Are You Investment Ready ?
Much is written about how to successfully approach angel investors, but do you know what the major requirements are? You only get one good chance with any angel investor or angel investor organization. Make the best of it by being prepared :
- Know Your Market and Buyer. The foundation of your entire business proposition is based on a large and growing market in which a compelling problem exists that a buyer will spend money to fix. You must know everything about your market opportunity and what drives it. You need to know all about what constitutes your market: market size, market growth rate, market drivers, competition, competitive market share, buyer’s problem, buyer’s purchasing preferences, key alliances, sales and distribution channels, and many more things about your market landscape. If you are not able to explain these and answer the hundreds of questions you will get, the investor will conclude you don’t have a business and your chances of getting any further interest is near zero.
- Know Your Competition. It’s a bad day when an investor knows more about your competition than you do or identifies competitors that you have not considered. Also an issue is saying that you do not have competitors because you are in a new market or nobody has a product or service like yours. Your potential investor will conclude that you have not done much research and not considered the various alternatives that your potential buyer has to solve the problem that your product or service solves. When your primary competitor is the status quo; make sure you have very strong marketing and sales skills that will motivate people to change. If you don’t know your competition, the potential investor will have little regard for your understanding of how to win in your marketplace.
- Realistically State Business Progress. If you say that you have made certain progress in product or service readiness, customer traction, strategic partner interest or investor interest, and it is later discovered not to be true, the investor relationship will be over. You will have shown a lack of integrity and precision in your communications which will be extrapolated to everything you have previously said. This is a breach in trust which can be impossible to recover from. Avoid this mistake by always telling the truth about the status of your business; doing it as objectively as possible using straight forward facts.
- Build Out The Management Team. As Dirty Harry once said, “A man has to know his limitations.” Well, so do entrepreneurs. Investors are going to make sure that the right management team is in place. Sometimes that means bringing additional people into the company to fill necessary roles, including the CEO. If you resist this by unrealistically insisting that you can play a role that you are not really qualified for and you are not acting in the best interests of the company, investors will not work with you. You will be showing a level of immaturity that indicates that the investor’s money is not going to be managed well, so they will not take the risk.
- Leverage Outside Stakeholder Knowledge. Chances are that your potential investors know more about starting and running businesses than you do. Their accumulated wealth is proof that they are good business people. If you come across as arrogant or not willing to listen or be coached, your potential investor will conclude you will not be a good business partner. This is common sense. Unfortunately sometimes entrepreneurs get totally wrapped up in their perspective of the business and are not able see other points of view. If your mind is closed to other perspectives, the door to investor money will be closed as well.
- Being Respectful and Mature. Most of the time the process of raising angel investor funds is an exercise in patience. Investors don’t know as much about your business as you do so they ask a lot of questions that may seem obvious to you. Investors have certain perspectives of how business models work that will have to be reconciled. Many angel organizations have procedures that take time. Not respecting the process and trying to push it faster than it will go will only frustrate you and create friction with the Angels. If you struggle with the investor due diligence process, you will lose them.
- Know What You Will Do With the Funds. Not knowing exactly how much money you will need is usually forgiven, especially if the amount has been determined by a cooperative discussion with the potential investor. But, not knowing what you need the money for is a mistake. It indicates that you have not thought about what you have to do next to launch your business and that you are struggling with the milestones. The investor has to feel comfortable that money is going to be spent wisely and on the right things. If you don’t show that you know where the money needs to be spent, you will not get funded.
- Unrealistically Insisting on Ownership Control. Too many entrepreneurs underestimate the importance of the investor’s role. In order to be successful, an entrepreneur needs a good business proposition and the money to finance it. Both are equally important. Some entrepreneurs think that the investor’s role is much less significant than the entrepreneur’s. After all, the entrepreneur had the idea and is doing all the heavy lifting. The investor is only providing the money. This attitude is both insulting and demeaning to an investor. The entrepreneur is forgetting that the investor has already done a lot of heavy lifting to make the money to invest. If the entrepreneur does not show fairness in sharing decision making and ownership of the company commensurate with the risk that the investor is taking, then the deal will not happen.
- Accurately Represent Financial Status. A sure death blow to an investor opportunity is to inaccurately report your and the company’s current financial status. If you misrepresent how much money has gone into the company, your debt position, your financial obligations, the promises you have made to others concerning their financial interest in the company, your revenue, your payables, and much more – the potential investor will conclude you do not know how to manage money. Therefore, they will not let you manage theirs!
- Disclose all Material Facts. The intent of the due diligence process is to discover all the material facts about the company. Upon entering this process, the entrepreneur must disclose all information that represents a material risk to the business. If you hid these facts and the investor finds them the deal is blown. This is another breach of trust. Make sure you are accurately disclosing intellectual property status, all business obligations, legal issues, contractual arrangements, customer relationships, alliance negotiations, personnel commitments, and all material facts about your business.
Good business judgment coupled with integrity and an ability to generate results are the foundation of a successful and mutually rewarding partnership. This is important since the investor is your partner and has to be treated as such. Bringing your potential investor into the business, in full disclosure and in the spirit of creating a long term respectful relationship, will keep you on the track of getting the financing you need and access to expertise that can be critical to business success and creating significant shareholder wealth.