Claude Debussy was surely not thinking about investment when he wrote “A beautiful sunset, mistaken for a dawn.” However, this is an apt analogy to the different perspectives of entrepreneurs seeking investment and investors evaluating a potential investment. Why would I invest in your company?
Things may look very similar, but there are nuances depending on which side of the table you are sitting on.
Many years ago, I was fortunate to work with an investor who became both an advisor to my business and a mentor to me. One of the enduring lessons he taught me as a young entrepreneur was how to think from the perspective of an investor and anticipate their perspective. Since that time, I’ve had a chance to sit on both sides of the negotiating table. But no matter which side I’m sitting on, I’m always thinking about the antipodal perspective, and you should too.
Operating capital is the lifeblood of any company or organization.
But how do companies attract investment capital to fuel their growth? Similarly, how do non-profits secure the financial contributions necessary to achieve their mission?
There are no easy or one-size-fits-all answers to these critical questions. But there are many important considerations for entrepreneurs, boards and investors to mutually consider.
Here are eight key questions that you should ask:
1. Have you established transparency and trust early?
The decision to invest is often predicated as much on the founders raising the capital as on the project or company itself. Is the founder candid and at ease with answering investment diligence questions? Does the founder seem evasive in answering any questions, or classify them as ‘too secret’ to disclose?
Remember that if you are not readily transparent with your answers, investors will have a much harder time establishing the trust necessary to move forward.
2. Have you adequately explored other areas of financing?
Investment capital is simply one means of acquiring capital. Earned income/revenue and loans are other methods that may or may not make sense for your business or project.
You must demonstrate to your potential investors that you have carefully considered the right mix for your finance strategy. As a related point, most investors will want to know what personal ‘skin in the game’ the principals have, and you should be ready for this question.
3. Do you and the team have a track record of success that correlates to the business?
Investors want to know how your past experience will help to minimize risk. Remember that experience is not only inclusive of success. If you have been involved in a failed business in the past, don’t try to hide it as this is the type of thing that diligence will ferret out anyway. Instead, make a strong case for how the lessons learned from the failure will contribute to your future success.
Similar points exist for the team involved. Investors want to invest in savvy principals who have recruited the right team for the job. Also be careful about industry shifts. For example, if your experience is in enterprise software, and you are raising money for a consumer product business, have a solid case for why your skills are transferable.
Plan your micro business case for transferable skills well. Be creative and find unique ways to communicate and endorse your position.
For example, I was recently engaged with a non-profit project while essentially all of my previous experience came from the for-profit sector. I knew, well in advance of any meeting, that my non-profit credentials would be questioned. Anticipating these questions, I researched, wrote and published about lessons of entrepreneurship for the non-profit sector. I also vetted my work with seasoned and respected non-profit professionals before publication. Later, I was able to bolster my case for transferable skills by sharing copies of the vetted publication; this was highly effective.
4. Do you know your market well?
There’s a lot more to knowing your market well than simply having an innovative product. What have you learned from customer development?
Does your business model demonstrate that you have accounted for important issues like consumer education and behavioral change?
Have you done your homework to make sure your product or service will comply with any regulatory environments? The graveyard of companies who focused heavily on technology and too little on infrastructure and social engineering is large. Don’t make this mistake; take the broad view of knowing your market.
5. Do you have a strong rationale for your valuation?
They say you’re worth what you negotiate, and this is largely correct. Be ready for a negotiation on the matter of valuation. As the founder, it’s your responsibility to research and know well the valuations for comparable companies. Use this information to build a strong case for your valuation. Investors will also look down the road at future expected funding and related milestones. Are you adequately presenting the risks associated with these? If the investor thinks the risk of a down-round is too great in the future, this is more than enough reason for many investors to walk away.
6. Have you been smart and thoughtful in your method of approaching investors?
Cold-calling may be an effective technique for some sales and business development activities, but it’s rarely, if ever, an effective method to pitch investors.
Research your targeted investors before approaching them personally.
Not only are investors much more likely to be non-responsive when you blast email your business plan to a list, your approach to raising capital provides valuable insight into how you are likely to operate your business. For example, pitching an investor active in the energy sector about your healthcare startup is highly unlikely to be successful. Similarly, contacting a fund that likes to make investments in the $50MM – $100MM range about your start-up must be avoided. Not only will these mistakes rob you of valuable time, you run the very real risk of establishing an unwanted reputation with investors as someone who does not do their homework
This is the type of thing that can haunt you into the future when you are pitching for the next phase of growth or for your next project.
7. Do you value the investor’s time?
Finding the right investor for your project often means someone who can offer specific expertise or relationships in addition to financial investment. It’s foolish to assume that they will simply want to be actively involved just because they have made an investment. Involvement on boards or even as an informal adviser can represent a major time commitment.
If you are going to ask for help beyond financial investment (and by all means, do so, if it makes sense!), demonstrate that you respect the time commitment that such involvement will reflect. Have a plan ready for how you will manage their time commitment for efficiency, and consider additional compensation, such as options or warrants, as appropriate.
8. How will the investor get their money back?
There are all sorts of ROI models to pursue. The issue here is not which one makes sense, that’s what your business and financial model is for. But be forthright with your prospective investors about your ROI model and build a strong case to support it. If an investor walks away from your pitch meeting without clearly understanding how they will get their money back, you are unlikely to be successful.
These key eight questions should be considered when preparing your investment pitch. As a practical exercise, consider these questions and other factors related more specifically to your business and create a checklist of things that will lead an investor to say ‘yes’ for your particular project, company or non-profit.
Keep in mind that you will improve your pitch skills with time and experience. There are almost always more investors that say ‘no’ than ‘yes’ along the way.
When an investor tells you that your project is not right for them, always be respectful of their decision. But also use this as an opportunity to improve your skills and preparation. Ask them why the project isn’t right for them and ask them for feedback on your pitch and business model. Smart entrepreneurs and principals are always harvesting this feedback to improve. Remember the wisdom of Winston Churchill, who said, “Success consists of going from failure to failure without losing enthusiasm.”
Guest contributor Alex Conrad has over twenty years of experience as an executive in the IT and resource/energy sectors. He has managed projects across the world including China, Russia, Brazil and Africa. After living in Beijing for several years, he has returned to the US and now lives on Orcas Island in WA State. He believes in the power of creative entrepreneurship and community to kindle innovation and inspire change. He is @Darnoc on twitter.
image ©CASUDI ” Dawn Over Cattle Point”