Introduction to Chapter 3.02

Quick Summary: Focusing on raising money at the start is the wrong approach.

Abstract:

The articles in this chapter discuss the first issues that an entrepreneur faces when they make the commitment to start their business. In most cases, an entrepreneur first thinks about raising money to start their enterprise.  This is exactly wrong and will result in lots of wasted time and effort and be very discouraging.  Instead, a fraction of that time should be spent on gaining an understanding of your business and what you can expect from potential investors and what they will demand of you.

The outcry from many first-time entrepreneurs is: “I know what to do; all I need is money!”  Unfortunately, in virtually every case this is simply untrue.  When potential investors hear this comment, they don’t walk away, they run away as fast as they can. Even if the idea has merit and the entrepreneur seems to have a lot of potential, giving money to someone at an early stage and with their confidence is a virtual recipe for disaster.  It will, most probably be a very expensive lesson for everyone involved.

Instead of asking for money, during the very early stages, the entrepreneur’s time would be much better spent on refining their business model and thinking carefully about how much money they will need (in stages) and what avenues are the best to purse when the time is right.  The articles in this chapter address those issues.  One thought that entrepreneurs need to always keep in mind is that their focus is getting money INTO the company NOW, while investors are focused on how they will get their investment OUT OF the company and WHEN.

Chapter Sections and Summaries

  1. Timing and Strategy

Sports teams scrimmage and play pre-season games before they “play for keeps”.  Entrepreneurs need to do the same thing before they approach investors.  Once an investor says “No”, it is virtually impossible to turn them around.  So, carefully plan both the timing and your approach.

  1. Investor Selection

Talking to investors is a great example of when more is less!  An entrepreneur’s time, not funds, is the most precious commodity they have.  Use that time wisely but carefully, filtering potential investors; use a rifle, not a shotgun.

  1. Financial Model

Excel ™ and other similar spreadsheet programs are both a blessing and a curse to an entrepreneur.  They make the mechanical process of building a financial model easy, but it is equally easy to get tied up in the “numbers” and lose sight of the business fundamentals and, most importantly, the basic business assumptions.

  1. Evaluation and Valuation

Business valuation discussions for pre-revenue companies is nothing more than a sophisticated version of the bar game of liar’s poker.  The value of a pre-revenue business is nothing more than a person’s opinion and can be expected to vary widely.  Entrepreneurs come up with high numbers and investors come up with low numbers.  All that matters is what an investor is willing to use.

Chapter Articles and Summaries

Introduction to Approaching Investors

 

Focusing on raising money at the start is the wrong approach.

You Can't Raise Money With An Idea

 

Demonstrable market acceptance is the key to raising money; not a good idea.

Asking For Money Or Advice

 

Solicit candid opinions from seasoned startup veterans to avoid quick rejections from investors.

Wait As Long As You Can To Raise Money

 

Focus on minimizing the market and product risk before seeking investment.

Bootstrap Wisely

 

Focus on core competencies of your business and seek outside help for other tasks.

Company Success Versus Realized Investor Returns

 

Investors invest to make money which may not be the same motivation as the entrepreneur.

All Money Is Not Equal

 

Different investors can offer significantly different expertise in addition to their financial support.

Investment Instruments

 

There are a number of different types of investment instruments that should be considered.

Investor Categories - A Baker's Dozen

 

There are more investor options than angel or venture capital investors that are available.

Select Investors Before They (De)Select You

 

Focusing on specific investor categories that fit your model and long-term goals.

The Three R's For Investors

 

Establishing a mutual satisfactory relationship between the company and investors is critical.

Because the Model Says So

 

In reality, business models accurately predict what most likely will not happen.

Business Plans Are For You

 

Business Plans should be thought of as your internal reference guide to validate your plan.

Creating The Financial Model: The First Step

 

Identify the key elements and variables before you begin to build the financial model.

Building The Financial Model: The Second Step

 

Your financial model will grow and become more complex; initially build in flexibility.

The Numbers Don't Speak For Themselves

 

You cannot expect investors to study your financial model; provide summary conclusions.

The Three Most Important Forecast Numbers

 

The time and cash it requires to break even and the revenue growth are the key metrics.

Use or Misuse of Funds

 

Develop a clear planned use of funds for the investors; include amounts, timing, and milestones.

Forecasting Market Share: Too Big Or Too Little

 

Set realistic expectations about gaining market share in a large, expanding market.

Evaluation and Valuation are Very Different

 

The valuation of a private company is an opinion that may or may not be based on an evaluation.

The Valuation Trap

 

Private company valuations are nothing more than a person’s opinion and may vary widely.

Shark Tank: Entertainment and Reality

 

What television views see is only a fraction of the investor-entrepreneur interaction.

A Framework for Evaluating A Company

 

Emotional biases can easily occur, develop an objective method to evaluate a company.

Company Evaluation Suggested Factors

 

There are many factors that can be used to evaluate a company, here is one such list.

 

Article Number : 3.020101   

A Handy Reference Guide for Executives and Managers at All Levels.

9 Volumes 36 Chapters ~500 Articles

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The weight of your world does not have to be on your shoulders.
The articles in this site will help to lift that weight from your shoulders.
Pick an article similar to how you pick a route on a page of an atlas.
There is no need to look at other articles, just as you ignore other pages in an atlas.
It is easy to start a business but it is hard to run. Bumps and unexpected sharp turns in the road are always present.
Others have traveled the road before you; learn from them. This site may help.