Investor pitch prep, revenue model / pricing strategy. Seasoned entrepreneur, successfully ran profitable service & product companies, then deepened that experience consulting for 150+ predominantly tech companies for the State of Michigan and independently.
I have experience in enterprise software sales, accounting, and spent the first decade of my career as a software engineer & system architect.
* see LinkedIn profile for specific details
Jon Manning's answer is spot on.
I will add that you have not done a good job of picking your customers. Instead, it sounds like you're trying to attract generic, undifferentiated customers. Pick a clearly defined subset of customers who most value what your SaaS product delivers and then hit them with that specific message.
For instance, your customer is never "every company between 50-500 employees in Industry X". It's companies in Industry X that highly value powerful, easy sales reporting OR maybe companies who value that the schedule notifies every employee of their activities via their smartphone.
When a customer thinks "these software guys really understand us", you're no longer competing solely on price. They may gripe about price, but they will buy if the value is clearly there.
Your experience of making a bad investment decision isn't tragic in the VC world, it's the everyday reality. In order to generate stellar returns from one investment, VC's invest in several promising companies (proven market fit, good/coachable team, ideally in an industry where they know the space as well or better than the founders and have connections).
VC's also have the dry powder (money in the bank) to either sustain their investment with a bridge loan to another round or to maintain their ownership percentage via pro rata rights.
It sounds like you don't have the amount of money necessary to invest like a VC. Plus, if you're not accredited then you aren't supposed to be investing in that manner anyway. That's not the end of the story though because VC-style investments are only one path.
Other things to consider:
a) adjust what type of companies you're looking at. Home run types of companies that are basically a billion dollar lottery ticket have million-to-one odds. Consider turning singles into doubles by helping a small company that's got revenue and break even cash flow become a profitable company four times larger than it is now. Or consider the often maligned "lifestyle" business which can generate very nice cash flow and an exit (typically at much lower multiples).
b) use what you have that VCs don't - time. VC investors have timeframes to get a return, regular investor updates to make, and limited time to actually get involved in a business. Find a business you are excited about guiding and get hands on in an advisory role. If you can't figure out how your involvement will increase the company's revenues or profits by 20%, question why you're considering that investment.
c) To find good investments and to learn how investors think, get involved in the startup world. Mentor companies, become a judge for startup weekend and pitch competitions, etc. Exposing yourself to companies pitching and people judging (more experienced than you) will help you develop a deeper understanding of what professional investors are spotting so quickly when they reject an opportunity in front of them. It's in the process of mentoring that you develop relationships with founders, get to understand their business, potentially consult with them and then know without a doubt if you want equity in that company or not.
It's less glamorous and more time consuming to take this approach, but it leads to a high success vs. whiff rate.
- every founder thinks their idea is disruptive/revolutionary
- every founder says their financial projections are conservative
- explain your validation & customer traction
- explain the assumptions underlying your projections
- focusing extensively on the product/technology rather than on the business
- misunderstanding the purpose of financial projections; they exist in a pitch deck to:
a) validate the founders understanding of running a business
b) provide a sense of magnitude of the opportunity versus the amount of capital requested
c) confirm the go-to-market strategy (nothing undermines a pitch faster than financial projections disconnected from the declared go-to-market approach)
d) generally discredit you as someone who understands how to build a company; for instance we'll capture 10% of our market, 1% of China, etc. Top down financial projections get big laughs from investors after you leave the room.
bonus) don't show 90% profit margins. Ever. Even if you'll actually have them. Ever.
- avoid false precision by rounding all projections to nearest thousands ($000)
- include # units / # subscribers / # customers above revenue line; this goes hand-in-hand with building a bottom up revenue model and implicitly reveals assumptions. Investors will determine if you are realistic, conservative, or out of your mind based largely on the customer acquisition numbers and your explanation of how they will be achieved.
- highlight your assumptions & milestones on first customers, cash flow break even, and other customer acquisition and expense metrics that are relevant
- thinking about investor money as your money
- approaching the pitch from your mindset (I need money); investors have to be skeptics, so understand their perspective.
