Guest writer

Guest writer:    Tim McEneny

By: Tim McEneny (Former Chairman and CEO of PurchasingNet, Inc.)
Note: This is the first of a three part series describing how entrepreneurs can get the most out of a meeting with a Venture Capitalist (VC).
Part 1- How to maximize your company’s value before meeting with a Venture Capitalist
Part 2-Understanding Venture Capitalists and other potential investors
Part 3-Making a Presentation to a VC…..Do’s and Don’ts
Months before thinking about meeting with a Venture Capitalist (or any potential investor), you’ll want to focus on ways to increase the value of your business. The greater the value of the business, the more likely you’ll be to draw interest from the VC community.
How do you determine the value of your business today? How do you start to increase its value? To answer these questions, you’ll need to look at it thru the eyes of the VC. Today you may be concentrating on improving customer satisfaction, but this may not be an “A item” for a VC. Let’s examine the “Value Drivers” most important to VC’s.
In the case of our internet software company, the main “Value Drivers” were:…
 

The “A Value Drivers”

1.      Revenue Growth: For most technology businesses, top line revenue growth is the most important determinant of enterprise value. The valuation of a software business is commonly stated as a multiple of annual revenue. For example, during the Internet boom, software companies were valued at up to ten times annual revenue (or more). During the Internet bust, software values were in the one-to three-times range (or lower). Normally, revenue multiples are based on the last twelve months (LTM) or trailing twelve months (TTM).
2.      Profitability: The importance of profitability varies depending on the overall direction of the economy. In good times, profitability may be a requirement for a VC. If you aren’t currently profitable, you’ll need to develop a believable “path to profitability”.
3.      Visibility: This means more than being able to forecast revenues and net income. This means you already have actual orders and contracts for products and services that you will be providing in the future. Some refer to this as “backlog.”
4.      Recurring Revenue: This means that there are actual service contracts and subscriptions with existing customers that extend into the future. This has become the second most important factor (behind growth) for most VC’s and acquirers of software companies.
5.      Management Team: The quality and depth of your management team is a factor in the decision to invest. The investor wants to know that your company can run without you (in case you leave or get hit by a bus).
 

The “B Value Drivers”

1.      Customer Base: The number of active customers and the quality of the customer base is important to many investors. Also, make sure you understand your cost to acquire a new customer.
2.      Unique Position in the Market: Investors value uniqueness. What makes your product or service different than the competition? What is your Unique Selling Proposition?
3.      Financial Processes: There can be no doubt in the VC’s mind that you have sound financial systems and controls. Also, if the buyer uses accrual accounting, make sure you can easily present your financial statements using this method of accounting. They’ll be looking at the last three years of your financials.
4.      Making It Easy on the Buyer: If investors sense there will be lots of work and complications with the deal, they’ll likely back away. Previous outside investment can be a complicating factor.
5.      Market Size: In addition to the current overall market size (in terms of total revenue), an investor will want to know your market share. Very often acquirers will want to know the “addressable” market size to gauge the opportunity.

The “C Value Drivers”

1.      Domain Expertise: How much do you and your team know about your market segment? Patents can be helpful. Awards can be useful. Experience is valued.
2.      Customer Satisfaction: Every company says they have happy customers. Third-party “proof” can be useful to prove your point.
3.      Partnerships: Forming partnerships with other companies is a good way to find a potential buyer. If you’ve actually worked with a company in the past, it can lead to a strategic investment.
Of course these Value Drivers can vary depending on the industry, but this list should give you a good starting point and help prepare you for a productive meeting with a VC.
Next timeUnderstanding VC’s and other potential investors.
His website at http://timmceneny.com/
Let us know what you think by leaving a comment below. Thanks!
Comments
  1. Reblogged this on stevesampson19 and commented:
    Some excellent insights. They appear to be common sense , but it is amazing how often they are forgotten.

  2. Hey, useful post…love the way you have presented the whole detail’s…it’s always good to read and get to know quality stuff… Entrepreneur India provides small business opportunities, best business ideas, how to grow your business etc. Do visit our website and get all business solutions as per your requirement’s.

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