These are heady days for entrepreneurs and founders. Economic indicators look positive and the taper is happening. Unemployment is down, housing starts are up and so is the stock market. If there is any downside to this news, it has to be that interest rates may begin to rise, fractionally of course, but rise nonetheless.
Entrepreneurs and founders should view these developments as contributors to an outstanding climate in which to seek the funding necessary to take your enterprise to the next level. In this environment, startups with the most aggressive plans and biggest ideas will have the inside track. If you believe your startup is ready to make the leap, take a moment and review these top strategies for dealing with VCs and Angel Investors.
Know Your Options
Important changes are in the wind for venture capital firms, angel investors, startups, hedge funds, private equity firms and crowdfunding platforms. The long standing ban on general solicitation has gone the way of prohibition and this will liberate a reservoir of capital, currently in the hands of the general public. All of the above mentioned entities will be competing for a long drink from those cool waters and startups will have an edge because they have the ability to capture the interest and attention of the small investor. For the startup, angel investors and venture capital firms will continue to hold sway in the funding universe, but as 2014 matures, crowdfunding will certainly begin making inroads into that once sacrosanct territory. Bring yourself up to speed on all these options so you can pursue the ones that are the best fit for your company.
Adopt the Investor’s Paradigm
It is of paramount importance that you understand the investor’s point of view. While pitches and demos are important, if they do not speak to the issues investors are most concerned about, you are setting yourself up for failure. You only get one crack at making a positive first impression, so it has to be the best it can be and as we’ve said already, it must speak to investor concerns.
Although it may seem an obvious point, you would be surprised at the number of founders who fail to bring a comprehensive business plan for investors to review. However, it isn’t enough to have the plan … you must understand it, be able to explain it and defend it against attack. In short, investors want to be assured that you thoroughly understand your business.
They will want you to demonstrate an understanding of break-even costs, costs per item, and other particulars. Be prepared to speak about your competition, their market share and your projected market share.
You will need to explain how much funding you require and why. You must be able to convince the potential investor that you have skin in the game, be it cash, or blood, sweat and tears.
Investors will also want to know what percentage of the company’s ownership you are prepared to exchange for funding. To answer this question, you will need to know your company’s pre-money value. Worthworm is an excellent resource to help you determine this value. Be assured they will want to discuss future funding needs and the extent to which their current ownership might be diluted in future rounds. Investors want realistic responses to questions of risk, return on investment and the length of time required for them to realize a profit.
The most important thing to grasp is that the investor is investing in you as well as your business. For this reason alone, making the right impression and carrying yourself well in the meeting is critical.
When dealing with an angel investor, it is important to look into their background. I promise you, they have thoroughly researched yours and your company’s. Try to speak with other entrepreneurs and founders this person has worked with previously. After all, this person is going to own a piece of your company—you have an obligation to learn as much as you can.
Gather Together an Outstanding Team
Get the best professional service providers you can afford. This is not the place to pinch pennies. Surround yourself with great advisors, people who have traveled this road before you and are willing to share their experience.
Polish Your Negotiating Skills
Once you know the pre-money valuation of your enterprise, you will have the necessary information to negotiate the percentage of your company it is reasonable to offer to make the deal happen. Be flexible, but make sure your end is sufficiently substantial to reward you for all the hard work, stress, and obstacles you will encounter … not to mention any cash you’ve invested.
These tips are not all inclusive, but they will help keep you on point for turning that dream into a reality.
About Author: Andrew Cravenho is the CEO of CBAC Funding, an innovative invoice finance company. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow.
“Macro Shot Of The Right Half Of The New 100 Usa Dollar Bill” courtesy of David Castillo Dominici /www.freedigitalphotos.net
Ellen Rohr says
Nice post! Love the advice about understanding the investor’s perspective. As Stephen Covey said, “Seek first to understand, then to be understood.” Great blog!! xo$
Rich Lewy says
Great article! Thanks for posting.