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
- 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.
- 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.
- 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.
- 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
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Introduction to Approaching Investors |
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Focusing on raising money at the start is the wrong approach. |
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You Can't Raise Money With An Idea |
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Demonstrable market acceptance is the key to raising money; not a good idea. |
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Asking For Money Or Advice |
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Solicit candid opinions from seasoned startup veterans to avoid quick rejections from investors. |
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Wait As Long As You Can To Raise Money |
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Focus on minimizing the market and product risk before seeking investment. |
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Bootstrap Wisely |
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Focus on core competencies of your business and seek outside help for other tasks. |
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Company Success Versus Realized Investor Returns |
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Investors invest to make money which may not be the same motivation as the entrepreneur. |
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All Money Is Not Equal |
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Different investors can offer significantly different expertise in addition to their financial support. |
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Investment Instruments |
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There are a number of different types of investment instruments that should be considered. |
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Investor Categories - A Baker's Dozen |
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There are more investor options than angel or venture capital investors that are available. |
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Select Investors Before They (De)Select You |
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Focusing on specific investor categories that fit your model and long-term goals. |
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The Three R's For Investors |
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Establishing a mutual satisfactory relationship between the company and investors is critical. |
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Because the Model Says So |
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In reality, business models accurately predict what most likely will not happen. |
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Business Plans Are For You |
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Business Plans should be thought of as your internal reference guide to validate your plan. |
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Creating The Financial Model: The First Step |
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Identify the key elements and variables before you begin to build the financial model. |
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Building The Financial Model: The Second Step |
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Your financial model will grow and become more complex; initially build in flexibility. |
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The Numbers Don't Speak For Themselves |
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You cannot expect investors to study your financial model; provide summary conclusions. |
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The Three Most Important Forecast Numbers |
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The time and cash it requires to break even and the revenue growth are the key metrics. |
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Use or Misuse of Funds |
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Develop a clear planned use of funds for the investors; include amounts, timing, and milestones. |
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Forecasting Market Share: Too Big Or Too Little |
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Set realistic expectations about gaining market share in a large, expanding market. |
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Evaluation and Valuation are Very Different |
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The valuation of a private company is an opinion that may or may not be based on an evaluation. |
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The Valuation Trap |
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Private company valuations are nothing more than a person’s opinion and may vary widely. |
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Shark Tank: Entertainment and Reality |
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What television views see is only a fraction of the investor-entrepreneur interaction. |
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A Framework for Evaluating A Company |
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Emotional biases can easily occur, develop an objective method to evaluate a company. |
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Company Evaluation Suggested Factors |
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There are many factors that can be used to evaluate a company, here is one such list. |
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