Finding Money Advice

While capital investors, both private ‘angels’ and institutional ‘venture capitalists’, are less formula-based than lenders, their decision-making process does use some of the same criteria. The lender’s Five Cs of Credit might be abbreviated to the investor’s Three Cs of Credibility, although you can be sure that their evaluation of your business will be, by no means, abbreviated…quite the contrary. Character will still be the most important issue, and the focus will be on Are You a Winner? Conditions will assess Can You Pull It Off? And Capacity will be concerned with Will It Be Worth It?

If someone is going to risk their hard-earned money on your company they’ll want to know who’s running the show, what have you done in the past, what do other people think of you, and so on. Investors will be much more thorough than lenders in their evaluation of your character. Their due diligence process, as it’s called, will include interviews with dozens of people including your friends, family, former employers and employees, business associates, former and current investors, bankers, credit bureaus, competitors, industry experts, existing and potential customers, and anyone else who they think might know something about you, your investors, your business, or your industry.

Capital investors are great networkers—they know everyone. If a smartphone proposal hits an investors desk, they might very well call a friend who heads the iPhone efforts at Apple to check out the idea—without revealing details, of course. On an entertainment industry deal, they might even call Steven Spielberg or George Lucas. An investor’s contacts with lawyers, accountants, business owners, and other investors means they have access to just about whoever they want to talk to, to find out just about whatever they want to know, about you and your business.

By the same token, don’t be surprised, insulted, shocked or appalled if investors check you, your team, and your current investors for criminal records, gambling excesses, substance abuse, marital discord, radical political or religious beliefs, and other iniquities.

Nothing will turn off a potential investor quicker than a business owner who opens the conversation complaining about existing investors. Asking to use new investors’ funds to pay off existing investors doesn’t play well either. If this is such a good deal, why would your old investors want out? Resolve any differences before you approach new investors, and remember that your new investors will be your old investors in the next round of fund-raising.

The business plan you present (you will have a business plan for VCs) can make or break your deal. A good one will convince investors that the market and product are real, and that you’re likely to grow the way you claim you can becuase the conditions are right. A poor plan will leave the investor with too many unanswered questions for them to want to bother gambling on your venture. Make sure the Executive Summary is clear, concise, and inviting or they’ll never even look at the rest of your masterpiece. They have very short attention spans, if for no other reson than they’ve heard, over and over, about this gee-wiz super-duper gadget that is going to change the world because absolutely everyone will buy it.

An outline for a business plan, the questions each section should address, and common business plan shortcomings are in the Finding Money ebook.  Yeah, there’s lots of business business plan guides out there, and even software to help you do it. #1 don’t use a cookie cutter, it’s obvious. And #2, what we suggest works, because we’ve used it outselves.

Before someone decides to invest in your business they’ll want to know that the potential returns will be commensurate with the level of risk. Like any investment, their returns will be based on three primary considerations:

• Can they buy at the right price?
• Can they sell at the right price?
• Will the return be worth the risk?

Of course this investment isn’t like any investment in one important respect: your investor can’t simply pick up the phone and say, “Sell.” In investor’s terms what you’re dealing with here are issues of exit strategy and valuation.  While some of your investors’ return may come from annual profits, most of what they make will come when your company has reached a level where it can be sold or taken public. Before going into a deal, they’ll want to know that your plans and time frames for cashing out match their own…usually three to seven years. So include an exit strategy as part of your financial projections. It’s an essential, but often omitted, part of a pitch to investors.

How much they’ll make when they cash out will depend largely on their equity, which will be determined based on how much your company is worth when it’s sold or taken public, and how much they own at that time. The valuation of your company at the time investors enter the deal, the extent to which any subsequent equity contributions reduced their stake, and the valuation of your company when it’s sold, will determine how much they make.