Thanks to present-day pop culture, the first thing that comes to mind for a lot of people when they think about investment capital is the television show “Shark Tank.” Featuring real startup business owners making the pitch of a lifetime to some of the most successful business minds in the nation, it calls attention to the notion that anyone has the potential to turn an idea into a profitable business. Because of this, it is highly regarded by many.
But not by all.
“I used to like it too, but I actually hate it now,” says Charlie Banks. “It is 100 percent made-for-TV.”
Charlie Banks is a co-founder of VentureSouth, one of the most successful angel investment networks in the country. Comprised of 11 community investment groups in North and South Carolina, the organization invites individual investors to pay an annual membership to come to local meetings and see entrepreneurs pitch, and to potentially collaborate on investments. There are 238 member investors of VentureSouth, 68 of whom are founders of their own companies, 52 are active CEOs, and 80 sit on a board of a company. To date, the collective groups have invested $20 million into entrepreneurial endeavors.
Banks believes “Shark Tank” has brought the idea that anyone can be an entrepreneur to the mainstream media. As might be expected, this has resulted in an increase in the number of small businesses in existence, as well as the number of innovative ideas being brought to the table. And on the opposite side of the entrepreneurial spectrum, it has also brought more investors into the fold.
However, all of this is not always a good thing in the eyes of Charlie Banks. Because starting a company is hard. Raising capital for a startup company can be even harder. And you don’t need to invest $100,000 into a company to be an angel investor.
Essentially, Banks believes Shark Tank has played a key role in creating an environment with lackadaisical entrepreneurs, and investors throwing far too much money into half-assembled ideas.
Charlie Banks is here to right the ship. To dispel false entrepreneurial ideas, and set the record straight.
Banks says VentureSouth has reviewed almost 2,000 business plans. Out of those, they’ve allowed 117 companies to pitch to them, and have invested in 55.
“We’ll look at 20 or 30 business a month,” says Banks. “We’ll boil that down to a handful that we then enter into a formal screening process. Companies come to a location, they pitch in front of a video camera, it’s streamed to all of our 200-plus members. The members then have a week to vote. They view the pitches and have an electronic voting system. They dictate the top two companies that will move into a funding cycle.”
This funding cycle is a 2-month period, during which VentureSouth takes its selected companies on a “road show” to each of the 11 groups in the organization to make pitches. At the end of this period, Banks and his fellow funders score the companies, and each member decides whether he or she wants to invest individually in the company. Those individual investments are pooled amongst the entire organization to represent VentureSouth’s total offer.
VentureSouth’s 60% average return on money is far higher than the industry average of 27%. Banks says that success can be attributed to his organization’s careful calculations before an investment is even made.
“Our diligence is really good,” he says. “We spend a lot of time on our diligence. It’s based on our exit [sale of a company]. When we look at a company, we say ‘can we exit this company, what can the entrepreneur sell it for, and what return can we get?’ We don’t invest emotionally, we don’t invest because it’s a good idea. It has to make really good economic sense.”
In all, VentureSouth has achieved 11 “fully-realized investments,” or companies with which they have actually been able to achieve their exit goals. A reminder that, even for the most successful groups, picking the right idea to put one’s faith behind is a difficult business. On both sides of the equation.
“Traditionally, with early-stage investments, about half of them are going to fail,” says Banks. “In the top half of that, 25 percent are going to return at least our money. That top quartile is where we get our returns. So we need to build a portfolio of these companies knowing that half of them are going to fail, and about 25 percent of them are going to give us enough return to offset the losses.”
So, what do the angel investors of VentureSouth look at to build that portfolio?
- Companies that are in the “go-to-market” stage.
This occurs after a business has created some awareness, and built up some customer validation of their idea.
“Customer validation, to us, is revenue,” says Charlie Banks. “It means at least one person is willing to pay you one dollar for your product or service.”
“We want our money to take your company from a five million to a twenty-million-dollar revenue company,” he says.
- The team behind the business.
For VentureSouth to consider an investment, the company’s players must be trustworthy, resourceful, and committed.
