Friday, May 18, 2007

Lesson #19 - Don't be Lost in Translation

A big part of being an entrepreneur is raising capital. I have had the fortune of being on both sides of the table - an entrepreneur pitching my business plan and as an angel investor and fund manager. As an entrepreneur I have learned a lot about the process of raising capital and what fatal mistakes you can make when presenting an investment to an investor. As an investor, I have seen a wide range of business pitches (ranging from bad to okay), which led me to understand why venture capitalists are skeptical and occasionally synical.

Before I give you my tips and techniques on how to have a conversation with an Investor, lets get into the mind of a typical investor, so you can appreciate what you are up against.

1. Investors are pessimists, not optimists. Investors are looking for weakness the minute you walk into the room. They are making a list in their head of reasons NOT to invest.

2. Investors have seen it all. All businesses are 80% the same, and the remaining 20% is what makes it unique. A novel technology and business model will spike their interest, but there is a high likelihood they have heard a variation of your pitch before.

3. Investors do not want to be alone. Investors feed on validation. The best way to validate an investment opportunity is to create demand. Investors want to invest with other investors. There are very few venture capitalists that will lead an investment, and even fewer will go in alone.

4. Investors are patient. Investors are in no hurry to write checks. They will wait until the last possible second before committing to an investment. And usually the only event that gets them to pull the trigger is if the investment round is closing due to other investors interest.

5. Investors don't like surprises. Investors want to know more about the business than you. If you withhold information, or forget to tell them you won't hit your numbers, or you just lost a key employee - they will be livid. Investors will accept bad news only if they knew it was coming.

Now that you have an idea of the investor's mindset - I can give you some tips on how to interpret what an investor says, and how they interpret what you say.

Here are some common questions and statements you will here in a typical "pitch" to an investor.

1. Investor Question - "What is the history of the Company?"

Interpretation - "I am interested in knowing if you have any proof whatsoever that this is a good idea? Any customers? revenue? Anything that can be classified as "operational proof" that this is actually a "company" and not just a business plan."

2. Investor Question - "How much have you invested in the Company?"

Interpretation - "Please don't tell me your only investment is "sweat equity". Please tell me that you invested real money, showing me that you are willing to put a large portion of your own money into this idea. If you aren't willing to invest... how can I really believe you are 100% committed?"

3. Investor Question - "How much capital are you raising in this round?"

Interpretation - "I already know how much you need to raise based on my experience, I just want to see how realistic you are about what type of funding it will take to grow a company. Also, I want to see if you dodge the question - or really have confidence in your financials."

4. Investor Question - "What is the valuation of the company?"

Interpretation - "I already know what I think its worth, but I want to see if you are in the ball park, or completely off the chart. I also want to see how desperate you are for money, and if you are ready to give up half your company"

5. Investor Question - "What is your exit plan?"

Interpretation - "Please give me a list of names of companies that you feel would benefit from acquiring your technology and business.... don't just say IPO or Acquisition."

6. Investor Question - "Who is your competition?"

Interpretation - "Please give me a list of names, details on size, market share, etc... don't say 'I don't have competition'"

7. Investor Question - "Who is your Market?"

Interpretation - "Do you have experience selling this to someone? Give me specifics? Who wants to buy your product and why? Describe the perfect customer - don't rattle off a list of industries or basic demographics."

8. Investor Question - "Who else are you talking to about investing?"

Interpretation - "Is another VC interested? Do they see something I don't? I am interested, but I need validation before I spend more time looking at this?"

9. Investor Question - "What is your current funding status? How much capital do you have?"

Interpretation - "How desperate are you? Are you not going to make payroll next week... or do you have plenty of funds and really don't need me?"

10. Investor Question - "What is your background?"

Interpretation - "Are you a seasoned entrepreneur? former VP of a Fortune 500 company or a Ph.D. Scientist?? If not... there is the door"

Ofcourse these are only a few of the questions you will be asked, but I think you get the idea. Just because an Investor asks a question, doesn't mean they don't know the answer. They are more interested in how you answer, then what the answer is.

One of the most difficult aspects of being an entrepreneur is learning how to bridle your excitement and your optimism for your idea. Think of it like fire. Fire in a controlled environment can be a very powerful tool, but if it gets out of control you can destroy everything.