Once a founder has decided to pursue outside investment, a process begins that can be much like the inquisition. Preparation and thickness of hide are mandatory attributes. Over my career as a founder and active early-stage investor, I’ve witnessed a variety of behaviors that can ensure you will either delight or really piss off your prospective or actual investors. Only a very small percentage of all businesses pursuing angel investment get it, and less than one percent of all ventures successfully raise venture capital.
Here are some things to consider as you prepare for the venture treadmill:
1. Progressive Disclosure. Transparency is required. Investors will find out uncomfortable facts and details. Disclose material issues upfront. Deals tank in due diligence when something material is discovered. Don’t be Elizabeth Holmes. Don’t fake it before you make it. Don’t let your investor know you are about to run out of money two weeks before you hit the wall. Tell the truth, be timely, and disclose material details.
2. Forecasting Magic. Creating a forecast driven by a percentage of market share achieved shows laziness and a lack of understanding of the sales process required to acquire customers. While forecasting is always an exercise in fiction, the veracity of your assumptions in your financial model will carry the day one way or another. Building a best case, worst case, and realistic case in your financial model will allow you and the investor to assess the possible scenarios and sensitivities.
3. Atmospheric Parameterization of Answers During Q&A. Don’t try to answer a question with BS. Investors have exceptionally well-tuned BS antennas. The game is won and lost in Q&A during an investor presentation. Be prepared. Capture invest FAQs and have backup slides easily at your fingertips, BUT if you don’t know the answer, the only acceptable response is – “I don’t know, but I will find out and will get back to you.” And then find the answer and get back to the investor.
4. Attention to Detail. An early mentor of mine reminded me that many investors would assume that if you can’t get the small things right, you definitely won’t get the big things right. That said, be on time for investor meetings. Follow-up in a timely fashion to investor questions. Be prepared and be crisp in investor meetings. Communicate regularly and efficiently. Be professional. Your potential investors will not piss away money they worked hard to earn on founders who appear to be sloppy. Investors are looking for execution, and execution typically flows from discipline.
5. There’s No Competition. When founders tell investors this particular whopper, here is the investor’s mindset: 1) There is probably no demand for your solution; 2) you haven’t done adequate research; 3) you never took Latin and don’t understand the status quo is also competition. Don’t fall into these traps. You need a comprehensive understanding of your market, your customers, why they buy, how they buy, and competitive adjacencies.
6. Valuation LSD. Silly valuations only serve the purpose of alienating the right investors. If a founder does attract an investor or investors with an unsubstantiated valuation, that investor likely has more money than sense. It will be trouble for everyone in the future. If the venture doesn’t grow into the valuation and a down round or flat round occurs the next time around, the founders take a beating, and the early investors are no longer LSD tripping and are thoroughly pissed they paid too much.
There are many more lessons in this process. Have a look at the Startup Junkie YouTube Channel for more info, and check out Brad Feld’s book Venture Deals, 4th Edition.
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