“A lot of the time, these people will have experience in the industry they’re working in,” says Banks. “They have industry expertise, oftentimes have done this before and have had a successful exit.”
- Capital efficiency.
Essentially, this is how long a company can operate before it runs out of money.
“Early-stage companies fail because they run out of cash. Period,” says Banks. “But that is due to them missing the mark on the market, mismanaging the money, not focusing on selling.”
- The structure of the potential deal with the company.
VentureSouth typically looks to take about a 20-30% equity stake in a company. They aim to make a 50% return on their money, and to “get out” in a 3 to 5-year time frame. For the company, this means it must be able to grow quickly, and the owners must plan to sell their business to a larger company.
“You absolutely need to have an exit strategy,” says Banks. “And you need to be able to back it up too.”
“Exits are the gasoline for this machine,” he says. “You have to generate those exits in order to be successful, period. For a community, for an investor, for an entrepreneur, for an entire ecosystem. The exits are the driving force behind all of that.”
When a company meets this criteria, when they have the attention of VentureSouth, they must nail their pitch to have a chance at making it to the funding cycle. Here, Charlie Banks offers some tips on things he and his fellow investors don’t want to hear.
- “These are conservative estimates.”
“Part of our due diligence is, we take your financials and pretty much shred them,” says Banks. “We do our own financials. But they’re based on your assumptions. And you’ve got to be able to back up your assumptions. So don’t start there. Say something along the lines of ‘This is what I reasonably think I can do. Based on my research, based on peer companies in my industry.’”
- 3-page Executive Summaries.
This is more of a thing Charlie Banks doesn’t want to see rather than hear, but the point remains the same.
“When we ask you for a 1-page executive summary, please give us a 1-page executive summary,” says Banks. “Make it concise. Let us know what you do, how you do it, how you’re going to make money and how we’re going to make money. Simple as that.”
- Presentation longer than 12 slides.
“You would be shocked at how many times I say ‘send me a 12-page PowerPoint Presentation,’ and they send me a 39-page presentation,” says Banks. “I rarely read past three, so in those first three pages you better get somebody’s attention. If your hook is on page 39, you’ve lost.”
- “We don’t have any competition.”
“I promise you, you have competition,” Banks says. “It might not be the competition you think of, but it’s there.”
- “We’re going to make money by monetizing our data.”
“That might have been the case five years ago, but that should not be your core revenue model,” says Banks. “That should be more of a cherry-on-top, oh-by-the-way kind of thing.”
- “We’re going to sell to Facebook or Google.”
Banks says that this should never be the exit strategy of a company.
“Build your company to make money, and if Facebook or Google come to you, and want to buy, sell to them,” he says.
- “We don’t have any revenue, we’re just banking on a bunch of users.”
To Charlie Banks, this is perhaps the most important “don’t” of all.
“You’ve got to have revenue,” he says. “Revenue is absolutely the most important thing you should think about. Driving growth through user acquisition, that’s great if it comes with revenue. But we want to see revenue.”
VentureSouth can fuel the growth of local economies by fueling the growth of the companies based there. So, what does Columbia’s portfolio potential look like?
“This idea of building an entrepreneurial ecosystem is really young in the Midlands,” says Charlie Banks. “And things like One Million Cups, and SOCO, and these initiatives are really just the foundation of what we believe could really be a burgeoning ecosystem here.”
“We want to take a more active role in helping the deal flow in Columbia, and in South Carolina,” says Banks.
“We have a 501c3 called Venture Carolina, and we’re going to leverage that much more in 2017,” he says. “So you’re going to see more workshops, seminars, webinars, a lot more education for the entrepreneurs and investors. It’s important that we bridge the gap between those two groups.”
“Once we start to bridge the gap between the investors and the entrepreneurs, we have some winds, then it has this flywheel effect that really takes on a life of its own,” says Banks.
“At the end of the day, if [startups] are focused on revenue, and [investors] are focused on making money, we’re going to end up doing good,” he says. “Jobs are created, ecosystems are developed, and people are happy.”
Watch the full One Million Cups, Columbia presentation here: