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Rule #1: Get Real

 

There are two kinds of information groups out there. One that consists of analysts, experts, bankers, fund managers, new born self-proclaimed investors and several small private equity boutique firms. The other group consists of very quiet but real investors like family funds, established private equities, private fund managers, private investors, banks, Institutional Investors and wealthy high net worth individuals.

 

The former, spins ideas and opinions that are often based on hearsay and borrowed information from other perceived reliable sources while the later don’t say much.

 

So, it is very important to first gather the right information about raising capital for your business. Especially on what do you need to have, what you should have accomplished, what you should know about your own business and competitive environment in order to present to a potential investor. It usually is a short list of common sense material.  Clearly and simplistically explainable business proposition, competitive environment, target customer who will pay for your product or service, a realistic analysis of this customer in terms of the affordability, buying behavior, frequency of purchase etc.

 

Basically you will need to be able to truthfully address the following critical questions:

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1. Why is your business proposition better than the rest?

2. Who is your target customer and their detailed analysis…?

3. Why will they buy your product or service?

4. A very well researched competitive landscape analysis

5. A realistically attainable progressive sales and revenue plan, usually for 3-5 years

6. Detailed promotion and marketing plan that will ensure the revenue is generated

7. Who within the company will manage what and why their experience is relevant

8. A very clear description of cost and margin allocations, cash flow

9. What and how much have you invested thus far in your business?

10. And finally, why should the investor place their money with you and not anyone else. (ROI)

 

Rule #2: Know your worth

 

Majority of entrepreneurs and start-ups seeking capital funding often overestimate their worth. There are several ways to establish your evaluation. It helps to invest a fixed sum in engaging a qualified accounting firm to build your evaluation based on your business proposition. The golden rule to remember is that, just because you can, it doesn’t mean you are!

 

If your business plan indicates you will generate $1 million in sales, it doesn’t mean that you have proved it by generating $1 million in revenue. A zero sales is zero worth. However, a unique and compelling idea with a realistic proposition is certainly worth something. Thus, pay attention to your projected EBITDA revenue, assets, intellectual property, patents if any, your unique value proposition (competitive advantage) etc. At the same time do not undervalue your business either. But the most common mistake people do is over value themselves and quickly lose the potential investors interest. Don't do that and quickly lose the investors interest.

 

Remember: Real investors do not think of a company evaluation like Shark Tank or Dragons Den. They often evaluate by actual revenue, unique potential, on hand customer contracts, LTV – Customer Life Time Value, business sustainability (how long can you sustain the business and will not need additional funds before you run out of cash etc.

 

Common mistakes in business evaluation:

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1. My business is worth $1 million because a former potential investor who didn’t invest said it was worth a $1 million to him or her.

2. Similar business claimed that they got the same evaluation...

3. Because our projected ROI to the investor is $2 million or more, we believe...

4. Our (often over estimated) revenue generation plan multiplied by industry multiplier value suggests that...

5. I have 3 customers who have given me a (non-binding) letter of interest for $1 million in sales...

 

 

Rule #3: Stop Equity Charity

 

Another very common mistake is giving away a lot more equity in desperation to raise capital or giving away too little to the person who basically is going to blow life into your dead business. No buyer/investor likes a desperate sales person. Even if you are desperate for investments, it is absolutely imperative that you do not show that. Your actual desperate status or need for cash can be discussed much later in the process. You will always fail trying to solicit investments on a short timeline. Your urgency and need is not an investors priority.

 

You need to understand why you are giving anyone any equity. Many start-ups use equity as cash and give away too much even before they approach a potential investor. Some give too less equity to an investor who may be taking the real financial risk in your business. So, be cognizant of the fact that equity before any solid progressive and positive revenue is only a perceived value.

 

Rule #4: Most investors are not smart people or surrounded by smart people

 

All those who have money or made money investing are not necessarily smart people. A little research will show you that many major investment firms and individuals have made very poor investments and lost hundreds of millions of dollars and many continue to do so. Market busts are often the result of too many investors betting on the wrong industry. There are several institutional investors who have invested in major big tech firms that are very popular that haven’t turned any profits yet. Many investors have placed hundreds of millions of dollars in projects and businesses that has been lost due to poor management. But you never hear about it after the grand news of capital raise. 

 

There are several investment firms and Sovereign Wealth Funds packed to the brim with Ivy League graduates and investment experts who have and keep making extremely poor investment decisions. This only proves, fancy suits and education alone doesn’t make one an astute investment analyst or investor. Hundreds and millions of dollars are brunt up in short periods by such bad investments every year globally.

 

So, do not be impressed or intimated by such big name investors easily. Amongst a list of such investors you will find many Investment firms who put on their own little private Shark Tank show with very little funds to invest. A bunch of few reasonably rich friends often show up as investors and entertain proposals with absolutely no ability to analyze a business, realize a potential or have money to invest. Usually they do not have the funds or the business acumen or the ability to take risk in start-ups.

 

Investigate your potential investors before you approach them. Ask for their past investment profile. Study the management teams’ experience. Find out when they last invested in any business. What is their average investment size? What is their preferred industry?

 

There is an investor in every market for every business and every industry. It is your job to find them and wow them with your business proposition. Remember, that every investor that gives you money is not necessarily a good investor for you either. Look for mutually beneficial synergies. Can they open doors for you? Do they have the courage and patience to be a supportive investor?

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Rule #5: Know your Investor

 

Your shoe will not fit every foot. There is no one size fits all in a shoe. Simple! If you want to walk a path towards success, find the right shoe.

 

Every investor often has a clearly defined investment strategy, preferred business industry, industry expertise, capital allocation for particular industries, funds available and allocated that given year to invest in a particular industry etc.

 

Research and find out who invests in your kind of business. Why do they invest? What is their strategy and what are their expectations? And most importantly, what is their expertise or past interests in your industry. You will waste a lot of time and resources giving presentations to wrong types of investors if you do not do your research properly.

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Also, it is extremely important to realize that many investors entertain several investment proposals that are often left at the mercy of a small group of inexperienced or low attention span individuals with probably one or two people in the room who would be paying real attention based on their experience. So, be prepared to dazzle everyone in that room when you get an opportunity.

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No one can refute a realistic, well thought out and compelling business proposition. Especially when it is presented by the right individual who speaks on items that are important to that particular group of analysts in simplistic plain language. So, make sure the presentation is sharp, focused and presented by the right person.

 

Rule #6: Keep it simple and unique

 

Many investment proposals are too long, boring and often loses the interest after slide number 3. Albert Einstein famously once said, “Any darn fool can make something complex; it takes a genius to make something simple.” Remember Rule number 4!

 

Spend some time in putting a short presentation in not more than 6-8 slides maximum. Remember the presentation is a Visual display of your idea. NOT a document to read. A good investor presentation should be a smart infographic with striking images that is visually pleasing. However it is important to keep it short with few important images and numbers that are important. Everything else and details can be provided in a document for them to read. The idea of a presentation is to deliver the “WOW” factor. NOT to get them to invest. It is an Infographic mostly.

 

A presentation should highlight the following information ideally:

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1. Purpose of your business

2. How and why did you get this idea

3. Why is it needed and why the target customer will pay for it

4. How much revenue you will generate, why and how will you ensure that

5. Competitive landscape and how you will fare

6. Why are you seeking the investment, how much and for what purpose

7. Why should the investor chose your business to invest

8. What will the investor get in return?

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Everything else should point to the supporting documents and files you will provide them.

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Rule #7: Understand Risk

 

Like any investment you will make, every investor looks at the risk closely. Several major investments fail because of two main reasons. 1) Trusting the entrepreneur group will attain the over enthusiastic revenue goals, and 2) A haphazard risk analysis within the investor group.

All investors are risk averse except when the investment amount is negligible. A risk analysis must be understood by yourself first before approaching any investor. You should be very clear in telling them of their risk and how you will mitigate that potential risk factor. This demonstrates your integrity and astuteness in building a business plan.

 

If you may not attain the expected revenue numbers, show how you will support the sales with marketing. Similarly, if you do not hit the expected revenue numbers, show how you will still be able to sustain the operations till you ramp up your sales. What are your contingency plans?

 

A good investor proposal will detail a list of items under risk and clearly articulate how you will mitigate those risks.

 

Rule #8: The mirror doesn’t lie! - Do not fool yourself.

 

Understand the difference between good and bad criticism. If someone says your business idea doesn’t make sense, do not dismiss that and then and set out to prove them wrong. Ask questions and learn what you can truly improve within your business plan. Be inquisitive about customer perceptions and mindset. YOU ARE NOTHING WITHOUT SALES!!!

 

One can find several start-ups who are stuck midway looking for funds because they haven’t generated the anticipated revenue from sales. What does it say about the leadership? Well…

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1. The founders have clearly demonstrated lack of true business strategy and planning

2. Poor or lack of marketing and sales plan

3. Management didn’t conduct a realistic risk analysis

4. The market may not be ready for that product or service

5. The perceived value proposition by the founders have failed

6. Cost of operations versus margins strategy has failed

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Why will any investor consider to place their money in such a business or trust this management team?

 

Be realistic and truly understand your strengths and weaknesses. Work on both of them. If you fail, do not despair. Make the necessary changes. Diversify, pivot, reinvest, break and build it better. Do anything but the status quo. You have to stop flogging a dead horse. (Perhaps a bad analogy!) But you have to stop doing the same mistake and stay in a perpetual cycle of denial.

 

Reality check list:

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1. Just because friends, family and your angel investors say it is a great idea it doesn’t mean your real target customer will consider the same and will pay money for your product or service. Nor will a seasoned investor invest.

2. People buy product based on perceived value. Not Branding and Packaging. Value brings revenue and repeat sales. Branding and Packaging keeps interest and may generate one time sales revenues.

3. Getting product on shelf is half the battle, getting customers to pick it off the shelf and pay for it is the real battle.

4. Marketing is an integral part of any business. Social, media, content, advertising, word of mouth are all required. You often need all of them in today’s market to sell. 90% of businesses fail due to lack of this major consideration

5. Research well. Approach your target customers or bring them into a seminar. Ask them pertinent questions about their perceived value of your product, ask them to critique it, ask them for suggestions, study their buying behavior.

6. Most importantly, do not get confused between marketing yourself or your business versus marketing your product and service.