15 Steps for Attracting Investors
Over the past 3 years, I have been blessed to do the following things…
– work with the Desert Angels, one of the nation’s largest angel investor groups located in Tucson, Arizona, redesigning their website, deploying the web-based deal management system Angelsoft and helping to perform investment due diligence
– volunteer as a business advisor for the Arizona Center for Innovation Business Incubator
– study venture capital at the University of California Berkeley
– lead a group of 15 undergraduate and graduate students from The University of Arizona to participate in the Private Equity Summit in Utah to learn how to start a career in venture capital and entrepreneurship
– build a team, write a business plan and go on to win the 2010 Best New Venture of the Year competition at The University of Arizona and the McGuire Center for Entrepreneurship
– complete my MBA with a concentration in Entrepreneurship from The University of Arizona
– partner with my good friend Jarret Hamstreet, raise $500,000 in seed capital and launch PostBidShip.com in an effort to bring innovation to the $660 billion commercial shipping industry.
Even before these 3 years, I was blessed to successfully launch 3 technology companies. In the third company, I raised over $1 million in start-up funds from outside investors and that company has since grown to help connect thousands of hurting teens and young adults with caring charitable organizations throughout the United States and Canada.
I don’t share this list to brag (ok, maybe a little). The goal is to build creditability for my list I’ve put together for entrepreneurs just like you seeking to raise capital. Through all these great adventures plus surrounding myself with very smart people, I have put together the following list of steps I feel strongly will help you on your path to becoming a successful entrepreneur and be in a much better position to attract investors’ attention.
#1 – Build a Strong Management Team. Investors want to know that your business has the right management team. I often hear and know from experience there are five common questions investors ask and the first three are “Who’s the management team?”
There is a term in the investment industry referred to as “Top 1% Management Team.” Investors refer to top 1% management when each role in your management team has an individual that would be considered in the top 1% of their profession. A rock solid management team is more investable than even the best of ideas. That is because ideas come and go but top talent can adapt to a changing environment, generate new ideas, exploit opportunities and create value.
An interesting fact to know and be aware: over 30% of all investment dollars go to management teams that have previously received an investment. The industry term for these second time investment management teams is “recycled.” Here’s to you being recycled!
#2 – Find an Untapped Market. Your second goal is to communicate that the current solutions are not properly addressing the problem you have identified. At the same time, you must connect that your management team knows how best to get the potential consumers who are experiencing the problem to pay for your solution. Even better is that you already have customers lined up and willing to pay for that solution. Investors like to hear that “the dogs are eating the dog food.”
#3 – Show Me the Money. Next, you must communicate that the market you plan to address is large enough to scale the business in such a way that investors will receive back within a few years a multiple on their investment. The average angel and venture capital investor is looking to harvest several times their initial investment within the next 3 to 7 years.
If you are looking to pay 5% to 15% APR on the money you receive, do not waste your time speaking with angel and venture capital investors. For those types of interest structured loans, you should speak with a bank or the Small Business Administration for a commercial loan because such a low APR fits their risk profile better.
I heard an investor once comment, “If I wanted interest, I’d get a CD and if I wanted collateral, I’d buy a house.”
#4 – Have a Plan to Keep Competitors at Bay. You must be able to communicate that your business has barriers to entry. Investors want to know that you can successfully keep other businesses from coming into your market. Patents often do this but know there are many other techniques in which to accomplish barriers to entry.
The reason investors want barriers to entry is to protect their investment and give you and your management team enough runway to build a business that can pay the multiples your investors need. Without strong barriers to entry, competition can easily enter your market and this increases you and your investors’ risks.
#5 – Know Porter’s Five Forces. Most investors will know and understand Porter’s Five Forces, a framework for an industry analysis and business strategy created by Michael E. Porter of Harvard Business School in 1979. The framework addresses the threat of substitute products or services, the threat of the entry of new competitors, the intensity of competitive rivalry, the bargaining power of buyers and the bargaining power of suppliers. Investors will use these forces to evaluate your business, so be prepared to discuss these in detail when the opportunity arises.
#6 – Have an Exit Strategy. Investors want to know that you are looking at ways to exit the business within a few years because an exit is the real path to your investors making money. If you are looking for a business to provide you a comfortable living for the next 20 years, it will probably not be a great candidate for investors. Investors are looking to harvest their investments, not fund your lifestyle.
I recently had a person ask me about my recommendations for garnering investors into his business. My first question was ‘What is your long-term goal for your company?’
His answer was to leave it to his children (an admirable goal in my opinion but not words of endearment to investors). I also asked him a question to reflect. “If I were to ask your children in 15 years if they’d rather run a company their father started or have $20 million in the bank, which would they pick?”