- bad investors; it's tempting to think that any money is good money. You can't get an investor to leave once they are in without Herculean efforts and costs (and if you're asking for money, you can't afford it). If you're not on the same page with an investor on how to run/grow the business, you'll regret every waking hour.
- it's their money; tell them how you are going to utilize their money to make them more money
- you're a founder, a true believer. Your mantra should be "de-risk, de-risk, de-risk". Perception of risk is the #1 reason an investor says no. Many are legitimate, but often enough it's simply a perception that could have been addressed.
- beyond the pitch, make the conversation 2-way. Ask questions of the investor (you might learn awesome things or uncover problems) and talk to at least two other founders they invested in more than 6 months ago.
Begin by creating a portfolio of your work and highlighting it on your LinkedIn profile. If you don't have a portfolio of work to point to, you need to get on that ASAP. Take on interesting paid projects via elance, guru, etc. or via a local placement agency, bidding aggressively if necessary to build a portfolio of work that will become the single most important reference point of your capabilities.
Determine a technology or platform focus. It's much easier to get work (and charge more) if you've got a reputation vs. being a jack of all trades developer. Yes there's tremendous value -- once you land a project -- to a broad set of experiences, but in the sales process it creates confusion. Pick what you love and can talk passionately about. If you're on the fence between 3 technologies, pick the ones that corporations view as most in demand.
Understand your target individual (the person who signs your contract). If you can understand and communicate directly with CEOs and CFOs in terms of business outcomes you will make 2-3x more money than if you are selling technology expertise to a CTO / head of IT. Technical managers are accustomed to looking for talent they generally view programmers as higher or lower skilled replaceable components. With a CEO, you can become a trusted partner - that's often not the case with an IT manager.
Once you've done all that, begin networking. You can find projects online, you find long-term clients via relationships.
Problem #1: virtually no freelance/independent contractors psychologically value the equity as equal to (let alone greater than) cash. To most people, 5% equity in a startup sounds like a very small amount, so they may demand 10% or accept 5%, but view it as a token amount. That leads to not prioritizing your business/project over cash-in-hand opportunities.
This means you could give 5% to a web developer, who you have to harass endlessly to prioritize your work, resulting in your being 3 months later to market. Eventually, if you succeed via your hard work, the company is worth $1M, so you ultimately paid $50k for a website and the developer never valued the equity anywhere close to what it's worth.
Note: it's not just undervaluing equity that leads to a lack of priority, many freelancers live on a short financial leash. The ones who are rolling in cash and charging top rates often don't have much incentive to take equity in a startup or they'll take equity alongside a reduced cash rate.
Problem #2: very few specialists are good long-term business partners. Do you want them seeing your financial statements? Do you want to explain financial projections and business decisions to your web developer? Want your accountant involved in management, marketing or hiring decisions? Would you put them in front of an investor or let them review a term sheet? Would you want them voting on your board of directors?
As the majority owner, you can't simply ignore minority owners: http://venturebeat.com/2011/07/18/what-are-the-rights-of-minority-stockholders/
Problem #3: most people (founding entrepreneurs included) are impatient. Everyone thinks their equity is going to be measurably more valuable in 6-12 months and the reality is it usually takes 3 years or longer to build a company that anyone would acquire. Is that service provider with equity going to be frustrated by the actual timeframe and constantly pester you to buy him/her out?
Problem #4: if you complicate your cap table with a few people who were short-term assets, that sends potential investors a message: you didn't value your equity, so they are going to grind you in valuation negotiations. They will also include term sheet clauses that are lopsided (including stronger than usual board representation) because they figure you're not savvy enough to negotiate them out. Also, if the cap table is perceived as too complicated, some angel / VC investors simply will pass because they don't want the hassle.
