An engineer I used to work with told me that everybody has a great idea that won’t work. This principle certainly applies to starting a business.

I am constantly exposed to people enamored with an idea for a product or service that they believe many people will buy. I have to admit that I’ve experienced this enthusiasm myself more than once. However, an idea is far from a viable business. Some great ideas turn out to be marginal or bad businesses.

As a serial entrepreneur, I’ve learned that there are right and wrong ways to approach turning an idea into a company.

The right ways are focused on proving that something will work and that people will buy it, while simultaneously minimizing risk, expense, and the pain of failure.

The wrong ways jeopardize your finances, future, and relationships, and have a high probability of eventually proving that an idea was simply not strong enough to support a viable company.

I believe it’s a wonderful thing to let your creative juices flow and try your hand at creating a new business. Just do it smart.

Pursue the development of business ideas in a reasonable way that will cull out the inevitable failures, and prevent you from being seriously hurt by financial setbacks.

There is no need to end up hanging your head in the shame of failure. The sooner bad business ideas can be discarded, the better. This frees you to move on to more productive enterprises with few regrets.

Once an idea is proven to a work on a small scale, you can begin to ramp things up. A good idea effectively implemented often matures into a business that generates both revenue and profit. Take things one reasonable step at a time.

This approach will help you maximize your potential to eventually hit a home run that will become a truly satisfying and financially rewarding experience.

Because many businesses deserve to thrive.

As you analyze your level of commitment, you may (a) need to adjust your expectations, and then press forward with realistic plans and determination; (b) decide that it makes sense to abandon your project and move on to something else; or (c) recognize that the project is simply a hobby you enjoy that is not worth trying to raise capital for as a business.  All of these are valid conclusions that can lead you to differing courses of appropriate action.

Self Test 

What will it take for me to secure the needed funding? 

1. Meet a rich person who tells me I have a great idea.
2. Read a lot about raising capital, and work hard to understand the entire process.
3. Write a business plan.
4. Consistently do the right things in the right way until I finally succeed.

How much of my own money am I willing to invest in the business? 

1. Other people should take all the financial risk for my visionary ideas and insightful leadership.
2. I don’t have much to invest, but I should be able to get some seed money from family and friends to get started.
3. I could probably invest what is needed, but I’d prefer to share the risks and rewards by using other people’s money as well.
4. I have already invested a great deal, and now need the resources of other people to take the business to the next level

How much time and effort am I willing and able to expend in the process of getting funded?

1. I want someone else to do it all for me.
2. I can spend an hour or two each evening.
3. I’ll do whatever I can, because this is my primary focus.
4. I will make time as needed and use the expertise of others to help me.

What kind of support network have I established to help me get funded?

1. I met a guy who raised millions for another company, and he says he can do the same for me, no problem.
2. I’m not sure what kind of support network I may need to get funded.
3. I actively network in my local Chamber of Commerce, but this is not providing the kind of connections I really need.
4. I know many potential investors who are willing to review my opportunity as soon as I have something professional to show them

Where am I in terms of the capital raising process?

1. I’m out of money, need it by 5:00 p.m. today, or they will repossess my ’86 Mercedes.
2. I’ll need capital within the next 3-6 months, and I’m now preparing for the financing process.
3. I recently engaged finders to help me connect with investors.
4. I’ve nearly exhausted my contact network and investor approaches, and I need expert assistance.

What happens if my business doesn’t get funded?

1. That’s O.K., I’ll just keep my day job.
2. I’m not sure; I am still working through the numbers.
3. My business won’t be able to expand as fast as I’d like.
4. My business will struggle, but it will survive.

Evaluating Your Commitment 

Your answers won’t indicate a clinically precise commitment, but they will generally correspond with the following commitment levels:

1. Weak commitment and unrealistic expectations.  Don’t waste your time or money.  You’ve got a hobby (and won’t get funded), or you are likely to waste lots of resources (and not get funded).
2. Early stage development and tentative commitment.  A preliminary expert analysis of your business, coupled with the creation and distribution of several key presentation materials, can provide a realistic indication of your potential success in raising funds.  If your initial efforts yield positive results, you can proceed with full capital raising preparations.
3. Attitudes and actions indicate a growing commitment.  An expert review of your presentation materials and methods can provide valuable insights that significantly improve your chances for success.  Specific changes and additions will result.
4. Conditions and actions indicate a strong commitment to get the job done.  Overhauling your materials and approach will probably be required.  Don’t expect more of the “same old, same old” to yield different results.  Get expert help to get the job done right.

For Startups

Consider the information following each question to get a sense of the present fundability of your business.  It is possible that with dedicated effort, a currently unfundable business may be fundable in the future, assuming that certain limitations can be overcome.

Do you have a great product or service idea, or a complete business system?

The value of a product or service idea all by itself is very low.  The practical measure of its worth is what a business can do with the idea.  So for an idea to have significant value, a business has to champion and support it, resulting in the transmutation of brainwaves into cash.  If you plan to borrow money on the strength of your assets or good name alone, you can start with a rough idea and fund the development of that idea into a business concept that individuals or companies may invest in.  However, you will not find investors willing to bankroll an idea alone, or banks willing to loan money on the strength of an idea.  Both want to see the establishment of a business that can turn ideas into gold.

How do you know that customers will buy your product or service?

So you’ve got a great idea, and turned it into a saleable product or service.  Customers are probably not clamoring to buy it from you yet.  Maybe things are still in the development or beta stage.  Investors need to know that customers will buy from you at a price that will support a profitable and highly successful company.  They want to see evidence that lots and lots of customers will buy your product or service, and it has to solve a painful problem for them while delivering great value.  Purchase orders, letters of intent, and sales receipts can provide substantial evidence.  A longstanding relationship with the buyer of a major potential customer who is coaching you to success in selling to that company can also sway investors.  If these things are lacking, a financial analysis showing how much money your customers will save by buying from you can be very useful.

Who are your key associates (employees, subcontractors, and strategic partners) that will deliver your products or services?

It’s tough to raise money if you’re a “one-man-band.”  It’s even harder to hire good employees if you aren’t adequately funded.  Fortunately, there are many ways to effectively address a current lack of employees during the funding process.  Most revolve around organizing and enlisting an external team that shares your vision and passion, and will help you become successful after you are funded.  This team should be highly qualified to support your company’s most pressing needs.

When will your business achieve positive cashflow?

Positive cashflow is a major milestone for all start-up companies.  If you’ve got a reasonable idea of the timing, then you’ve probably done some preliminary calculations.  Having no idea means you’ve got some work to do before you’ll get funded.

When will your business achieve profitability?

Profitability is another major milestone.  Either you know the timing, or you don’t.  If you don’t, get your homework done before you expect any funding.

How much profit can your business reasonably generate the first 12 months after achieving profitability?

This is another size question.  After the company becomes profitable, it should generate a profit the following year?  Many start-up businesses lose money during the first year, but begin to operate at a profit some time during the second.  Of course there are exceptions (life science companies may lose money for 10 years before becoming highly profitable).  But in most instances, timing and volume are critical.  If the net of the first and second years is a break even, the business has to make lots of money in the third year if it hopes to attract investment capital now.

How much funding will your business need to achieve positive cashflow and profitability?

Many entrepreneurs will say something like, “I just need $50,000 to buy a machine, or some inventory, or pay for technology development.  If I get that money, I should be OK.”  If your explanation is along these lines, you’ll need a good cashflow projection to help prevent your business from running out of cash.  The amount sought in this example is usually far less than is needed.  Not asking for enough is worse than asking for too much, because running out of cash is one of the fastest ways to shut your business down.

How much capital can you personally contribute to the funding of your business?

If you’ve got enough of your own money and are willing to put it into your company, there’s nothing to stop you from starting a business.  In many cases, founders don’t have enough to properly fund the company.  Lenders and investors like to see that founders are financially committed to the success of the business.  There’s no motivation quite like the knowledge that you can’t afford to fail and lose all your investment.  While it’s possible to raise money without having a big piece of your own nest egg invested, it’s a lot harder to do so when you get past the friends and family stage.

Assuming you had the right preparations, how much money could you get from friends and family to help launch your business?

