar story in the real world, where few business ideas ever get the backing they seek.

Even the best proposal will fail to evolve beyond the idea stage without the necessary financial backing. But sourcing funding can be difficult, even for those with a decent track record. For new entrepreneurs, the task can be almost impossible.

The poor success rate is no surprise, given that many entrepreneurs are so badly prepared when they approach potential backers. In short, they often simply haven’t worked out their story, and here substantial companies can be as guilty of poor preparation as one-man-band ventures. In fact, insufficient homework is the main reason why 85% of appeals to Venture Capital Trusts for funding fail.

The one essential tool for fundraising is a comprehensive business plan. It needs to have a focused summary of the business itself, supported by financial projections, an outline of the marketing strategy and a thorough evaluation of the market and any competitors. The financial projections must be more than just a disembodied profit forecast. This must be a fully integrated package that includes a cashflow projection and both opening and closing balance sheets.

Entrepreneurs are invariably in love with their ideas and desperate to explain every last detail. But it is important to make sure that the plan is as brief as possible, otherwise it will end up in the bin long before the investor reaches the end. It should have an executive summary right at the front, setting out all the key facts in one page of bullet points.

Producing a clear summary of the major assumptions underlying the business plan is a valuable exercise. This is the angle from which much of the questioning by potential investors will come. If you can set out your assumptions clearly and explain the rationale behind them, the plan will come across as being much more professional. There’s no guarantee that investors will agree, but at least they will understand the thinking behind the business.

There are few sure things in life, and the only certainty about business forecasts is that they are wrong. So, working out by how much, in which direction and, crucially, why, is the challenge. Failing to include some sensitivity analysis is a mistake that inexperienced entrepreneurs often make. Business plans need to recognise this and identify what the impact will be if, for example, the business misses its sales target by 10% in the first year.

It is the accountant’s role to play devil’s advocate – asking all those awkward ‘but what if’ questions – once the business plan has been finalised. Entrepreneurs may not find it easy to listen to your suggestions and take your advice, so interpersonal skills are key at this point. You may be experienced and have helped prepare a thousand business plans, but the client will be suffering from that curious mix of stubbornness, optimism and self-doubt that often characterises the entrepreneurial breed.

Turning the finalised business plan into a professional presentation is the next step in the process. The presentation should memorably – and succinctly – outline what the business does. The pitch is too complicated if the core purpose cannot be explained in 30 seconds, and you risk losing the interest of the investor. There’s a lot of truth to the old cliche about identifying a ‘unique selling proposition’, even if it may have been overtaken by newer management jargon.

The credibility of some seriously good projects has been destroyed in one fell swoop by a hesitant delivery and, worst of all, when the technology gets the better of an entrepreneur. Practise the presentation as much as possible. And if you’re using PowerPoint to deliver your presentation, make sure you have hard copy sets of the slides, just in case the projector bulb blows or the PC crashes.

Accountants – either working as external business advisers or in-house specialists – have a vital role to play in helping to anticipate the questions that a real-life panel of Dragons might ask, and prepare strong, well-researched responses. Once in front of the potential investor, you must be open and not defensive. Prepare yourself for detailed questioning and make sure you’re in a position to demonstrate why your skills and experience will justify the risk the investor is being asked to take.

And don’t sell yourself short. A common mistake entrepreneurs make is not raising enough money. If an idea is sound, a professional investor will be happy to put in a little more, if it gives the business a contingency fund to deal with the unexpected costs and problems that are inevitable with any new venture. Going back later to ask for more is usually difficult unless there is a very good reason why the extra requirement wasn’t anticipated at the outset.

Entrepreneurs must also be realistic about the potential value of the business. Investors will want a meaningful stake in the company, and not just a few per cent, so prepare yourself for giving up a significant share of the action.

They will also want a very healthy return on their investment and a planned exit route, so that they can see how they are going to get it back.

Raising money for new ventures is difficult at the best of times, but good professional advice and a planned, strategic approach can prevent it becoming mission impossible.

Nick Hood is the senior London partner at business rescue firm Begbies Traynor

TV TIPS
The budding entrepreneurs on The Dragons’ Den need all their powers of reasoning, presentation and persuasion to convince a panel of five business experts that theirs is a product worth investing in.

It may seem less of an exercise in business pitching, and more an excuse for public humiliation. But it’s certainly compelling TV.

Fellow judge Doug Richard, founder of data services company Library House and co-founder of the Cambridge Angels, a business angel for technology start-ups, has put together a Pitcher’s Bible to help contestants source the cash to put their business dreams into reality.

His advice is simple. You need to be doing something unique. You need a nose for an opportunity, and you need to know the market you’re targeting inside out – and then find a way to prove all of this to potential investors.

But remember that investors are not your enemies. ‘When you sell a part of your company, what you’re doing is getting married to a stranger for a very long time,’ he says. ‘If you don’t like them from the outset then the chances are you’re not going to like them later.’

For more about the programme, see www.bbc.co.uk/dragonsden.