Doing your homework before seeking an investor is absolutely number one priority. There are thousands, if not millions, of entrepreneurs that haven’t the slightest clue how to approach a deal. Here are some common mistakes I see entrepreneurs make when they’re talking to investors. Don’t say or do any of the following, and you’ll have a leg up on the competition for those investment dollars.
“This is a no fail deal”
Every investor is well aware of early stage investing risks, and all investors know there is no success guarantee with any company. Equity is unsecured. Even if you are raising money for your company with convertible debt or a loan, there is always a chance of default. Your optimism, I’m sure, is what has pushed you through the riskiest stages of your business, but that investor needs to know you are not blind to the consequences of reality.
Takeaway Lesson: All businesses stand a significant risk of failure. Acknowledge it.
“You will receive 40% ROI”
This one is pitched by entrepreneurs over and over again. I appreciate the fact you have done your financial projections, and you understand the expected return to your investors. However, this still signals to an investor you are new or immature in your understanding of raising capital. Why? For one, this could potentially put you in a very negative legal obligation to give that exaction return on capital.
Takeaway Lesson: Never give a promise of return on investment.
“I will give you X amount of shares for X amount of dollars”
The vast majority of fundraising negotiations with investors are done behind closed doors, especially for a company that has yet to receive its first institutional round of financing. Leave the negotiating door open until you get to that point. It’s best to go into the negotiations with an idea of what you want, but please, keep this is in your head until you’re in the door. Investors also have a magic number in their head, and if you’re pitching your number up front many investors won’t even bother with you.
Takeaway Lesson: Everything is negotiable.
“You must sign an NDA, too many of my ideas have been stolen”
I completely understand what is going on out there in the entrepreneurial world. It is often survival of the stealthiest, and yes ideas get stolen. Unfortunately, ideas are not material possessions. Almost any attorney can break through a non disclosure agreement, so it doesn’t protect your ideas at the end of the day anyway. The only protection you have is to listen to your gut and form trusted relationships with those you disclose to. Now on the investor side, many talk to countless entrepreneurs every week. Any one of those ideas or business plans can easily cross competitor boundaries. If investors did sign NDA’s, it would be a legal nightmare.
Takeaway Lesson: Your gut is your only protection.
“Hi, my name is______. Here is my 50 page business plan and PowerPoint”
The majority of investors are bombarded with business plans and PowerPoint presentations, yet most of the investments they actually make are via personal referrals or long standing relationships with an entrepreneur they know. When fundraising, business plans are always needed for the due diligence phase, mostly so your investor knows you did your homework. Up front, though, your business plan is for your use, to prepare your pitch. Presenting the formal plan comes later. The majority of your investors will want to get to know you long before they ask to see your business plan. And in fact, many investors will actually enjoy helping you build or rebuild your business plan over time, and may suggest different distribution channels, go-to-market strategies, etc.
Takeaway Lesson: Have a business plan, but don’t pitch it upfront.
Final Thoughts on Fundraising
Even if you follow all the advice here, there is no guarantee of success. But there is one thing that helps increase success rates in this phase, and that is a well developed relationships with your investors. That means building trust, asking for guidance, active listening, etc. Building a solid relationship with investors is often a long term process that has to happen before any investment is made. The best advice I can offer in this category is that you should start building these relationships early. The best time is actually before you even start your business.
Also, consider what it’s like to be an investor. Put yourself in their shoes. Most investors are NOT backed by LP’s or institutional money. The majority of angel investors invest their own hard earned money, out of their own pockets. So don’t treat investors like a credit card application you found on the Internet.