Blog: The Would Be Entrepreneur – Part Two
This is a continuation of Would Be Entrepreneur-Part 1. As indicated in part one, this was initiated by a person, I call, a Would Be Entrepreneur, who originally did not convince me he had an idea to build a business. He called months after we met and we had a long telephone call. He called again saying he wanted to go a step further. He said he digested Part 1, and he wanted to continue the relationship with me. I continued this call with the following:
I tried to convey to him that when you're trying to enter a market you'll find different levels of difficulty.
- Market - Find a market for your concept – This level of difficulty is a 1 on a scale of 100.
- Find a need for your product – 5
- Determine if you have a match and solution with for your product. - 10
- Prove you have a plan to penetrate the market which means, getting someone to pay for your solution – 100
In the second call back, I continued with the next step, being careful on how you provide ownership for your key staff. I always start out by saying ownership is a very precious gift and should be thought about in detail before it's distributed. Some people feel good about giving stock away, but you have to be sure you will have enough in the future, including when you need it for bringing in key people and providing it for investors.
Use the equity in place of compensation, if you can, but make sure you have advice on how to distribute it, from coaches, mentors and a lawyer, because they will introduce you to stock options for your team - a method to distribute stock as an option over a number of years to ensure that people stay with you to get it.
Now let's talk about the team. Beside the basic need, you need to broaden your team as investors will look for credibility. This could include:
- Management depth
- People that been there, done that
- Coaches and mentors in place
- A real plus is if you and the team are loaded with passion
There is one more statement, to be careful, about the ownership. When some entrepreneurs come to me, they have multiple equal partners. I believe equal partners are doomed for failure because as the company grows their goals and objectives start to split apart.
Let's talk about the investors since you’ll get to a point to start looking for some funding and this will be a very new experience and you will not understand the investors. This is what I believe.
Family and friends — They can be your top toughest investors because they are generally unsophisticated investors. Their pressure comes in different forms, like your Uncle Joe constantly calling you asking about getting money back, and points out. “You know my son is ready to start college.”
Angel investors — these are the ones that will need for your first big money. They, they can be quite helpful with advice and contacts for the next round of investment. One of their goals is to see if your concept is a winner.
Venture Capitalists — you're not ready for them because you are not today reaching the point where you need $10 million. In my opinion they will be tougher than Angel investors.
Banks — There is a need be very cautious — I have seen too many businesses plans where early on their there are bank loans in the financial projections. They are not going to lend money to start-up companies that says no revenue or profit, as they want several ways to see how their loans will be covered. Banks are not interested in equity investments, because they have a low risk mentality.
An Entrepreneur’s danger for raising money is creating a self-styled business. This will be when the entrepreneur owns the majority of the stock indefinitely, which limits the investor’s effective voting rights. If so, investors will try to prevent that from happening, by having by having clauses in the final agreement. Most investors can feel a self-style company and walk away from it, as early as they see a presentation.
I have found many people think the most important thing to investors will be the market, and others believe it will be the team. I believe the most important thing to investors is comfort. I see investors walk away because they weren’t comfortable with the information provided from the entrepreneur. I believe comfort comes first in the credibility from meetings with investors. Credibility turns into trust and trust turns into comfort. I believe entrepreneurs should make comfort occur, so the investor’s hand it is not shaking and they could sign the big check for them.
Markets tend to change for what investors are looking for. In my recent self- surveys, I find out that the list now includes Internet services, apps, social networks, big data, the cloud, and life science. The buzzwords always continue by proving the concept, having a differentiation from the competition and most important proving scalability, which is needed for growth, and growth is needed for getting a healthy financial return for the investors and the entrepreneurs for their investment in money and time.
One last thought on the investors. Keep in mind, that you will believe you plan is a great thing for investors, but the investor maybe looking at a 100 opportunities. You can see the priority needs to be to close the gap between between the 1 and the 100.
Now I going to give you a list of what I call the Tips. If you care to go with someone else or help, please do. If you want to continue to seek my help, please get those advisors in place before you face sophisticated investors.
- Always present the needs first to get the investor’s attention
- Present the funds that you're looking for
- Detailed the amount of money and show how is was going to be used
- Make a personal investment in dollars, if you can Investors "Like what they call" skin in the game".
- Use the best storyteller in the team for making presentations even though It might not be the founder.
- Make your investors believe as they want to or they wouldn't be sitting there
- Make it for growth as the this is the way to get a return
- Your motives must be financial; if it's not, investors will relate to not making money for them
- Present your projections far enough out to show how and when the ROI occurs
- Make sure you get the total money needed each time or you will pay dearly when asking for more.
- Be strong on market penetration and make them comfortable
- Provide a meaningful exit plan.
Try to start with a lawyer up front so when needed to form a legal organization, protect your IP, how to distribute stock, help negotiate a term sheet (the agreement) when the investors are ready to make a deal and any agreement needs to be signed.
- Now since I am addressing a Would Be Entrepreneur, here's some final advice, regarding the very beginning, and jumping in.
Avoid doing it the old way, so:
- Don't wrestle with the business plan
- Don't quit your job or school
- Don't incorporate company
- Don’t plan on getting a loan
- Don't promise any ownership
- DO VALIDATE!!