Small businesses are 3 to 5 times more likely to get funding from informal investors, including friends and family, than they are from angel investors or venture capitalists.  You want to treat them right.  They are usually your biggest fans.  They often represent your best chance to get seed capital.  If they can and are willing to make a loan or an equity investment in your business, you may be able to get started right away!

How much revenue per year can your business generate at the end of 3 years?

If your company has the potential to achieve $30 million or more in revenue within 3 years, its scalability will be of interest to sophisticated angel investors.  But most businesses don’t have this level of realistic growth potential.  And that’s OK.  A smaller company usually has more modest funding requirements.  If you can satisfy lenders or investors with acceptable potential returns based on your projections, you have a reasonable chance to get funded from sources that are well aligned with your needs.

Existing Businesses

Consider the information following each question to get a sense of the present fundability of your business.  It is possible that with dedicated effort, a currently unfundable business may be fundable in the future, assuming that certain limitations can be overcome.

Does your business have positive cashflow?

Positive cashflow is an operating imperative for all businesses.  If you’re solid on this subject, you’re off to a good start.  If you’re out of cash and have been in business a few years, chances are good that you’ve exhausted most of your capital resources.  It will be difficult to get funded in this condition.  Performing financial triage on your company may be necessary to survive, with a focus on strengthening your cashflow.  Once you are healthy again, you’ll be in a better position to get funded.

Does your company operate profitability?

As with cashflow, this vital metric is essential to survival, growth, and attracting additional funding.  Kudos if you are profitable, prepare for triage if you aren’t.

What will you use the capital for?

If you plan to finance growth, you’re more likely to attract capital than if you need to meet a balloon payment, pay down debt, or buy a new BMW.  Of course, growth alone does not necessarily mean you’ll get funded.  Growth rates, new business volumes, anticipated profit margins, and risk levels will all be analyzed, among other things.  Every significantly improved performance that growth capital will provide adds another point in your favor when talking to investors.

Is your company a lifestyle business or a scalable business?

Successful lifestyle businesses provide a comfortable life for their owners, but do not normally provide high enough returns to attract investors.  Growth in lifestyle businesses is normally funded with secured debt, additional founder investment, or bootstrapping.  Scalable businesses are more likely to attract investment capital, provided the opportunity and potential for success are compelling enough.

How many of your existing channels, partners, and customers will support your new business volume?

If you can leverage your existing relationships to rapidly and economically achieve and sustain significantly higher business volumes, your growth plans will be more credible to both lenders and investors.  If you are pioneering new markets, products, or customers, the higher risk associated with these activities will make it harder to secure funding, unless your company has a well established track record of similar pioneering success.

How much revenue per year do you expect your expanded business can generate at the end of 3 years?

If your company has the potential to achieve revenues in excess of $30 million within 3 years, its scalability will be of interest to sophisticated angel investors.  A smaller company will typically have more modest funding requirements.  If you can satisfy lenders or investors with acceptable potential returns based on your projections, you have a reasonable chance to get funded from sources that are well aligned with your needs.

• Your opportunity must fill a significant need in a large niche in the marketplace.
• This opportunity should be suitably documented and presented (packaged).  If you don’t have a solid business idea and present your opportunity in a professional, focused, and credible way, your chances of getting funded are very low.
• Investors are unlikely to capitalize your business if they don’t like you or believe you can deliver solid results.  Your ability to relate well to others and your personal credibility are critical elements of the capital raising process.  In other words, investors invest in founders rather than in products and services.
• Most investors want to see strong management.  If you don’t have a strong management team yet, a credible approach for building one needs to be developed.
• The deal must be attractive and make sense to investors within certain well established guidelines.

Many early-stage company founders are not well prepared to address these issues with investors.  As a result, many never get past the first step.  They may get words of encouragement or a lukewarm response from investors, but receive little or no funding.  If you have tried to raise investment capital but have not been successful, the chances are good that the primary reasons are found in the five issues summarized above.

So what can you do about it?