#7 – Demonstrate Now is the Time to Act. In your presentation, you will want to share with investors that “the stars have lined up” to provide this opportunity to create this business and you have the right management team to take advantage of this opportunity NOW!
#8 – Pick a Beachhead. The word “beachhead” was made popular in business by the book “Crossing the Chasm.” To cross the chasm, the book’s author Moore advocates that a company focus on a single market, a beachhead, win domination over this small specific market, and then use it as a springboard to win adjacent extended markets.
#9 – Know Thy Weaknesses. Knowing your weaknesses is a good thing when it comes to speaking with investors. Just this week, I was working with a company that needed to raise capital to hire a marketing director. They considered marketing their weakness and admitted it openly in their pitch to potential investors. While interviewing potential investors, an investor referred them to what he called “the perfect investor for you” because he knew a guy who was looking for an opportunity to work for a start-up company as the marketing director plus he had money to invest.
The founders of the company knew their weakness, shared it openly with investors and the right investor beat a path to their door.
#10 – Be Coachable. When an investor chooses to invest in you, they will be making the decision to partner with you for the next 3 to 7 years on average and even longer if they choose to recycle (see #1). I have often heard investors refer their investments in terms of a marriage. They want to know before they tie the knot that they like the person they are about to spend a lot of time with over the next few years. The best way is to demonstrate you are open to new ideas, constructive criticism and their counsel.
Remember also that you will choose an investor for their resources, not just their wallet. Those resources may also include their wisdom, experience, contacts and counsel.
I heard a venture capitalist once define investing as “the act of paying entrepreneurs to not take his advice.” Demonstrate you are coachable and the marriage will be a happy one.
#11 – Set Realistic Goals. If I told you there was a business right now that could do $50 million in 5 years, you would find it hard to believe. But when the founder breaks down how the business grows and then shows you 3 other companies that grew in the same industry at an even faster rate, you start to believe him. Then you find out that his family has started and sold 2 other companies in the same industry and they currently own another which is highly successful, now you start to really believe this guy. That is how good investment opportunity sounds to an investor because it is realistic.
Then there is the opposite problem. Your business plan states you need $1 million in start-up funding but in your financials, month 5 shows the lowest cash deficit of $300,000 and then in month 7, you have a cash balance of $3 million from the huge sales you experienced in month 6. I’m just saying that probably isn’t realistic.
#12 – Serve as Your Business’ Champion. There are ‘up’ days in an entrepreneur’s life and there are ‘down’ days. And just so you know, those down days can be very, very down (I can see all you experienced entrepreneurs shaking your heads in agreement right now).
Whether you are running out of cash (I have done this), laying off all your employees (I have done this), trying to make payroll for those who for some reason have stuck with you (I have done this), convincing your spouse that you promise to replace the mortgage payment when that big order comes in (I almost did this) and then sitting around watching the email and checking your spam filter for that big order than never seems to come (I have done this).
Investors know these days are ahead for many of their entrepreneurs and they need to believe you have enough passion that you won’t just walk away when the going gets tough.
#13 – Be Consistent. I heard just the other day from Jerone Davis at Tucson’s Microbusiness Advancement Center his recommendation that businesses be consistent in their business plan. Davis states “If you say in your business plan that your industry is growing 80% but later you show your revenues growing only at 10%, that would be considered inconsistent.”
#14 – Show, Don’t Tell. Jarret Hamstreet, my business partner and former analyst for the Desert Angels shared with me that he always appreciated seeing a working proto-type or final product over just hearing about an idea.
Jarret, like many other investors, thinks more positively about an investment’s potential when they can see and touch the product. If your venture is an Internet venture, can they demo your website? If your venture involves a product, can they examine it? If your venture is a software application, can they install it? If you can say yes to any of these questions, you will be a lot further ahead than the rest of the crowd who can’t do these things.
#15 – Pray for Luck. ‘Pray as if it all depends on God and work as though it all depends on you.’ Those are the words I say to myself every day. I strongly believe them and they serve as the foundation for how I live and work.
So does luck play a role in success? Many successful entrepreneurs have shared how luck has played a key role in their success. That potential competitor went a different direction, their first hire turned out to be a rock star or that sale they needed to make payroll came through. All these events can often be due to pure luck. But another saying I have heard is ‘Success is where preparation and opportunity meet.’
Now go out there, execute on that idea that you have. My last 2 sayings for today are that ‘you will fail at 100% of the ideas you never try.’ So in the words of Nike, ‘Just do it.’