One of the most common complaints I get from readers is about the painfully long time it takes to raise money from investors. From their perspective, all the blame rests with angel clubs, venture capitalists and private investors.
The length of time it takes entrepreneurs to raise startup and expansion funding is highly dependent on their actions and attitude. The more they press investors for fast answers, the more investors slow down their responses.
Here are five ways entrepreneurs needlessly increase the amount of time it takes to get the funds they need to build and grow.
No. 1: Assuming your company takes priority. Venture fund managers look seriously at a dozen or more investment opportunities at a time. In addition, they have to monitor existing investments, attend industry conferences, and study emerging market trends.
Angel investors are equally pressed for time. Entrepreneurs just can't expect high net worth individuals to cancel weekend golf games or postpone other work obligations to meet with entrepreneurs.
Further, successful investors (the ones who usually have the most money allocated to entrepreneurial companies) don’t make hasty decisions. They spend time with management, separately confirm all key information in business plans, study the competition, call management's references, and "work the numbers" to understand where weaknesses exist in the company's business strategies. Only then will the average investor start to "socialize" the deal with other fund managers and angel club members to gain support to negotiate a workable transaction. This process takes months, not days. Ironically, entrepreneurs who are patient and respectful get funding faster than entrepreneurs who demand attention in an unprofessional way.
No. 2: Completely ignoring investment criteria. There are angel investment clubs in most cities across the country and dozens of “seed” stage, “early” stage, and “expansion” stage venture capital funds that invest in high growth potential businesses. Each funding resource has what is called “investment criteria” to guide their investing activities. Some funding resources only invest in medical technologies whereas other funding resources invest only in revenue generating companies.
Entrepreneurs who think that their business plan is so special that the investor will make an exception to the published investment criteria are destined to be ignored. Simply stated, if a fund’s Website says that it only invests in Internet commerce, don’t bother to send a business plan to franchise your burger restaurant.
No. 3: Hiring the wrong attorney. Negotiating investment terms with savvy business investors calls for an attorney who understands state and federal securities laws plus the fine points of preferred stock transactions. Entrepreneurs who hire general purpose legal counsel who may not understand the nuances of terms sheet proposals may slow down negotiations. The time-saving approach is to find a law firm that is respected in the venture finance community and has successfully closed one or more venture deals in the past two years. Who you hire tells investors a lot about your managerial capabilities.
No. 4: Betting on one investor. It’s common for entrepreneurs to gain a false sense of confidence after a positive first meeting with a first investor. Entrepreneurs assume a successful outcome and stop solicitations to other prospective investors. What they don’t know is that most angel and VC investors are polite and complementary to entrepreneurs even if they have no intention of funding a deal. Entrepreneurs have to be aggressive, persistent and not stop talking to investors until a large amount of cash is wired into the company checking account.
No. 5: Overpricing a company’s shares. There always will be some investor who will buy a company’s shares at a top-dollar business valuation. The trouble is that it might take a long time to find that “needle in a haystack” investor. Angels and venture capital fund managers know the value of their investment dollar and won’t willingly overpay to buy a stake in an entrepreneurial company. When investors are uneasy about a company’s valuation, they have to invest more time to find information about a company that will reasonably support the higher per share price point. Entrepreneurs who want fast funding have to sell their shares at “market” or at a discount.
Here’s one last tip. If investors are not calling you back after a first presentation, then it’s likely that your plan needs some reinvention. Rather than walk away in a huff, reach out to the funding sources one more time. Ask thoughtful questions that are most likely to get you somewhere rather than nowhere. For example, ask where or how your company’s business strategies can be improved. Ask for ideas on what types of investors may be a better fit for your company’s funding requirements. Also, ask what you can do to improve your presentations.
Remember, there are many roads to the top. If one road seems closed to you, then find another way to reach your destination.
Susan Schreter is a 20-year veteran of the venture finance community and entrepreneurship educator. Her work is dedicated to improving startup longevity in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.