1. You can read lots of books and articles about how to raise money from angel investors and do everything on your own.  Some of what you read will be very helpful.  Much will be repetitive.  Virtually none of it will tell you exactly what to do in your specific situation.  You will be on your own to figure out how to adapt the information to fit your business, which is the weak link of this approach.  How will you know if you are doing the right things in the right ways at the right times, especially if you don’t have experience in the entire process?
2. You can get someone with lots of experience to prepare the needed tools and do everything for you on spec (no money now, but the promise of money in the future after funding is raised), or in exchange for a piece of the business.  This is a great idea that rarely works.  People who successfully help businesses raise investment capital have paying clients.  They see dozens or even hundreds of opportunities on a regular basis, and have little time for pro bono work.  If someone has the time to invest weeks or months of effort to work on a business with a slim chance of getting paid, they are probably not very experienced in the process of raising investment capital.  This option is included here because many entrepreneurs think it’s the best way.  It usually does not work because the people you get often turn out to be the wrong people.
3. You can combine your best efforts with expert assistance as needed to give you the best possible chance of success.  In this case, you will spend the time and effort needed on your part, and invest in the necessary expertise to package the business and prepare you for the capital raising process.  Then, you will be integrally involved in every subsequent capital raising activity and meeting.  Even after all this, there is no guarantee you will raise a nickel for your business.  However, you will significantly increase your ability to succeed if you combine efforts in this manner.  A team approach can make a huge difference, if it’s the right team.

The third option represents the highest likelihood of success for most early-stage companies.  It requires a solid personal commitment to the business and the process of raising capital to support its growth, and often the prudent allocation of seed capital to engage the necessary expert assistance.

Here are some questions to help guide your thinking on the subject.

• What is the fastest and best way for me to capitalize my company in my current situation?
• Is there a phased capitalzation approach that would best meet my needs?
• How much is my company worth now?
• How much could my company be worth in a few years if it achieves its financial projections?
• What kind of deal should I offer that will be fair to me and attractive to investors?
• How much of the company should I expect to sell to investors for the money I need?
• What is the most ideal capitalization structure for my company so that it will be appealing to investors?
• Do my current financial projections help or hinder my ability to raise capital?
• Are the assumptions built into my financial projections reasonable, defensible, and properly described?
• Are there any red flags in my financial projections that need to be resolved?
• Will investors believe I am looking for the right amount of money?
• What are the weak points of my company, and how should I address them?
• Does my business plan address the right issues in the right ways to attract capital?
• What is the right amount of information to include in my business plan?
• What is the most effective way to use my business plan?
• What is the best way for me to find and approach potential investors?
• What is the most effective strategy for presenting my opportunity to potential investors?
• How should I respond to challenges and objections raised by potential investors?
• How can I motivate interested but uncommitted investors to put the first money into the business and thereby catalyze my whole capital raising process?

The answer depends on many factors, but I’d like to focus on what I believe are three critical aspects; 1) how well developed the revenue generation model is, 2) how reasonable the key financial assumptions are, and 3) how the management team views the numbers.

Revenue Model

Projections that are based on capturing “just 1% of the market” are the mark of a novice entrepreneur.  Projections of generating X million dollars of revenue in the first year will be greeted with questions about what the company will do to achieve that revenue volume.  The action plan for generating sales prospects and converting them to orders should be outlined and quantified in a good revenue model.

There are multiple benefits to this approach.  First, you demonstrate an understanding of the marketing and selling processes by which investors can assess your ability to oversee these key aspects of a business.  Second, you create an action plan that will be easier to implement upon funding.  And third, you generate leading indicators which can be used to manage the business.  This enables you to seek resolution to problems that arise before the company starts missing revenue targets several weeks or months later.  I believe the revenue model is the foundation for the entire business.  If done well, it will demonstrate your business expertise to investors, thereby engendering confidence and moving you toward funding success, as well as creating a useful tool that will help you manage the growth of the company after funding.

Reasonable Assumptions

In your financial model, the assumptions used should have a reasonable basis, something that is relatively easy to justify for a company at your stage of development.  For example, if you are a start-up, it would be unwise to use conversion rates or success factors of well-established competitors.  Your numbers should be reasonably lower.  Though it does not always work, I try to use assumptions that investors will acknowledge are reasonable after a brief explanation.

When talking with investors, “reasonable” is not a specific number, but rather a demonstration of your perception of reality.  Are you a pessimist, an optimist, a pragmatist, or a starry eyed dreamer?  As you explain your assumptions, investors get a read on you personally, as well as on the business opportunity.  What will they see?   In my experience, entrepreneurs that are pessimists and dreamers don’t generally get funded, and optimists have limited success.  Most successful investors are pragmatists, and optimistic investors generally have limited success.

