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Ten
things entrepreneurs often overlook when trying to raise capital
Every
entrepreneur believes in their heart of hearts that their business is truly
worthy of getting funded. Thus, they can't understand why this one aspect of
building a business is so hard. Surely everyone should be able to see what
an outstanding opportunity is being offered by your business! What is it
that investors see that keeps them from investing? Why do so many
entrepreneurs seem to make the same basic mistakes over and over again?
Here
are 10 common mistakes to avoid:
1.
Investing too little in your own business. When an investor sees that an
entrepreneur has invested little or nothing in their own business, it sends
a big signal to them that perhaps they don't really believe in their own
idea. What constitutes an acceptable investment? Well that depends on a
variety of things. Different types of business require more capital than
others (e.g., a medical device company would require more capital than a
hair salon). The degree of sacrifice represented by the investment. In other
words, how much pain will the entrepreneur feel if this business fails?
2.
Investing too much in your own business. Believe it or not, you can
invest too much in a business. Don't let yourself get trapped into being the
only one investing in your deal. If that's the case, there may be a good
reason why you're the only one who believes in your business.
3.
Paying yourself too much (and/or accruing unpaid salaries). One of the
worse signals an entrepreneur can send an investor is that they're living
off the investments of others. When investors see an entrepreneur who has
made a limited investment in their business, yet they're paying themselves
$200,000 a year--not on sales revenue, but investor capital—they will be
strongly inclined to pass on the deal. Some entrepreneurs try to get around
this by accruing a differential between what they feel is an
"affordable" salary and the salary they feel they're truly worth.
The difference is expressed as a debt to the business. Investors generally
find this offensive and won't invest under those conditions.
4.
Not proving sales and sales potential. There's a saying that investors
want to see that "the dog will eat the dog food." In other words,
if your product won't sell, then you don't have a business. For some reason,
a lot of entrepreneurs seeking capital don't seem to understand this
concept. Yes, there are cases where businesses need capital before they even
have a product to sell, but that's not the issue here. The thing that'll
turn off an investor quicker than a cold shower is a business that either
has a salable product but has made no effort to sell it, or they've
discovered that the market potential for the product is far less than
anticipated.
5.
Failure to recognize the "sale to value ratio." Another thing
that'll turn off an investor is to see that the entrepreneur has sold off
the majority of his business before they've even had their first Venture
Capital round (we all know that VCs are the ones we're supposed to give up
our control to!). What these entrepreneurs fail to realize is the
sale-to-value ratio. That is, you never sell too much of your business when
the valuation is low. The trick is to only sell off enough to help you get
to an important milestone where the value will increase significantly and
the next round of capital will buy a lot less of your business.
6.
Hiding Intellectual Property (IP). Businesses that try and put all their
IP into a separate holding company and only license the IP to the company
seeking investments don't fool investors. Generally, investors want to know
that if management fails to achieve their objectives, the investors have the
option to sell the IP and get some of their money back.
7.
Incorporating unwisely. A number of entrepreneurs have been fooled into
thinking that it's a good idea to incorporate in states like
Nevada
where there are no state income taxes. On the surface it sounds like a good
idea, but from an investor's standpoint those states often have other laws
that aren't favorable to investors and discourage investing. Be sure and
investigate whether or not the state you're considering is investor
friendly. If not, it may cost you more than you save.
8.
Incorporating at all. Qualified investors won't invest in a DBA--you
must have a corporate structure in order to legally sell stock. Generally,
investors prefer to invest in "C" corporations because they're the
most common form of corporation. In recent years, LLCs have become popular
due to their tax incentives. If you decide to go the LLC route, just make
sure your lawyer structures the operating agreement to read as much like a
"C" corporation as possible. Investors tend to not like LLC
investments because they refer to shares as "units" and
shareholders as "members."
9.
Not having a strong management team. Investors will place strong
emphasis on who you've attracted to join you in your vision and whether or
not they have invested, contributed and/or bought or used the product.
10.
Not having outside investors. Finally, investors will be looking at who
else has invested in your business. How much have they invested? Did they
invest more than once? How impressive are your investors? Are they
"A" players? As an entrepreneur, you're truly known and respected
by the business you keep. If your investors are deemed as sophisticated and
knowledgeable, then you will be respected and, with any luck, a check
will soon follow.
Jim
Casparie is the "Raising Money" coach at Entrepreneur.com
and the founder and CEO of The
Venture Alliance, a national firm based in
Irvine
,
California
, that's dedicated to getting companies funded.
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