Conclusion: I've seen these situations pretty often and most go badly, so if you think I'm generally down on the concept, you'd be right. I would be remiss if I didn't say it can work well, but only if you are gaining a true long-term partner who wants to be involved in ownership of the business long-term. If the person simply has some non-billable capacity and is viewing your equity as a lottery ticket, definitely pass.
- I am NOT a lawyer and am only providing links to resources, not legal opinions or advice.
- I have also been out of the industry for a few years and this is a fluid landscape, so continue monitoring the latest news, court cases, etc.
- Join the Fantasy Sports Trade Association and attend one of their conferences. Their legal panel is quite knowledgable and the cost to join and attend events is reasonable. http://www.fsta.org
- Fantasy sports traditionally have clear protection in federal legislation as contests of skill: http://en.wikipedia.org/wiki/Unlawful_Internet_Gambling_Enforcement_Act_of_2006
- The less luck (and therefore more skill) required for a given fantasy concept, the less likely it is to draw scrutiny.
- Make sure the legal counsel you hire has a clue about this stuff before hiring them or ask the FSTA if they can provide a referral.
- If a business is ultimately determined in court to be guilty of gambling, the legal structure is unlikely to offer protection to the owners personally.
Additional thoughts / resources:
- Generally speaking, "skill" is a combination of factors including method of selecting players, size of roster / starting lineup, ability to modify a roster via trades & free agents and the duration of the fantasy period (i.e. season, month, day).
- There are multiple lawsuits currently pending that could set precedence for daily games.
Details on the legal proceedings regarding daily fantasy:
There are two potential outcomes - a negative decision could drastically alter the fantasy sports world while a positive decision upholding daily fantasy as a contest of skill could result in the market being flooded by daily games from the huge media companies CBS, ESPN, etc who are sitting on the sidelines in part because of the legal uncertainty.
Regarding money, I'm not clear on the specific legalities, however a pretty obvious thing is that collecting money with a promise to pay it out and then not delivering is fraud. For customers, it's a huge trust issue, therefore the contests with a long-track record or a policy of escrowing funds develop a strong following.
Regarding licensing, again the best source is FSTA.org, however a generic answer is to steer clear of trademarks (including images) of the professional sports leagues and teams. Statistics are public domain (confirmed by legal precedent - see FSTA), but you'll likely want to subscribe to a stat provider as real-time stats are pretty basic expectation by customers.
- Do more research by reading the aforementioned articles and searching online for more current articles since things can change quickly.
- Talk with the FSTA if you're serious about getting into the industry - the value of their research and the panels at the conference is well worth the money, let alone the networking opportunities.
- Ultimately you're running a business and if you don't position your concept and execute well, it doesn't matter how fun & cool the industry is.
Asking a broad question welcomes suspect advice. It's unwise to apply generic "data" to a specific application.
Narrow the focus - who is the typical user? Under age 30? Over the age of 45? Is the application typically used in the office during work hours or mostly out in the field? Is wifi/cellular Internet access generally available or is there an expectation that connectivity won't be available?
Based on those demographic questions, what devices are your potential customers using? If it's 60%+ mobile/tablet, lean toward an app right away. If it's under 30%, consider starting web and then add a mobile optimized offering once you understand how your software is being used and how it will be best used on mobile vs a browser based offering.
The key to negotiation is understanding what the other party wants. What aspect of the business are they interested in? Are they going to run the business in the same manner you did or are they just after the brand/trademark, domain, list of users/emails, underlying software platform, etc?
If you truly walked away from the business, then it's tough to have negotiating leverage, however you can afford to be creative, such as taking $15k in cash and then 3% of gross sales over the next 18 months.
The other often overlooked aspects of selling a business:
- legal fees (can easily consume the sale price in your case) and the cost incurred by the seller in transferring the assets.
- unless the effort is negligible (and it almost never is), a consulting agreement should be in effect to compensate for the time spent transferring assets / knowledge to the new owner.
- tax ramifications can be significant depending on how the transaction is structured; consultant an accountant and since it's December, consider delaying the close until January unless all the tax implications are fully understood.