Management Team View

Does your management team believe that your projections are cast in stone, are lofty goals, or are performances to manage by?  Clearly the best answer is the last.  Is your management team expecting things to go awry as you start to implement your plan?  The odds are very high that this is what will happen.  A solid management team that is experienced in dealing with such challenges (making lemonade from lemons as it were) can use a good projection tool to manage by.  Assumptions may change.  Revenue streams may be significantly altered or fall by the wayside.  If your financial model enables you to enter actual data in the place of assumptions, you can see what the effect will be on the business, and make appropriate course corrections faster and with better visibility.

Summary

Perhaps you noticed a common theme in this brief discussion about financial projections.  The exercise shows investors how you approach complex challenges, and how you view a good financial model as a flexible navigational aid rather than a definitive road map.  I like to use the analogy of a commercial jet flying from Los Angeles to New York.  Before departure, the pilot files a specific flight path.  During the flight, weather conditions, winds, and other issues arise that cause the plane to deviate from the flight path more than 90% of the time.  However, a good pilot can still arrive at the destination specified on time.  This is similar to the mission of the management team.  The development and presentation of a good financial model helps quantify a business while demonstrating the perspective and capabilities of the management team – a key factor in most investment decisions.

I provide for my family by helping entrepreneurs prepare for the capital raising process.  I’ve seen angel investors, venture capitalists, and trade associations strongly recommend that you should not hire people to help with your financial projections and business plans.  Obviously, I disagree with this recommendation, but I believe there are several basic principles that apply to entrepreneurs trying to raise money that we should all be able agree on, leading to mutually beneficial coexistence.

• Business owners must have a thorough understanding of their financial projections and business plans.
• Many new business owners have limited experience with creating detailed financial projections, developing effective business plans, and raising money.
• For business owners, time equates to money.

The Issues

If you hire someone to do everything for you, you won’t get the benefit of learning your finances and business model inside and out.

If you don’t have much experience with financial modeling, spreadsheets, business planning, writing, and experience in raising capital, it can take a tremendous amount of time and effort to get it right.

A lengthy learning curve can be very costly to you, as you spend less time in activities that can generate revenue and profit, and more time developing expertise in the capitalization process.  In my experience, even those who have done it multiple times often rely on help from others.

If your business has the potential to get funded by angel groups or venture capitalists, you preparations better be right on the mark, or your deal will probably not pass the screening process.  This is very difficult to do, especially if you’ve never done it before.  It’s like trying to hit a home run in your first at bat in the major leagues.

A collaborative effort between entrepreneurs and experts in the capital raising process can overcome all these challenges.  This approach has been proven to work effectively time and time again.

Elements of Effective Collaboration

In an effective collaboration:

• An expert walks through all the “nitty-gritty” details of a business with the entrepreneur, discussing ideas, strategies, tactics, plans, opportunities, weaknesses, and many other issues.
• The expert coaches the entrepreneur, and helps identify solutions to challenges and pitfalls to that specific business, which result in better projections and stronger business plans.
• The expert provides qualitative feedback on the information provided by the entrepreneur, something that does not come from books, websites, videos, or software.
• The expert works “side by side” with the entrepreneur to develop a comprehensive financial model and business plan, which are highly customized to each business.
• At the end of the collaborative process, the entrepreneur has been intensively schooled and tooled in preparation to raise capital.

If any of these elements is missing at the end, then the collaboration has not been fully effective.  If the expert does all the work, then the collaboration has not been effective, and the end result is an unprepared entrepreneur.  Intelligent investors will be quick to recognize the lack of preparation, and won’t invest.

Entrepreneurs:

• You do have to pay the price to get correctly prepared.
• You don’t have to do it alone, you just have to do it right.
• An effective collaboration is a proven, viable way to do it right.
• An effective collaboration can save you a tremendous amount of time and money.

A smart man learns from his own mistakes.
A wise man learns from the mistakes of others.
A fool learns from neither.

