Seeking Investors, Part I
Small business capital comes from three primary sources: 1) profits left in the business; 2) debt, like a bank loan; 3) equity investment.
The challenge is to blend the right amount from each source into a capitalization plan.
In recent years, acceptance of the third source, investor capital, has increased among small business owners as well as investors. And while many elements of finding and acquiring investor capital are similar to getting a bank loan, the investor process is much longer and much more complex.
In his book, Raising Capital, Andrew Sherman lists common mistakes entrepreneurs make searching for investment capital. This is the first of two articles in which we’ll identify Sherman’s “mistakes,” and follow each one with my thoughts.
Mistake: Using an investor search that’s too broad.
Each investment firm has a strategy that fits its interest. An investor that likes medical ventures won’t be a prospect for your retail franchise idea.
Qualifying each investor prospect before making contact will greatly improve your search efficiency.
Mistake: Misjudging the time involved.
Part of Murphy’s Law states that everything will take longer than you thought. Alas, Mr. Murphy is alive and well in the investment marketplace.
It usually takes months, not weeks, to find, approach and get an answer from investors.
Mistake: Falling in love with your business plan.
Every mother’s baby is beautiful. But your plan is not your investor prospect’s baby.
Accept that your business plan will likely have to be adjusted before you get funded. So be prepared to accept capital that’s tied to modifications to your plan, or not.
Mistake: Taking financial projections too seriously.
First, let’s establish the prime rule of investment evaluation: All projections are wrong!
Of course you can show projections you believe are achievable. But also include a set that shows at least where your break-even point is if things don’t go as planned.
Mistake: Confusing product development with sales development.
Investors love real customers and real sales. Nevertheless, even projections based on history will be highly scrutinized. But sales projections based on projected products will be highly doubted.
Mistake: Failing to recognize the importance of the management team.
A good management team can fix a bad plan, but a bad team can ruin a good plan.
Unless you’re asking investors to also contribute management expertise, which is not unusual, don’t seek investor capital without a qualified management team.
Here’s a good place to begin your search: www.sba.gov/inv. Next time, the rest of the investor search mistakes.
Write this on a rock… The most valuable lessons are learned from mistakes. Make your own, not these.
Jim Blasingame
Small Business Expert and host of The Small Business Advocate Show
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