Having seen many family companies who think they can get money because the investors will fall in love as hard as they have, I thought I would write a quick list of 6 Bear Traps of raising private equity. I asked a few fund managers for their opinions which are quoted in the book, Money Magnet. I also checked out some blogs where these sorts of lists are popular. Here are the top Bear traps sabotaging most funding efforts, in decreasing priority sequence:
- Lack of a growth story. That story has to begin with the painful problem shared by a large collection of viable customers, with your competitive solution and why your company needs to grow. It has to be a big enough difference to get people to switch. Clay Christenson, Harvard Business School, wrote an entire book about how to get people to move from using the stairs to a new technology called the escalator. Many mature companies have not thought about how to grow their business, preferring to stay in the same, safe markets. Additionally, you need to be able to communicate the essence of that story and value to investors in a couple of sentences – your elevator pitch.
- Lack of simple goals. Often, the number one question that owners fail to address is: “How much money do you need, and what valuation do you place on your company?” Then you have to have evidence to support your request. I’ve asked this question many times of presenters in angel meetings, and often get a blank look. What are the three things you would do with the money and in what time frame? Keep it to three. How much is your company worth and over five years forward, how much will it grow? Remember, the investor's other options are the stock market and putting the same amount of capital on gold - can you beat that growth?
- Failure to prepare for due diligence. Any serious investor will perform a thorough archeological dig on your business and your background. Make sure there are no surprises, so you should explain any possible issues first, in the best possible light, before being asked. Get a professional financial advisor to ge you and your company ready and that should include 100% of due diligence already done and ready for the investors to merely review.
- Lack of understanding of the fund. The book Money Magnet helps you get inside the head of the person with the capital. The key here is to create a win-win situation for your investors. Discussion of risks and rewards in an open fashion, without sleight-of-hand or shortcuts, will convince investors that they can count on you, and will avoid shareholder lawsuits later.
- Reliance on inappropriate business professionals. Using well-respected professionals to find you capital and introduce you to the right people as well as stick handle your way through to the check signing is smart. If you can attract well-known advisors, attorneys, and accountants, it will give potential investors comfort that you have been able to get an implied endorsement of your concept, as well as your integrity.
- Being unprepared for the next steps. After a good elevator pitch or initial presentation, investors will ask for your formal business plan and financial projections. Don’t derail their enthusiasm or risk your professional image by not having these materials immediately available. The same thing goes for incorporating your company, having key hires lined up, and facilities arranged as required.