Money Talks. How Do You Make it Listen?
By William Freedman - Member of FinTech Connector / New York
From personal experience, I can tell you that being the finance guy at IBM carries as much cachet as being the IT guy at a bank. Still, that grueling, 15-year existence gave me some rare insight into what decision makers really want to know about a new technology.
As one project exec described my job as he introduced me to the client, “Freedman takes what the [technologists] are trying to say then translates it into English and into dollars.” (If you really want to know what the boss said instead of “technologists,” hit me up offline.)
Five years after leaving Big Blue, I now put this hard-earned skill to work writing business plans and white papers for startups – more and more in the fintech space. At this point, I can confidently offer you concrete advice for communicating with the funding community. As crucial as attracting The Money may be to your enterprise, the stats say you’ll lose interest in this post in about seven minutes. I can’t share all the details in that time, but here are a few pointers to get you started.
What The Money wants to know
Value proposition. Forget the tech. Forget the spreadsheets. Just explain what the problem is and how you’re going to solve it.
Use of proceeds. Would you give $10 million to someone for “application development”? If you’re asking for serious money, be ready to present a serious budget. How many developers do you need? What specific skills must they have? What’s they’re average, fully burdened, hourly rate? The Money will know whether you built your budget from the ground up and are only asking for what you need, or if you decided how much money you thought you should be worth, then backed into that number.
Burn rate and plan to be self-funding. Suppose you get the capital infusion you asked for. How much will you be spending every month? At that pace, how long will the cash hold out? And once you’ve blown through it all, will you have revenue coming in from sales?
Founder interest and lockup period. Do you have your own money riding on this startup’s success? Are you willing to promise The Money right now that, no matter what, you won’t be selling your interest in it for at least five years? Three? One?
Risks. Anyone reading your business plan or white paper has an appetite for risk. Otherwise, they’d have all their wealth parked in a Vanguard fund and be reading The Robb Report instead. What’s life-changing money for you amounts to casino chips for them. They know what the risks are. They just want to know that you know what the risks are as well.
Exit strategy. The Money is willing to take on these risks because roughly one out of every ten of these highly speculative startups is going to hit it big. All the others are going to fail – there’s very little middle ground. So they want to know: If you call the shot and it follows, what’s in it for them? Public offering? Sale to a legacy competitor? Leveraged buyout? And how much patience will be required before it all pays off?
What The Money doesn’t care about
Utopian vision. Emerson wrote, “It is one of the most beautiful compensations of this life that no man can sincerely try to help another without helping himself.” By some sketchy application of property equivalence, there are those who take this to mean that helping themselves helps everybody else. With few exceptions – and these do exist – the individuals pondering your proposal only want to know how this deal is going to work for them. Will your fledgling organization end starvation, prevent Miami from washing into the sea, foster justice for all and bring about world peace? Maybe. But what’s the internal rate of return?
Hype. Don’t oversell. Be humble. If you find yourself bragging about your managerial experience, the brilliance of your team of geniuses, your bulletproof go-to-market strategy and everything else that’s superlative about your new enterprise, just remember this: The person you’re talking to pays more for haircuts than you pay for rent.
Jargon. If you can’t dazzle them with brilliance … then don’t bother. If you’re using terms that only the full-stack priesthood understands, you’re wasting your own time as well as your audience’s. If there’s a point or two you need to introduce them to, then do so succinctly. You don’t say “linear low-density polyethylene” when you mean “plastic”. So don’t say “transaction processing system” if “software” will do.
What The Money wants to avoid
Jail. As the regulations around initial coin offerings, security token offerings and whatever Dogecoin was continue to mature, blockchain startups will remain dicey ventures. AML? KYC? Tax implications? Qualified investor? U.S. person? The Howey test? Reg T? Reg A? Reg A+? There are more third rails than crossties on this stretch of track. The worst thing that can happen to the investors – or maybe you have to call them “funders” for legal reasons – is that they’ll lose the money they dedicated to your distributed autonomous organization. But whoever introduced you to The Money could get hit by lawsuits, fines or even prison. So could your lawyer, accountant, banker and transfer agent. If you can’t guarantee your service providers that guys in dark glasses, shiny shoes and windbreakers won’t make a dawn raid on their offices, you’re not getting anywhere near the investor class.
Tips and tricks
Peer comparisons. Even if you’re one in a million, there are 7,000 just like you and The Money has seen them all. Let them know which of their successful bets you’re most similar to. Then remind them how much a $1 investment in that company at the angel stage is worth now. Peer comparisons are almost always a good idea but, if you’re doing an ICO and trying to convince regulators that what you’re selling are utility tokens that are essentially no different from Delta Sky Miles, these are indispensable. If you’re floating an equity stake, then you can state reasons related to anticipated future earnings why you believe the value will increase over time. But if you’re selling magic beans, all you can do is show that someone else’s very similar beans saw a quantifiable amount of love from the market.
Tech audit. I already mentioned how interested in code the investor’s aren’t. Most of them aren’t techies themselves, but they do have some very smart techies working for them. So you need to be prepared to demonstrate to their experts that your fintech solution is going to work. Don’t be offended if The Money asks you to prove it. Be prepared for the tech audit. If you’re using open-source code, you might want to include your link to GitHub or wherever you’ve parked your repository.
Co-founders. At IBM we had a saying, “None of us is as smart as all of us.” We also said “IBM gets along perfectly well without U.” If you think you’re indispensable, The Money will prove you wrong by dispensing with you immediately. They have nightmares about you depositing their check in a Cayman bank then dying in a plane crash on your way home. Some won’t even consider a one-person company. And they’re right. One person could be a great coder or a great project manager or business process engineer or marketer or … , but nobody is all of those. Every Gates has an Allen. Every Jobs has a Wozniak. Every Musk has a Straubel. Every Bezos has a … fine, but you’re not Bezos. Know your limitations, and be generous with extending equity to a core group of people who will contribute their enthusiasm as well as their skill set to the goal of realizing your dream. But let’s say you can’t find anyone else you’re willing to partner with who’s also willing to partner with you. Should the rest of us believe you’ve got the social skills to lead dozens or hundreds or thousands of employees?
Advisors. Pick quality over quantity. On one hand, The Money wants to know that people whose opinions they trust have a good feeling about you and are willing to provide the mentoring you need to launch your business. On the other, every name you add to your pitch is additional padding to the burn rate.
So was that seven minutes well-spent? I do hope so. Best of luck with all your endeavors.
William Freedman is a New York-based fintech writer. He serves as an advisor or consultant to Coinexio, Collective Wisdom Technologies, Exsulcoin, goTRG, OpenGift, SharEstates and others, providing white paper/business plan composition, media strategy and web content. He blogs about blockchain economics at https://medium.com/@WilliamFreedman and holds an MBA in international business from The American University.