• Do you really need a business plan, and why?
• What’s the fastest, easiest and cheapest way to get one? 
• Should you copy one for a company that got funded and edit it? 
• Should you do it yourself or hire someone else to do it all for you, and why? 
• Can you just start with an executive summary?

I’ve reviewed many websites, articles, software programs, videos, audio files, and books on the subject of writing business plans for raising capital.  Here’s what most of them say in answer to these questions:

• You need a business plan so you can effectively communicate your business to investors, employees, and other stakeholders.
• The fastest, cheapest, and easiest way to get one is to copy and edit one.  However, this is the least effective way to create a business plan.  You get out of the effort what you put into it.  It would be like trying to become a medical doctor by using someone else’s lab work and notes.   May I never visit a doctor thus prepared to practice medicine!
• Ditto on copying and editing a plan for a company that got funded.
• Most experts say you should write the business plan yourself.  Sweat it out, gain from the pain, pay your dues, and all of that.  This approach has merit, and you’ll become much more knowledgeable about your business.  But you’ll almost certainly waste a whole lot of time trying to figure things out on your own, learn lots of things that are useful and interesting but not yet critical, and probably have to do quite a few rewrites as you start showing it around.  If you can partner with someone who knows the ropes and is willing to work with you through the process, kind of like a personal trainer or a mentor, you can reduce the time it takes to create a solid business plan and be prepared to present it effectively.  I’m not talking about turning the whole thing over to someone else to create for you, but engaging the support of an expert who works with you to do it right the first time.

All this stuff is pretty straightforward.  It’s going to take time to create a business plan, and the clock is ticking.  So it’s the final question I primarily want to address.

Can you just start with an executive summary?

Many entrepreneurs, realizing that a business plan represents a significant investment of time, wonder if they could perhaps create an executive summary and start shopping it around while they work on the full plan …

In theory, it’s a great idea.  But most experts concur that this is not a good approach because you have not thought things through well enough yet, and so you’ll be communicating faulty information.

Well, I’m not most experts.

I believe you can and often should go with an executive summary first for a number of reasons.  With one caveat.  First you need to build a comprehensive financial model that tells the story of the business with numbers.  Then you’ll be prepared to start hanging words on the numbers, even in abbreviated form.

The benefits of this approach include:

• During the process of creating a comprehensive financial model, you’ll think through all aspects of your business, and see how they interrelate with each other.  You’ll have a clear picture of your key success drivers.
• After you’ve done the complete numeric creation, it becomes quite easy to start putting the story into words.
• A solid executive summary supported by a comprehensive financial model can be developed faster and at a lower cost than a complete business plan.
• This speed means you can start circulating the executive summary to generate interest in your business, and even start raising capital, while your business plan is in development.  I have many clients who have successfully followed this path.
• For startup businesses in particular, this is an economical way to test the waters to see how viable your business is and how attractive it will be to investors before you invest heavily in time and other resources.

The viability of this approach all comes down to one thing – how effectively you develop a comprehensive financial model before committing your ideas to words.

]]> http://www.readyforinvestors.com/bucking-convention/feed/ 0 http://www.readyforinvestors.com/an-essential-unspoken-truth/ http://www.readyforinvestors.com/an-essential-unspoken-truth/#comments Tue, 30 Mar 2010 21:40:37 +0000 Steve Mortensen http://www.readyforinvestors.com/?p=266 As most everyone over the age of five knows, people don’t always tell the truth.  Untruths come in many flavors, ranging from nonspecific or slightly misleading information to pathological lies.

When raising money for your business, you have control over the truths you tell, and therefore the ability to earn trust from investors by demonstrating integrity.  But there is at least one truth that’s difficult for entrepreneurs and investors to candidly discuss, even though it’s a vital factor in the decision-making process of most investors.

Investors won’t write a check to your company if they don’t like you or find you credible.

Some may tell you to your face (particularly if you live in New England), but most will either simply stop communicating with you, or will offer a less offensive reason for not investing.  In either case, it can be difficult to know what really went wrong.

The best way to address this problem is through preparation, presentation materials that invite discussion, honesty, and humility.  Here are several tips for each of these issues that can help increase your likeability, credibility, and capital raising success.  They’re not meant to be comprehensive, but rather to point you in the right direction.

