The “Money Pitch” begins with the presentation you make when you send investor groups your business plan. Your business plan should be detailed, but concise, and in addition to containing an Executive Summary it should also state your financials, preferably audited financials.
Your Business Plan should also contain a detailed “use of proceeds” section. In this section you should state the exact amount of funding you are seeking and break it down so investors can see that you put thought and research into how you arrived at the total amount you are seeking. I have reviewed Business Plans from many clients and development stage companies. More than a few were poor estimates that were not well thought out. The amount you are seeking should also directly relate to that section in your business plan that shows your projected financials.
Investors will not want to fund your company $3,000,000 (for example) if in 2 or 3 years you can’t at least generate a multiple of that amount in gross revenues and achieve some sort of significant net profit. This is important because the investor group needs to consider its Exit Strategy even if that is 3 to 5 years after they fund your company.
Let’s break this down so you can understand the thought process of a venture capital or private equity firm that is going to make a funding decision regarding your company. By understanding the goal they want to achieve on their investment this will help you in preparing your business plan, obtaining the funding you need and achieving your goal.
Let’s say you are looking to raise $3,000,000 for expansion of your specialty hardware company and will give up 40% ownership in your company. The venture capital or private equity firm is thinking, we are investing $3,000,000 and are looking to get back $6,000,000 or more in 3 to 5 years. Now, if you can convince them that your company can use that $3,000,000 to increase its current $500,000 net profit to $2,000,000 then you probably have a good chance of getting your funding.
Here’s the reasoning. If the private equity firm owns 40% of your company and you go public or do a “reverse merger”, then using a low price-to-earnings ratio of 10 would mean your company would be worth $20,000,000. This is 10 times your $2,000,000 net profit and gives your company a $20,000,000 market capitalization. So if the venture capital or private equity firm owns 40% of your $20,000,000 company they can sell their stock for $8,000,000 and be very happy with the profit they have made.
Now let’s take another example. Let’s say instead of going public, you decide to sell your specialty hardware company to another much larger hardware company. The larger hardware company may only pay one times your gross earnings, or a little more depending on patents, technology, equipment and how strategic the acquisition of your specialty hardware company may be to them. So if your company has gross revenues of $8,000,000 and a larger company will buy you out for $10,000,000 then the private equity firm would get back 40% of that amount or $4,000,000 and still be happy with its profit.
Now that you can see the minimum end result that private equity firms are looking for, you just have to make sure that your use of funds can achieve the end results they are looking for so that you can obtain your funding and execute your business plan.
