Venture Capital and Investing in Business Start-Ups

Need Money? The Lowdown On Investors

Everyone knows that equity capital and fast growth go hand-in-hand. Unfortunately outside investors drive hard bargains and the process seems to take forever. On top of that, you could get all the way to the end of the line to find out that either they don’t want you or you don’t want them.

What's going to gain favor for your business; is it a sound business plan, skin in the game or an operation that’s in the black but desperately needs a propeller? Once you locate investors that will give you the time of day the hard part begins. You’ll need the answers to questions such as:

• How much are you willing to give up?

• What else are you willing to do to see your company stay alive and thrive?

• Just what is you company worth?

The acceptable answer to these and other questions can vary from one end of the spectrum to the other depending on whom and what type of investor you’re talking to. Think of potential investors like an inverse dart board. The bulls eye in this analogy is not the goal rather it’s the starting point and the ultimate objective is the big outer ring which represents the big money. The first fund-raising level is you. Your good name and credit are the first to go on the block. After all, if you don’t have the faith in yourself necessary to risk bankruptcy and homelessness then why should other people have faith in you?

As you move to the next layer finding investors is still relatively easy but now you have to be willing to risk Mom and Dad’s retirement, and all that goes along with it, or hit on your friends and risk suffering their ridicule if things don’t work out.

The better point of being here is that the value of the company, or its assets, are seldom in question. Most of the time these folks just want to help out because you’re either related or the benefactor of a great friendship. Their stock, if any is ever actually transferred, becomes a conversation piece or dream of future wealth. From a business stand point people in the inner circles will only bet on you once and rarely can you count on any of them for sound advice. The next circle is the angel investor. These days finding an angel is fairly easy even if getting them to part with their money isn’t. Many of these folks accumulated their wealth by exercising stock options. That doesn’t necessarily make them wise business people and you still may have no where to go for good, sound advice.

Angels will sit down with you in a restaurant, at your expense, and talk to you about your business plan or model. If they get infected with your energy or enthusiasm and the model/plan is feasible you may get the backing you need. Angels aren’t especially concerned about valuation but neither do they have large amounts of money.

From here the going gets a little get tougher.

The most common next layer is an incubator. Generally you get the basics, such as receptionists, assistants, meeting rooms, copy machines; phone and network access is provided free or at a substantially reduced rate. If you find a good one you may receive help refining your business plan or, more importantly, you may get to network with, or receive council from, seasoned executives. The downside of incubators is that some are government funded or assisted. In this case they may not be as experienced in the real worlds as you might like, they may be restricted or limited in the types of businesses and business models, and they expect a large part of your equity in exchange for their services.

If you decide to forgo incubators the next step is small venture and funds or angel groups. These funds consist of somewhat savvy people with an eye toward a certain market. Most often they aren’t chartered and sometimes their contributors or members don’t meet the requirements for a sophisticated or accredited investor; reasonable intelligent individuals with net worth’s in excess of one million dollars.

Some of these funds want a full blown business plan while others just want a one page executive summary. You’re asking for their money and to get it you’ll have to dance to their piper. They will also be more valuation oriented but the bottom line will be all over the place.

You’re now in the big leagues but like any league the degree of “big” varies. The attitude at this level is don’t call us, we’ll call you. You’ll rarely ever meet with anyone at this level without being referred by someone they trust or have done business with in the past.

These companies rely on the financials when determining a potential business's potential. They employee sophisticated analysts and they expect a certain rate of return. At this point a business plan alone won’t do. You will be expected to have a full-scale sales and marketing plan including a detailed profile of your customers and they’ll expect you to have customers and profits. You’ll also have to turn over a larger portion of your business in return for their cash, network and expertise especially the expertise.

Along the way through the circles you’ll meet some very well meaning people and some not so well meaning. Be aware of the fee for connecting folks. If you get involved, check credentials and references and make it understood, in no uncertain terms, that they can’t collect on promises and effort. Pay them only out of the proceeds that they secure for you.

Dan Light is a target-driven professional and MBA with over 30 years of experience in information systems, data modeling, business modeling, and process reengineering. He has planned and managed projects valued between $13K and $20M without a cost overrun or delay in delivery. In a 12-year period, I generated over $10B in new revenue and he has directed teams of up to 160 professionals. Dan has demonstrated a high proficient in process design, management and optimization as well as change management, business continuity planning, and Sarbanes-Oxley compliance.

Dan Light's career includes a history of success and accomplishments in companies ranging in size from start-ups to the Fortune 25. It also includes a high competitive proposal win rate, orals coaching, operations management and business development in addition to broad-based IT knowledge.

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