Accomplishing a successful investor relationship requires thoughtful preparation and skillful … [+]
This is the second article in a two-part series on how to maximize your chances of success when approaching an investor for your business.
Last time, I pointed out one of the modern marketplace myths mouthed by talking heads and politicians, which 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 and, as it turns out, Andrew Sherman did.
Andrew is my friend and long-time member of the Brain Trust of my radio program, and his important book, Raising Capital, reveals, among many other things, the common mistakes entrepreneurs make when searching for investor capital. So far in this series, I’ve revealed six of the mistakes on Andrew’s handy list. This time we’ll cover the other six, each followed by my commentary. To see the first article, search for this title with “Part 1.”
The good news for seekers of investment capital is that outside 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 almost always takes longer. And as you have and will continue to learn, there’s more to acquiring investor capital than writing a business plan.
Mistake: Not understanding the investor selection process.
Don’t deliver information with a fire hose when a water pitcher is preferred. If there is interest, investors will request more details as needed. You’ll need three documents: an initial, one-to-three-page executive summary (the pitcher), an intermediate 10-page (+-) model, and the one with all numbers and research (fire hose). Deliver the last two only upon request.
Mistake: Too little research and analysis.
You must have market/industry research and analysis to back up your assumptions and projections. Investors don’t value promises or hunches. Don’t show extensive data until requested, but reference and summarize what you’ve learned in the short models.
Mistake: Underestimating the funding chronology.
If your funding requirements and the investor prospect’s schedule are not in sync, guess who makes adjustments? Remember, to an investor, too much urgency sounds like desperation. And this will be true for crowdfunding as well.
Mistake: Being afraid to share your idea.
Sherman says you can’t sell if you can’t tell. Get a non-disclosure agreement that fits your project and use it. Investors not only expect to sign an NDA, they won’t respect you if you don’t give them one.
Mistake: Being dollar-wise and investor foolish.
Trick question: Which is the best alternative: a) $1 million from investors who know nothing about your industry; or b) $500,000 from investors who have industry background and business contacts? Since the value of an investor relationship is usually more than cash, “b” is often the correct choice. Consider all forms of investor contribution when evaluating an offer.
Mistake: Getting hung up on initial ownership and control.
Establishing ownership and control is where most investor negotiations break down. Remember the Marketplace Golden Rule? He who has the gold makes the rules. And typically, that translates to 51% control. Business founders are better served by focusing more on the investor exit plan and less on initial control. But this is a tricky calculus because you don’t want to sell too much of your business for too little capital. As I said last time, capitalizing a business isn’t – is not supposed to be – easy.
Accomplishing a successful investor relationship requires thoughtful preparation, plus skillful negotiation, and likely more patience than you’re used to demonstrating.
Write this on a rock … Know the rules before pursuing an investor search.