The Basic Rules for Finding Business Investors
The Basic Rules for Finding Business Investors By William Cate
When it comes to finding business capital, most entrepreneurs
spend most of their time wasting their time seeking the wrong
investor, making the wrong offers or making offers that won't
result in the needed financing.
Here are nine rules that will help you find the money your
company needs to grow.
1. Define Your Target Market. Everyone isn't interested in
investing in your company. Develop a profile of potential
investors in your company. Angel investors rarely invest in
businesses more than fifty miles away from their homes. Venture
Capitalists won't invest in local businesses.
2. Have a Concise and Defensible Business Plan. Your business
plan should be focused on your Target Market. It must ring true!
It must show your commitment to your company's success. A badly
written business plan may not render your investment opportunity
absolutely unfundable. After all, someone might see the genius
behind the clutter. However, any investor who regularly funds
companies usually lacks the time to find the genius behind your
words. 3. Hire competent advisors! You need a business attorney;
an accountant and a business finance advisor. Carefully select
all three advisors, if you want to raise money for your company.
If you fail to do so, the odds are you won't raise any money and
you might find that you are spending money to explain your
efforts to State and Federal Regulators.
4. Define your niche market and focus on developing it. Your
product or service may have universal appeal. However, your use
of risk capital funds should be to develop a smaller niche
market with the investors' funds. Spending a million dollars to
develop a U.S. Market for your product or service is rarely a
credible proposal. Spending a million dollars to develop a
California market for your goods or services is far more
believable. Focus on an achievable niche market. Use your
profits to see that niche market grow to be an international
market.
5. How will your investors make money from their investment in
your company?' You need to clearly define your investors' exit
strategy. The investors not only need their risk capital
returned to them as quickly as possible, they need a return on
their investment commensurate with their risk.
6. You must be willing to surrender control of your company to
your investors. Most investors expect at least a 50% equity
interest in your company for their money. If you won't surrender
control, there is little likelihood that you have a serious exit
strategy for your potential investor. Why? Because ultimately an
exit strategy is about a change of control. If you won't give
control to your investors, you won't agree to any exit strategy
that benefits those investors.
7. Your view of what your startup company is worth is grossly
inaccurate. If your company has revenues, discounted cashflow
and profitability formulas are a sound basis for valuation. If
you have a startup company, your cash investment plus your sweat
equity is a good basis for valuation. Over value your company
and forget about finding investors.
8. Your plan is local in focus You might find local angels to
fund a good local restaurant, bar or nightclub. However,
sophisticated investors strongly prefer risking their money on
companies with a national or international market for their
goods or services.
9. Keep your company's books current and accurate If your
bookkeeping is a mess, forget outside investors. If you haven't
kept your books in a detailed and accurate fashion before you
started your money hunt, potential investors realize that your
accounting won't improve after they make their risk capital
investment. If they can't trace how you have spent their money,
they won't give you the money to spend. Cashflow projections are
rarely accurate. If your company has cashflow and your cashflow
projections deviate very much from your past performance, nobody
will believe them and in due course they won't believe your
business plan. If you are a startup company, you are better
served outlining and documenting the sources and potential of
your revenue stream than trying to estimate it's size. Your goal
should be to muster enough evidence to show a realistic
potential of at least $25 million per year in three years after
the investors' funding.
If you don't have a written business plan, write one or have a
professional write it for you. If you lack a strategic plan,
write one or have a professional write it for you. Always
remember that sophisticated investors are hiring professionals
to play Devil's Advocate. Their job is to find the weaknesses in
your business or strategic plan. Write your documents in such a
way that there are no serious misstatements of material facts.
It's possible to find naive investors for any business project.
However, it often costs more money to find these dupes than they
will contribute to your company. Naive investors losses billions
of dollars annually. Swindlers and the starry-eyed entrepreneur
spend billions of dollars trying to find these investors. You
are far better served putting together a professional investment
package and seeking sophisticated investors to fund your
company. It's your only realistic chance of bring your vision to
life.