Preparation Highlights

• Be thoroughly familiar with the way you have developed the financial projections for your business.  Build your revenue model not on capturing some percentage of the market, but rather on specific activities that should result in the revenues you project.  Be conservative in your assumptions – it’s better to underpromise and overdeliver.  Find external data to show that your assumptions are reasonable.  Don’t lead with this data, but keep it handy to show if asked.
• Identify a significant and painful problem your business will solve, be prepared to give a few “real world” examples of how your solution is or will be better than other alternatives available to customers.  You’ll always have competition, and you need to be able to convincingly explain why customers will choose your solution over those offered by competitors.
• Be highly conversant in the “secret sauce” aspects of your business – those things that give you a significant competitive advantage.  While you won’t give the recipe to investors, they will have to get enough of a taste to validate your claims of competitive strength.

Presentation Materials

• Your presentation materials will perform several critical functions, which include demonstrating professionalism, communicating specific information, and providing a framework for dialog.
• Your materials should be professional in appearance and content.  Typographical and grammatical errors, sloppy formatting, and faulty data must be eliminated.
• Investors are not the federal government, so they usually don’t want to be buried under a mountain of research and projections from entrepreneurs.  You need to say the right things in the right way in the right amount at the right time to efficiently and effectively move investors through the decision-making process.
• Lastly, your documents should lead investors to ask you questions about those subjects they are most interested in.  If you are properly prepared, this is one of the most effective ways to demonstrate both your likeability and your credibility.

Honesty

• The tendency for entrepreneurs is to maximize business strengths and opportunities while minimizing weaknesses or problems.  This is both naïve and dangerous when raising capital.  Investors will usually see through the smoke and mirrors, hurting your chances to get funded.  If investors let you slide on these issues and make an investment, you will likely be unable to achieve your projections, opening a whole different can of worms that can put the future of your company in jeopardy.
• A balanced discussion of strengths and weaknesses is a far better approach.  Show that you understand the risks, know where the company is weak, and have appropriate strategies for addressing these issues.
• If you cannot answer a question asked by an investor, don’t bluff.  They’ll know.  It’s better to recognize the validity of the question, promise to get back with an answer, and follow through on your commitment.

Humility

• Investors like smart people, not smart alecks.  So don’t act like you know it all.  Be confident, but be receptive to input.  This does not mean that you have to implement all input, but you should at least express thanks for and appropriately consider it.
• While there are certainly some arrogant business owners, the majority of those I’ve encountered are approachable and open to the ideas and concerns of others.  In my capital raising experience, arrogance on the part of entrepreneurs is a deal breaker.

1. Customers buy from you and perceive value

The question professional investors often ask is, “Will the dogs eat the dog food?” If you have an existing business where customers pay reasonable prices for your products and services and perceive value in the exchange, you have the foundation for a successful business. The absolute best source of capital for your business is satisfied customers. But if your company has strong proven customer demand and you need expansion capital to meet that demand, you’re in a highly attractive position to investors. For start-ups, the question is more difficult to answer until customer traction is achieved, and we’ll address this issue in a future post.

2. Your business generates strong earnings

Many start-ups launch with strategies to attract customers with free or low-priced goods and services. Of course, the company eventually has to generate profits to be successful, so prices usually escalate and more revenue streams are established. Most start-ups lose money for a while, and even well established companies lose money occasionally. If your business is not currently profitable, you need to demonstrate a clear and credible path to profitability. Investors are looking for proof of your company’s ability to maximize earnings while keeping the customer value equation in balance.

3. Your business is scalable

How much realistic growth potential does your business have? Is there a way to double or triple your revenues within a year or two? What will it take to make it happen? If you can demonstrate the scalability of your company, you’ll find more investors willing to talk to you. However, if you have a $1 million business today and can grow it to $5 million within the next 3 years, your deal won’t appeal to venture capitalists or angel investors, but it may be attractive to informal investors or commercial lenders. The type of investor will depend on how much your company can reasonably scale. Proof of scalability enhances your strength in the eyes of investors, even if it is on a limited or trial basis.

Start-up companies generally don’t have much evidence of these issues, but are often able to achieve it after a period of bootstrapping with a focus on generating the necessary proofs. Both investors and lenders respond well to business owners who have taken this approach.