132 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
weeks to hear something from the VC, suddenly you get an unexpected
phone call from the Managing Partner. “I am in the elevator going to a meet-
ing. Tell me why I should fund your company now.” The Partner has just
asked you to answer three questions: Why me? Why you? Why now?
Guess what? You only have one chance of being funded. Thus, an
Elevator Pitch must be a concise, carefully planned, and well-practiced
description of your company that anyone should be able to understand in
the time it would take to ride up three oors in an elevator. Like Babe Ruth,
your pitch needs to touch these bases:
◾ A burning market need and your proposed solution to the burning need
◾ Your team and how they are uniquely qualied to manage the company
◾ How you will make money for your investors
◾ Memorable tagline/pitch closing
6.10.1 Must Haves
Your pitch should have a riveting opening; that is, grab the interest of your
recipient. Your pitch should show passion—if you are not excited about
your idea, no one else will be.
I. Too many slides (not enough time)
II. Speaking to the slides; not the audience
III. Reading the slide
(although audience is literate)
IV. Presentation does not match the audience
(Talking birth control to retirees)
V. Fonts too small (unreadable from a
distance) (what is the room size?)
VI. To o much information in one slide
VII. Using light background with dark print
(did you hear about eye strain?)
VIII. Not practicing beforehand
How to screw up a presentation
Figure 6.8 How to screw up—How to fail at your presentation in eight easy steps.
Financing Your Dream ◾ 133
6.10.2 Brief Descriptions
Following the pitch be prepared to answer questions briey. You must pre-
pare a brief description of how the business is different from the competi-
tion, how you will make money, the resources you need from investors,
and the returns/payback the investor can expect.
6.10.3 Last Three Bits of Advice
Always use the KISS principle—Keep It Simple, Stupid. Do not use techno-
Latin, a language that only you understand. Highlight marketing advantages,
not technical benets.
6.11 Estimating StartUp Costs
Expenses incurred prior to the commencement of operations, startup
expenses are incurred after the decision to proceed with the new business
but before beginning operations, including:
◾ Business investigation expenses
◾ Organization costs
◾ Advertising
◾ Bank service charges
◾ Commissions
◾ Ofce and laboratory supplies
◾ Taxes (other than federal)
◾ Licenses, accounting fees, and legal fees
◾ Salaries and wages
◾ Utilities
6.12 Valuing You and Your Team
“It is better to invest in an ‘A’ team with a ‘B’ technology than in a
‘B’ team with an ‘A’ technology.”
Just about everyone will tell you that management is the top factor for a suc-
cessful startup. Furthermore, the entrepreneur represents 80% of the value
given to teams. It is not surprising to hear seasoned investors speak of the
134 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
“ABCs” of their entrepreneurial investments. The “ABC” philosophy can be
summarized as follows:
1. Type “A”. The entrepreneur is technologically experienced, and has a
successful record of running innovative companies. (Least risky)
2. Type “B”. The entrepreneur is technologically experienced, but does
not have managerial experience. (Average investment risk)
3. Type “C”. The entrepreneur is neither technologically nor managerially
experienced. (High risk)
Also, keep in mind that investors rarely provide you with all the required
capital, preferring instead to invest in pre-determined stages (milestone-
based). By staging their funding, investors retain the ability to abandon the
project or re-value the company.
6.13 Valuing Your New Venture. (Calculating
Pre-Revenue Valuation)
Valuation is the core determinant of return for investors. Unfortunately, seed
and early-stage venture valuation creates the most contentious negotiations
between the owner and investors. Aligning owner and investor expecta-
tions, particularly in the pre-revenue stages, is difcult and often leads to
an impasse.
In this section, we will undertake a simple case of nancing to illustrate
how the process works and to demonstrate that valuation is more an art
than a science and is ultimately determined by the marketplace and recali-
brated annually.
6.13.1 Basic Calculations
Pre-Money valuation is the value of the company before any money is invested,
while Post-Money valuation is the value after the money has been invested.
If an investment adds cash to a company, the company’s post-money
valuation will increase immediately after the investment.
External investors such as Angels and VCs will use Pre-Money valuation
to calculate how much equity to negotiate in return for their cash infusion
on a fully diluted basis.
Financing Your Dream ◾ 135
Post-Money Valuation = Pre-Money Valuation + Money (investment)
Post-Money Valuation = Investment × (Total investment shares
outstanding/shares issued for the new investment)
Pre-Money Valuation = Post-Money Valuation – new investment
6.13.2 Valuation Examples
Startup Capitalization Table
Stockholders # Shares $/Share % Ownership Enterprise $ Value
Founders 1000 N/A 100 N/A
Financing Series “A” Objective = Negotiate raising $1 million for 200
newly issued Series “A” shares.
Series “A” per share value = $1 million/200 shares = $5/share
Implied Post-Money Valuation = $1 million * (1200/200) = $ 6 million
Implied Pre-Money Valuation = $6 million − $1 million = $ 5 million
Capitalization Table Following Series “A” Investment
Stockholders # Shares $/Share % Ownership Enterprise $ Value
Founders 1000 5 1200/1000 = 83.3 5 million
Series “A”
Investor
200 5 1200/200 = 16.7 1 million
Total 1200 100.0 6 million
Financing Series “B” Objective = Negotiate raising $2 million for 300
newly issued shares.
Series “B” per share value = $2 million/300 shares = $6.67/share
Implied Post-Money Valuation = $2 million × (1500/300) = $10 million
Implied Pre-Money Valuation = $10 million – $5 million = $5 million
Capitalization Table Following Series “B” Investment
Stockholders # shares $/share % Ownership Enterprise $ Value
Founders 1000 6.67 1500/1000 = 66.7 6.67 million
Series “A” Investor 200 6.67 1500/200 = 13.3 1.33 million
136 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
Series “B” Investor 300 6.67 1500/300 = 20.0 2 million
Total 1500 100.0 10 million
A successful company can expect to have a series of investment rounds,
ideally at Up-Round valuations (a higher Pre-Money valuation in each suc-
cessive round). If the reverse were true, it would be called a Down-Round.
In our example, notice that the founders went from owning 100% of zero
to owning 66.7% of a $10 million enterprise, that is, $6.67 million in equity.
That is called value creation—get the picture?
References
1. Shapiro, J. http://thenextweb.com/entrepreneur/2012/04/22/
before-naming-your-startup-read-this/.
2. http://en.wikipedia.org/wiki/Corporate_title
3. http://www.investopedia.com/terms/s/sweatequity.asp
4. http://www.angelblog.net/Startup_Funding_the_Friends_and_Family_Round.
html
5. Hoeksema, A. http://blog.startupprofessionals.com/2010/08/friends-and-
family-largest-startup.html.
6. http://en.wikipedia.org/wiki/Venture_capital
7. WGBH Public Broadcasting Service. Who made America?—Georges Doriot.
8. Ante, S.E. Creative Capital: Georges Doriot and the Birth of Venture Capital.
Cambridge, MA: Harvard Business School Press, 2008.
9. Venture Impact: The Economic Importance of Venture Backed Companies to
the U.S. Economy. NVCA.org. Retrieved 2013.
10. Lucas, S.E. Speaking to Persuade. Chapter 15. http://www.jdcc.edu/includes/
download.php?action=2023&download_le_id=5274&action=2023&table_
num=.
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