This is the first article in a two-part series on how to maximize your chances of success when approaching an investor for your business.
One of the modern marketplace myths mouthed by talking heads and politicians is that small businesses don’t have enough access to capital. You could write a book about what these people don’t know about small business.
It’s true that capitalizing a startup isn’t easy. Here’s some non-breaking news: funding a startup is supposed to be hard. But if you have a viable business model, a performance track record, can justify future performance, and are creditworthy, capital sources will come and play in your backyard. But remember the Marketplace Golden Rule: “He (or she) who has the gold, makes the rules.”
Before we go further, let’s identify the four primary sources of small business capital:
- Founder’s equity – whatever you contribute out of your own pocket, initially and thereafter.
- Retained earnings – profits left in the business. This is the best kind, and it demonstrates that you’re worthy of a loan or an investor.
- Debt – a business loan from a bank, credit union, crowdfunding and/or individual.
- Outside investment – from investors. This source is the focus of our two-part series.
The good news is that outside investment sources have become more robust and multi-faceted, whether from venture capital funds, angel investors, and more recently, crowdfunding. The rude news is that, just like getting a loan, you have to have your corn flakes together to score this kind of funding. The bad news is the investor capital process is very complex, and it almost always takes longer.
In his important book Raising Capital, my friend and long-time Brain Trust member, Andrew Sherman, reveals the common mistakes entrepreneurs make when searching for investor capital. In this series, Sherman’s handy list will be revealed – six in this article, and six in the next – each followed by my commentary.
Mistake: Using an investor search that’s too broad.
Each investor has an interest and related strategy. An investor that likes medical ventures won’t be a prospect for your retail idea. Qualify each investor prospect before making contact.
Mistake: Misjudging the time involved.
Part of Murphy’s Law states that everything will take longer than you think. Alas, Mr. Murphy is alive and well in the capital acquisition marketplace. It usually takes months, not weeks, to find, approach, and get an answer from investors. Even crowdfunding will take more time than you think. And remember, like prayers, sometimes the answer is “no.”
Mistake: Falling in love with your business plan.
Every mother’s baby is beautiful, but your plan is not your investor prospect’s baby. Expect your business plan to be adjusted before you get funded because investors don’t fall in love.
Mistake: Taking financial projections too seriously.
First, let’s establish a prime financial truth: All projections are wrong! Absolutely, put your best foot forward with projections you’re prepared to justify. But also include a conservative set that shows your break-even point if (when) things don’t go as planned. Did I mention Mr. Murphy?
Mistake: Confusing product development with sales.
Investors love real customers and real sales. Even sales projections based on history will be highly scrutinized. But projections based on projected sales will be highly discounted. This is the meeting where you’ll be asked, “Will dogs eat your dog food?”
Mistake: Minimizing the management team.
A good management team can fix a bad plan, but a bad team can ruin a good one. Unless you’re asking investors to contribute management expertise, don’t seek outside capital without a qualified management team the investor can believe in.
Write this on a rock … Remember the Marketplace Golden Rule: He who has the gold makes the rules.
Next week, six more investor search mistakes to avoid.