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Working with Investors

Private investors are individuals who usually have earmarked a portion of their portfolios for risky, high-return investments. Venture capitalists are expert investors who specialize in a few industries. They perform sophisticated analyses of your opportunity and structure the deal to cover their interests. Venture capitalists may solicit other investors and institutions to entrust portions of their portfolios to them to invest in potentially high-return opportunities like yours. Everyone who plays this game knows and accepts the risks and they use the following guidelines:

Does your business fit into their niche?

It's likely you'll get a warmer reception (and a more valuable partner) if you choose an investor who already has a portfolio with many companies in your industry or market. They already understand the common difficulties and opportunities in your industry, and they may be able to provide much synergistic assistance for your venture.

What's your advantage?

Proprietary technology-a patent, process, trade secret, or something that can be protected from competition demonstrates an advantage. Regardless, you must have a unique product, process, or something special that can make a lot of money. An improvement or product that addresses a very limited market isn't nearly as interesting as something that appeals to a broad market.

Never invest in a programmer with a tan.
- Derek Blazensky, Adobe Ventures

Can they bet on you and your management's track record?

Investors usually bet on the jockey, not the horse. You must assemble a proven management team. A venture capital firm usually wants to invest at least $2 to $3 million or it's not worth all the effort. Since the stakes are higher, they want to see an experienced management team capable of capitalizing on your unique situation. Venture capitalists and most investors are masters at sizing up management. Any attempt to convince them that an inexperienced manager can do the job will only damage your credibility. It's much better to describe the management competence you intend to hire. Plus, you must have a team-investors want to be assured that the business will continue should something happen to the founder.

Will they get a ten to twenty times return?

For the risk, most investors expect huge returns. After all, there are some stable, growing companies whose stock can be purchased which will generate respectable returns with much less risk. Are you making a better offer? Will an infusion of money make a big difference? When you project your future ncome, their investment should enable you to do big things that will catapult your company forward. Often they look at the "J curve," which projects the difference in growth (revenue and profits) of your business with and without their investment. The upward point on the curve in the 'J' is the point where they've written you a check and the business takes off. If it will. This means that your business must be 'scalable'-bigger is better-like rolling-out a franchise (like Starbuck's), building a factory that will enable you to manufacture a gizmo inexpensively in quantity and therefore generate huge profits...

What is your exit strategy?

This doesn't necessarily mean that you must leave, it just means that you must sell your investors on how they will actually get their investment plus a return out of your business. When you can convince investors that your company will grow to $[20] million and go public in [four] years or sell to a larger company, investors will see that your opportunity is indeed worthwhile and that you have provided for them to make their money. (You must not resent them making a fortune from your hard work and creativity-they are providing the coveted cash without which you go nowhere... or you make very little otherwise.)

Getting your plan on top of the heap

Investors, especially active venture capitalists, see a foot-high pile of business plans every day. To get yours directly into the right person's hands, the best way is to have someone who knows the investor personally introduce or recommend your plan to them. When venture capitalists do their triage on the deals that come in their door, the ones recommended by someone they know are read first and get the highest consideration.

You can take NO for an answer

Even though you usually only get one chance to make a favorable impression, "No" often means "not now." Come back in 6 months... when the market conditions are more favorable... when your product is further developed... No may mean that the investor just isn't the right one for your deal. Ask if they know another investor who might be a better fit.

A couple of things to consider before looking for investors

Often, when starting a business, many people think they need investors. I always wonder how much you can do without investors. Instead of spending your time trying to sell a portion of your business to investors, what if you invested your energy in selling your product or service to customers? Obviously, if you need expensive capital equipment to get going, you'll need cash, but what if you could get the equipment or to use it without cash? Having no money compels you to be creative. I'm in favor of exercising my creative talents as far as possible before taking on investors.

I'm also in favor of starting small to experiment with what works with customers. We often create simple desktop published brochures, photocopy them, and use these as sales tools with real customers before we commit to a run of 10,000 to 100,000 expensive full-color brochures. It never ceases to amaze me how many changes and improvements we make after we start showing customers our materials and then answer their questions. Other ideas include renting space in a customer's building in trade for your services. You may even win their business with an offer like this. A friend of mine runs his graphics business in the spare offices of a public relations firm in downtown San Jose, California. And, he gets a nice location, extra business and the occasional services of a competent staff.

Big bucks can mean big mistakes

With a lot of money in your pocket, you can make big mistakes. Unless you've tested your marketing materials, refined your business model, and know how your customers will respond to your product or service, you may be tempted to put a lot of money behind some invalid assumptions.

You really want to know what's working and what's going to work before getting money to expand. If your business doesn't work out, the investors will own your business, you'll still not have enough money to make the necessary corrections, and if you need to ask for more money, your position is weak. You don't want to go out whole hog and mail 500,000 mailing pieces without testing. If you have no money, you can mail only 5,000. Then, if you lose it, you've only lost 5,000 mailing pieces, not half a million. Keep testing everything in your business on a small scale. Then when everything is working, you can build on it with a big investment. You'll also be able to promote your business to investors with greater confidence and come from a very strong position.

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