I often daydream about the opportunities so many start-up businesses had during the tech boom of the late 90s. The amount of venture capital available for start-ups was virtually limitless during this time of unprecedented growth. In fact, many economists announced that the old laws of economics were irrelevant. They told us that the world was entering a new age of economic growth fueled by technological advancement, including the explosion of the internet, personal computers, software and communication devices.
During that time, it was not uncommon for start-ups to receive capital investments equal to 50 times valuations. Today, those valuations are unheard of. The vast amount of capital available back then, along with speculation of a “new age economy,” drove the markets wild. It’s insane to imagine that many start-up companies would only ask for quarterly funding, and why? The valuation was always higher quarter over quarter. Companies did not want to be locked into a long-term valuation when their value would be higher each subsequent quarter. The entrepreneurial community became drunk on the vast amount of capital at their fingertips.
And then came the hangover…
Did Tom Petty’s/ Jeffery Lane 1991 hit song “Learning to fly” foreshadow the ravishing of the financial markets 10 years later?
“I'm learning to fly, but I ain't got wings
Coming down is the hardest thing.
Well the good ol' days may not return
and the rocks might melt and the sea may burn”
The problem many funded start-up companies faced was a lack of viable profit strategy in the near term. Many companies were benefiting from capital available, but had no viable plan to grow revenue. Therefore, they could not sustain. These companies were “succeeding” based upon excellent market conditions; however, they had no sustainability and no wings to propel them to long-term sustainability and growth.
When the “dot com” boom came to an end, so did the limitless amounts of capital available for start-ups. Companies that practiced the quarter-by-quarter funding strategy simply ran out of money and were forced to turn off the lights.
In recent months, I’ve spoken to many investors, largely because the private Investor process interests me and I just launched a startup digital media company. Through these interactions, I’ve learned a significant amount over the last several months about angel investors, private equity, and venture capital.
I’ve also talked to many entrepreneurs recently and one thing is for certain - the earliest money is the hardest money to find because investor risk is substantially high. I was cautioned by a couple of different funded entrepreneurs to be careful of certain traps, including the common mistake of selling a high percentage of their business too early in the process. Selling too early at a low price will surely negatively impact subsequent funding sources.
In my own quest to learn more about private investing, I have chronicled 10 points that every entrepreneur should consider and prepare for prior to seeking investors. I have received some great guidance and now it is my turn to share what I’ve learned.
Before talking to Investors, one must consider the following:
The company must possess significant growth potential.
Your company’s growth potential is the most important item an investor will consider when choosing to invest in your company or not. Your company must possess a viable plan to hit aggressive growth targets. If not, you will most likely struggle to attract investors.
Is there a significant need for your product or service?
Private equity investors and venture capitalists are natural risk takers; however, you may be surprised by how cautious and conservative they can be when selecting companies to invest in. Make sure you adequately discuss the significant market need for your product and articulate how your technology is the solution to the market needs.
Who is your competition? Is there room for you to compete?
What’s your company’s differentiator that’s going to help you drive revenue and beat the competition? Articulating your winning strategy is crucial. YOU WILL BE TESTED on this subject. Remember, the most courageous innovators could care less about subtle differentiators; instead, they have a desire to create new market segments.
Is your product/service market ready?
Your company has a much better chance of attracting investors if your product and/or services are market ready. If your product or service is near market ready, layout an accurate timeline for product/service release.
What have you put on the line?
An investor wants to see an unwavering commitment. “Bootstrapping” is a term we use to describe building a business without the proceeds of outside investment. Make certain to articulate your ability to continue “bootstrapping” the project if needed. Create the perception that you can grow the business significantly on your own. If you can build the business on your own, you’re likely to attract investors.
Do you have a strong leadership team?
If the investor doesn’t believe in the leadership team, there will be no investment.
Who is your client base?
Is your client base diverse? Sophisticated? Global in scale? You must know the answers to these questions and more before approaching a potential investor.
What is your client acquisition strategy?
Do you have a strategy to acquire new clients without spending precious capital dollars? You better have a solid plan in respect to customer acquisition. You will need a plan that is strategic in nature and costs zero dollars. If you articulate a strategy to acquire clients without spending advertisement dollars, you will be far more likely to attract advertisement dollars.
Avoid using the word sustainability… Investors want growth!
One critical mistake a friend of mine made when talking to a private equity investor was using the word “sustainability.” He was working with a group that provided him a commitment on roughly 70 percent of the seed capital needed to launch his business. The investors who verbalized their commitment to the project wouldn’t cut him a check until he found another investor or two who was willing to invest the remaining 30 percent. He was pushing for the 70 percent immediately. He wanted to be funded prior to a few major product launches so he made the following statement: “$500K is enough to sustain the business for two years.” Immediately the investors looked him with a scowl and said “Jack, I don’t want sustainability, I want growth.” He continued by saying, “Never use the word sustainability when talking to an investor.”
My friend was kind enough to share his experience which taught me a valuable lesson.
Do you have a high growth business plan with a concise exit strategy?
You must articulate a plan that provides your investor with a clear winning strategy. Most investors want a clear picture as to when they can expect a sizable return on their investment. Their return may come from a variety of different scenario’s including: an IPO, company divesture, selling shares to a larger investor at a higher valuation, etc. The most common scenario is when an investor and entrepreneur sell their company to a much larger company at a significantly higher valuation than was established years earlier during the funding phase.
In order to provide a concise exit strategy, you must provide attainable growth projections within your business plan. The projections are generally used as a basis for company valuation:
So where do you find venture capitalist, angel Investors, and private equity investors? Learn more in my special report available in September 2013.