Seeking Investors, Part II
As we learned earlier, there’s more to acquiring capital from venture capitalists than just writing a business plan and asking for money.
This is the second of two articles based on a list of investor search mistakes Andrew Sherman identifies in his book, Raising Capital.
Below are the rest of Sherman’s “mistakes,” each followed by my thoughts.
Mistake: Not understanding how busy investors are.
Don’t deliver information with a fire hose when a pitcher is preferred. If there is interest, investors will request the full details as needed (see below).
Mistake: Providing a 4-inch-thick business plan.
Actually, you probably will need three plans: a two- or- three- page executive summary (the pitcher), a 10-page (+/-) model, and the long one with everything (fire hose). Use the last two as details are requested.
Mistake: Too little analysis in the business plan.
You must have history, testing, and/or research to back up your financial assumptions. Investors won’t invest based on your promises or instincts.
Even though you shouldn’t show your extensive data until requested, you should summarize what you’ve learned in the short plan models and produce the details when appropriate.
Mistake: Not recognizing that timing is everything.
If your schedule (when you need the money) and that of your investor prospect are not in sync, guess who makes adjustments?
Be sure to build some wiggle-room into your timing.
Mistake: Being afraid to share your idea.
Sherman says you can’t sell something you can’t tell.
Get your hands on a confidentiality agreement that fits your project, understand it and get comfortable with using it. Investors expect you to protect your ideas and property.
Mistake: Being price wise and investor foolish.
Which would you rather have: A) $1 million from an investor who knows nothing about your industry; or B) $500,000 from investors who have industry background and contacts?
Believe it or not, “B” will be the answer many times.
Remember, capital is more than just cash. Consider all contributions before turning down an investor’s offer.
Mistake: Believing that ownership equals control.
Establishing initial ownership and control is where many investor deals fall apart.
Here’s a modified golden rule that can be handy: He who has the gold makes the rules, and he who puts in the gold usually gets control.
Founding entrepreneurs are typically better served focusing more on how the investors are going to get out – their exit strategy – rather than how they’re going to come in.
Sorting out initial and ultimate control and ownership requires thoughtful negotiation by motivated parties.
Write this on a rock… Before seeking investors, educate yourself about the fundamentals of acquiring investor capital. As the leader of your company, it’s your job.
Jim Blasingame
Small Business Expert and host of The Small Business Advocate Show
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