- The entrepreneurs lacked experience running a business and had unrealistic financial projections. Their proposed online gambling business would operate in a legal gray area and focus on making money rather than building a sustainable company. - When asked about competitors, the entrepreneurs demonstrated only a surface-level knowledge of the market and competition. They also did not appear to understand the cultural factors needed to succeed. - Questions about technology, intellectual property, and capital requirements revealed the entrepreneurs had done little planning or preparation. They intended to waste funding and misrepresented details about other term sheets.

1. ?
What do
investors
look for?
Presented by:
Peter Tolnai
ptolnai@marsdd.com

2. ?
The Question
“I’m afraid I can’t remember how this
meeting was set up and I don’t have any
documents. Can you please remind me who
referred you to me?”

3. Setting up the Meeting
The Question
A Review
Positives
Some homework on investors
!
Resourceful
!
Results-oriented
!
Negatives
Inappropriate use of Craig Lauder (who doesn’t know about this meeting)
!
Over-aggressive
!
Demonstrates that the team is not well-connected
!
Defensive about the deal – won’t send advance materials
!
The Bottom Line
Get the best quality introduction you can get
!
Send some materials in advance so VC can prepare and use time more efficiently
!

4. ?
The Question
“Please give me your personal
backgrounds and tell me the story of how
you know each other.”

5. The Management Team
The Question
A Review
Positives
Two people have worked together before
!
Negatives
Each team member should speak and provide their own backgrounds
!
All have large company experience; no entrepreneurial experience evident
!
Bob and Mark are brothers: Nepotism often a problem
!
The Bottom Line
Experience in BOTH a large sophisticated company to acquire skills AND a
!
small, resource-constrained company to learn entrepreneurial skills provides
best background and complete skill set.
Teams who have worked together before reduces risk of creating a new
!
management team.

6. ?
The Question
“Mark do you think you have the right
experience to be the CEO of this deal?.”

7. Mark as the CEO
The Question
A Review
Positives
Some very limited entrepreneurial experience
!
Knows the online gambling industry
!
Negatives
Knows the online gambling industry
!
No entrepreneurial experience; questionable abilities to set priorities; identify HR
!
requirements; recruit a management team; manage a business “by the numbers”;
etc.
Overconfident “sales-guy” without recognition of challenges of starting a business
!
The Bottom Line
Entrepreneur may or may not be the CCEO at different stages of company
!
development.
Listen to the VC and assess if he/she has practical insights on this point.
!

8. ?
The Question
“Please tell me about the technology and
the market you’re going after.”

9. The Market Opportunity
The Question
A Review
Positives
None - Sorry
!
Negatives
“Gray” area legally; needs to be offshore and many investors in the fund would not
!
be supportive”.
Completely unrealistic revenue and EBITDA forecasts. Defining revenues by
!
assuming market share is an illusion; all start-ups start with zero market share.
Greedy and arrogant
!
Focused on making money personally – not building a business.
!
The Bottom Line
Build a business that solves a real business or consumer need, and the financial
!
rewards will take care of themselves.
Building a business is very hard; demonstrate confidence with an awareness of
!
the risks.

10. ?
The Question
“What segment of the market are you
targeting and what is the competition
doing in that market segment?”

11. Market Segmentation
The Question
A Review
Positives
The online gambling market in Asia is large and potentially underserviced; these are
!
not games that most mos North American companies would typically “do first”.
Negatives
It isn’t clear that Mark has played Mah Jong or any of the other games he wants to
!
target, as his knowledge of the competition appears to be thin.
Even if this were a relatively open market opportunity, Mark and the team appear
!
to lack the cultural sensitivity which would almost certainly be required to succeed.
The Bottom Line
You have to know more than just what you’re doing! Try to know EBERYTHING
!
about the market: segmentation & characteristics of each segment; competitors
and their strategies; key success factors; who has failed and why;movement of
key managerial talent; etc.

12. ?
The Question
“Can you describe the technology
architecture and whether any of your
technology could be considered proprietary?
Have you looked at the intellectual property
estate around your technology?”

13. Technology Review
The Question
A Review
Positives
None - Sorry
!
Negatives
No IP work at all
!
The Bottom Line
Understanding of IP estate is essential, both “positive” (“Do we have
!
anything patentable?”) and “negative” (“Does our invention infringe on any
existing patents?”)

14. ?
The Question
“How much capital do you need
to get started?”

15. Capital Requirements
The Question
A Review
Positives
At least they understand they need marketing money; many entrepreneurs assume
!
their products will “sell themselves” based upon the sheer brilliance of the solution.
Plan to complete software V1 and demonstrate viability before raising second round
!
of financing at (hopefully) a higher valuation.
Negatives
Frightening use of proceeds without project plan for software development
!
Wasteful spending on the wrong expense items; this is 2007, not 1999.
!
Unintended insult and arrogance (raising money in New York), implying that “this
!
deal will get too big or you”.
The Bottom Line
Investors must see well-planned use of proceeds with spending “appropriate”
!
to the deal.
Amount of capital to be raised in Round 1 should finance achievement of
!
significant value creation step + at least 6 months at then-current burn rate
to allow time for raising Round 2.

16. ?
The Question
“What valuation are you putting on the
deal, and are you speaking with other VCs?”

17. Other VCs
The Question
A Review
Positives
Understands the process
!
Negatives
Consultation with others in management team undermines credibility, followed
!
by blatant lying on getting another term sheet to attempt to obtain negotiating
leverage.
Unrealistic timing
!
The Bottom Line
Never misrepresent ANYTHIING during the process; it undermines trust in
!
everything else.

18. ?
The Question
“Isn’t online gambling illegal in Canada
and the US? How will you operate?

19. Legal Structure & Documents
The Question
A Review
Positives
Their plan MAY be legal, but clearly violates the spirit and intent of the gaming legislation and
!
tax code.
Negatives
Their plan MAY be legal, but clearly violates the spirit and intent of the gaming legislation and
!
tax code.
Impossible to obtain legal opinions on legality and tax from credible sources.
!
Deviation from “tried and true” convertible preferred share structure is a “red flag” to
!
VCs; it always makes things more complicated, consumes time and is expensive to paper
with the lawyers.
Structure makes it VERY difficult to sell to a third-party buyer (except another online
!
gaming company) and very difficult to have an IPO.
The Bottom Line
Keep the structuring very simple.
!
Use standard documents.
!