One type of pitch companies sometimes make goes something like this:
- Founders have a reasonably successful consulting services company where they do development or other project based consulting in a particular industry niche.
- Based on their knowledge of the space and seeing a need, they come up with an idea for a product.
- They divert some of their companies time/money to develop the product and maybe get a beta version installed at a couple of their customers.
- Now they are looking for money to take things to the next level.
In comparison to a ground-up startup, this type of investment opportunity does have its share of advantages due to the consulting services part of the company:
- There is some level of cash flow to help fund the new company
- There are existing relationships with customers in the industry
- Management has proven their ability to run a services company in the industry
However, in terms in of pitching to investors, there are a few aspects that need to be positioned compared to a ground-up startup.
Company – investors will probably not be that interested in investing in a low ROI services based business. The up-side will be with the product business. As such, since you are looking to bring in outside investors, now is the time to formally split the two parts of your company. This means separating into 2 different legal entities, setting the share capitalization of the new company, transferring any assets into the new entity, etc.
Intellectual property – since you probably did a large part of the development of your product as a side project to your consulting services business, you need to be clear where the intellectual property lies and who has ownership of it. Often the exit value of a company will be heavily dependent on its IP. Investors will not want to get into a situation where the services entity of the company retains the IP ownership and the product entity does not own the IP.
Revenue – past revenue generated by the services part of your business is not meaningful in terms of the new product part of your company. It is good to show for historical purposes to show stability, growth, etc of your consulting services business. But in terms of how well your product is selling, investors will want see this separately as most likely its only a small part if any of your current revenue.
Management – until the new product company takes off, most likely management will be splitting their time on the new company as well as keeping things running on the services side of the business. Investors will want assurances that management will be able to devote enough time to grow the product company without getting bogged down in fighting fires to keep current customers happy on the services company.
In today’s challenging investment climate, start-ups are going to have to rely on bootstrapping even more than ever. Providing cash flow by doing consulting services is a perfectly viable way to do this. When looking for outside funding, you just need to ensure you correctly communicate some of the unique structural aspects of the deal.
craig at mapleleafangels.com