Writing a winning prospectus isn’t about presenting your financial crystal ball to investors. It’s not always about the numbers.
Yes, investors want to see that some thought went into realistic number-crunching and revenue calculations. The more realistic, the better. But, the reality is, if you’re an early stage start-up seeking funding beyond the F&F network (friends and family), your numbers are less important, and, for a variety of reasons.
SO, what should you focus on in the prospectus? Everything but your numbers.
With this post, I’ll walk through a real-life prospectus I wrote that helped a nascent start-up secure a nearly $1 million investment with only three “proof-of-concept” projects under its belt. This particular start-up needed some bridge capital to help cover a portion of the burn and minimally expand staff, technology and operations.
Today, I know $1 million doesn’t sound like a lot of cash. However, if you’re a small business start-up, securing that kind of money early can feel like winning the lottery.
The following are some key topics you will need to address.
Let’s Talk Structure, First
Your prospectus should flow easily. First, it should present an “at-a-glance” view of the company, leadership, industry and the investment ask up front. Then, it should unfold with details. All in, your prospectus will likely be 25-35 pages or more, depending on how detailed you get and how many exhibits you provide.
The prospectus provides an opportunity to discuss your company’s plan, promise, products and people. It is an opportunity to:
- present your culture
- demonstrate your innovation and thought leadership
- discuss future product development strategies
- show potential investors the roadmap for your brand, marketing and business development strategies.
Let’s get really granular for a minute and discuss the physical structure.
LAYOUT FOR BINDING: Delivering a professional-looking, bound prospectus to an investor establishes a good first impression. Take the time to set up your document with the end product in mind. Give yourself a minimum 1-inch margin on the left to accommodate the binding (whether that’s 3-ring or spiral). Set up your footers so that each page is numbered as part of the entire document – for example, “Page 3 of 32”. And, be sure that even page numbers sit left justified and odd page numbers sit right justified. Consistency and presentation matter.
Your cover page counts as page one, but should not contain a page number. Leave page two blank (the backside of the cover page) and put your table of contents on page three (you’ll see below I didn’t do that, but I should have). This should be the first instance of page numbering in the footer.
COVER PAGE: The cover page of the prospectus provides an opportunity to quickly position your company. Use it to tease a potential investor by providing a short positioning statement, such as:
Introduction to [START-UP FIRM]
A Veteran-owned Company Poised to Transform __________.
With a short positioning statement on the cover page, you’re building immediate interest with potential investors. They will want to learn how you will live up to your positioning statement, so be prepared to back it up with details in the prospectus.
TABLE OF CONTENTS: Don’t forget to include a table of contents (TOC) that outlines key sections of the document. It’s usually best to wait to create your document’s TOC until the prospectus is complete, but leave a placeholder in the document for reference. Waiting to create your TOC until the end will save a lot of hassle with constantly changing page numbers on it as your prospectus evolves. Here’s an example of the TOC:
CONFIDENTIALITY STATEMENT: In the footer section of every page (including your cover page), embed some confidentiality language. For example:
“Confidential Memorandum. Contains Proprietary Company Information Subject to Non-Disclosure Agreement. Not for Distribution.”
NOTIFICATION PAGE: The notification page differs from the “notice of confidentiality” page for three reasons: 1) it establishes, up front, the purpose of the document; 2) it gives you an opportunity to address key points about the document; and 3) it’s not necessarily legal language. Think of the notification page as a disclosure of material information. Here is an example:
The purpose of this prospectus and confidential memorandum is to acquaint a prospective investor with preliminary information about COMPANY.
COMPANY, as is common with nascent start-up ventures, has elected not to audit financial statements, appraisals of tangible assets, or real property. In addition, management has elected to omit substantially all of the informative disclosures ordinarily included in financial statements prepared on an income tax basis of accounting, market value presentation, and valuation reports. If the omitted disclosures were included, they might influence the prospective investor’s conclusions about the company’s financial condition. Accordingly, the documents contained within this confidential memorandum are not designed for those who are not informed about such matters.
As I mentioned, at this stage of start-up, the prospectus is not all about the numbers.
NOTICE OF CONFIDENTIALITY: This early section of the document is the legal stuff. As such, it should be drafted by an attorney to offer maximum protection for your particular business.
Among other things that may be recommended by your attorney, the notice should establish protections for the confidentiality of the information contained in the document, including any proprietary technology, intellectual property, patents, trademarks, etc. It should also inform the reader of their obligations to non-disclosure, especially if a potential investor has third-party advisors with whom they share information. And, it should reference that possession of the document is an acknowledgement that the recipient has signed appropriate confidentiality, warranty and non-disclosure agreements before reading further.
Now that we’ve set up the structure of your prospectus, let’s get to some of the good stuff.
This is Our Company’s Promise & This is Our Strategy for Success
Your prospectus is a strategic roadmap of how you will grow your company. In it, you must be demonstrate confidence in your company, its business model and processes, its leadership team, and its products and services. Don’t underestimate the importance of good story telling in your prospectus. Here are a few topics you will need to address within your prospectus:
- demonstrate your knowledge of the industry in which you operate;
- lay the framework of the current market conditions;
- discuss how conditions in your market may evolve and you with them;
- show that you’ve done your qualitative and quantitative research;
- demonstrate that you know the competitive landscape and how to maneuver through it;
- present your leadership team’s qualifications beyond what each has done in the past – demonstrate how their experience and capabilities will shape the future of your company.
- discuss the company’s products, services, points of differentiation and development strategies;
- lay out the company’s marketing and communications strategy, providing details about vertical markets, target buyer profiles, channels of influence, marketing mix, etc.;
- discuss the company’s brand and positioning strategy;
- demonstrate you know how to make money within the framework of your business model, and discuss the sales cycle and product/service distribution strategy.
In your capital-raising prospectus, it is important to go so far as to discuss factors that could negatively impact your business and how the company has plans to address these factors. Presenting a well-rounded viewpoint begins to decrease investor objections and increase your chance of getting funded early. Likewise, demonstrating the depth of investment and commitment to the business by the founder(s) provides would-be investors a comfort level to proceed or to walk away.
Please feel free to add comments and reach out if you have any specific questions.