Having been on both sides of entrepreneurship – starting businesses and financing businesses, I have some advice on where to focus your efforts to help ensure success.
As an entrepreneur, it’s hard to imagine that anything could be more important than money for your start-up. Most start-ups are created on a shoestring with almost no real cash. Sure, there’s a lot of sweat equity, but that’s just code for no one is getting cash for their work. Many people gladly trade time and effort for the possibility of a big payday later on. For some this pays off; for many it doesn’t.
Investor support
However a company gets started, it is merely a matter of time before real cash is needed in the business. Founders may have some cash that they can contribute and very often friends and family will contribute the love money that is necessary to get through the first number of weeks, maybe months. But when real cash is needed, more sophisticated investors will have to factor into the funding equation. It is best to understand right up front what these people want so everything can be built with that goal in mind.
Investor requirements
Simply put, investors are going to look at three things – the team, the product and the market.
The team
The team is first and foremost. Regardless of what the plan is at the start of the business, chances are most likely that it will not play out as planned. Something is going to happen that will destroy the assumptions about the opportunity, and the resilience of the management team is going to determine if the company can successfully navigate the turbulent times. Intelligence, commitment, experience – all are desired attributes that are necessary to get through the challenges of getting a business off the ground.
The product
The product needs to meet an unfilled need – the larger and more understandable the need, the better. Investors will consider how the product’s position will be defended – what intellectual property (patents, know-how and trademarks) covers the invention and offers some degree of protection from competitors who might otherwise enter the market. Or in the end, is it all about speed into the market and execution to develop a leading market position?
The market
The market opportunity should be significant and ideally global. Increasingly, subscription models are preferred over purely product sales in order to assure a base of revenue from customers through time. Plans should consider what might disrupt the market and reduce the opportunity.
The whole package
All of the three factors should look strong to potential investors at the outset. The strength of one factor doesn’t compensate for weakness in the other two. A weakness in one factor can torpedo the whole opportunity from an investor’s perspective.
Family and friend support
Getting a reaction to the story from friends and family early on can be a good thing, but remember that these are the people who love you. They may have neither the background nor the skill to truly assess the strength of your plan – and more importantly, they may not want to be the ones to deliver a cold dose of reality. While these people can be a good source of early money, it will typically be only a small portion of the money needed to take a significant opportunity forward.
Dispassionate evaluator meetings
This means that making the move rapidly to more dispassionate evaluators, including bankers, angel investors and venture capitalists, is going to be critical. Ask for a short amount of time to introduce your company prior to actually needing the money. Some will give you time, while others will not. You can tell them your story and ask for their input and advice. Be sure that it is advice that you are seeking and that the request for a meeting isn’t a ruse to get in to ask for money.
Getting money is serious business, and it means putting yourself in an investor’s shoes. Your pitch needs to address key success factors from an investor’s perspective. Speak the language of team, product and market. Embedded in the message about what more sophisticated investors want is likely some good advice about how to think about your business – money and more.
