I met with a potential client who was in the process of sorting out some pretty good ideas for an Internet business.
As expected, he was very forceful and enthusiastic, and in need of funding. As he worked through his rough plans with me and a member of his board of advisers, he said he needed to finalize both his business plan story and a separate investor’s story.
I was astounded that he thought he could or should prepare an investor story that differed from his business plan. I knew this was his first experience with outside capital, but still I was rocked by the thought of two stories.
He wasn’t being duplicitous; he just thought a separate investor story was expected as part of a presentation.
What other misconceptions do start-up and smaller companies have about funding?
Some think capital sources look to say no to every deal they see. The reality is that the capital source wants to say yes. Seed, angel, venture and mezzanine sources make their money by investing in companies, not by parking their funds. They don’t look at hundreds or thousands of plans with the goal of dinging them. They are looking for businesses that will elicit a yes.
These types of funding sources are extremely selective because they are being asked to invest in a company often with little or no operating history, possibly being represented by an untried entrepreneur and in an industry or with technology that might still be in its infancy.
To top it off, the investment is illiquid. To get funding in that environment, you’d better understand what they look for and offer them a terrific opportunity to make a whole lot of money.
A prominent Cleveland dealmaker once told me that no matter how good a deal might seem, he flat out won’t do business with people he doesn’t trust. He claimed not to be bright enough (and he’s among the brightest) to see every place where he could be cheated, so he just passes when he’s not comfortable with the principals.
Capital sources first must trust and believe in the principals and the story. Present them with real data, not hot air. If the company has an operating history, use its past numbers, not some pie in the sky pro forma projections, as a starting point. Be brutally honest, warts and all.
Capital sources need to see a merchantable product or service with a significant market and the expertise to penetrate that market. One of the great things a capital source can bring along with the money is access to expertise you might not have. If you need a certain skill and capital can provide it, grab it. Capital sources need to protect their investment by helping you succeed, and you should be eager to take advantage of their offer or request.
Most capital sources have an area of comfort in both industry and deal size. If a source prefers metal bending, don’t bring it telephony; if its threshold is $10 million, don’t bring it a $500,000 deal. Take the right deal to the right source.
Angels may invest in an idea, but venture capital is now less and less the place to fund an unvalidated business plan. Validate the plan in the marketplace first, then approach VC.
You are asking people to take significant risks with their money, so understand the view from their side of the table as best you can. Funding has nothing to do with the stars being properly aligned and everything to do with credibility, product, markets and expertise.
Give capital sources strong reasons to say yes. That’s what they want to do. Erwin Bruder ([email protected]) is president of The Gordian Organization, which provides business planning and structuring services to start-up and growing companies. Reach him at (216) 292-2271.
