Is your company investment ready?

More capital is available than there are good deals looking for funding. Investors are only looking for good investments and barely a small percentage of funding applications succeed. Actually only two percent of companies seeking to raise equity from $100,000 to $2 million are successful. It is not luck that makes them successful; it's because the applicants know what investors look for. They understand that obtaining funds is a highly demanding process and most engage an experienced money raiser, to avoid being distracted from the core business and to make sure they get funds in the shortest possible time. This requires budgeting for professional help, as well as the actual process of creating a professional business plan.

It is unrealistic to assume that professionals will work only on a "back-end success fee," getting paid only when the entrepreneur obtain funding, and that they will accept stock in lieu of cash. Early in development a business, the stock has no value and it's illiquid. Professional advisors, who might be providing with consulting, legal, accounting and investor introduction services, are paid for their professional efforts. They have businesses to run themselves, and those businesses require cash in order to provide with the assistance the entrepreneur need. A common mistake by many entrepreneurs is to assume the professionals to be "partners" in the venture.

For the smaller businesses it more difficult to raise capital, mainly because 'business angels' are highly fragmented and regionally based. At the higher end, the venture capital firms prefer to fund larger and more mature enterprises. Pure startups have become less desirable investment targets. Actually the numbers of venture firms and their personnel will shrink, and probably hit bottom at the end of this decade. Venture firms will be under significant pressure to outperform their peers and their limited partners' common benchmark indices like NASDAQ. Angel firms (that are institutionally backed) will feel the same pressure. Angel investors (individuals investing their own capital) will become more risk averse.

Investors want to see proposals presented in their language, to meet their criteria and expectations. They receive hundreds of proposals and won't waste time if a business plan doesn't get to the point quickly and cover all the details the investor want to know. All investors want to make a swift and reasonable judgment.

To qualify for funding at any level requires more than a promising product or service. There are many boxes to be ticked if a company is to qualify. It pays to refer to someone who knows what investors want and who to approach.

Investors are only interested in providing capital to develop a business, not to prove an idea. In short, part of being 'investment ready' is to show there is a real and well-defined commercial opportunity. Every entrepreneur who wants to start a business should be prepared to invest his own money to prove an idea.

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. 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.

Investors look for the right mix of skills and experience, results, track record and deep understanding of the business and the market it operates in. Early stage growth businesses based on low gross margins are unlikely to attract equity finance.

Obtaining capital is time-consuming and a bigger task than many realize. Most management teams are too busy and don't have the expert knowledge to become investment ready. Some try, become distracted and their revenue stream suffers as a result. It makes more sense (and is more cost-effective in the long run) to invest in the right advice and resources that will enable a business to become investment ready, which will significantly increase the chances of a successful funding round.

In reality most investors prefer an application to be made in conjunction with an advisor who knows what is expected. It includes leaving no gaps or issues that may invite adverse comment or the opportunity to decline an application. .

Ben Hedenberg

Page last updated Tuesday, June 15, 2010


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