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6 Key Things Entrepreneurs Should Consider Before Seeking Outside Investment

small-business-blog-6mistakesThere's probably no one area were more mistakes are made, more misconceptions exist or that troubles entrepreneurs and small business owners more than that of raising outside investment. Now, not every business needs to raise outside capital. But if you do, here are some key things to consider to keep you out of trouble, dispel faulty notions and make it go a little easier. Understand, raising capital is no "day at the beach." But if you approach it with the right frame of mind, the right business model and the right expectations, your chances of success increase dramatically. But it is still a difficult mountain to climb.

1. Investors Fund Businesses, Not Ideas.

I have seen more "business plans" than I can even count that were not plans at all, but an idea surrounded by hopes and dreams. A fundable business plan has, at a minimum, a business that has passed "proof of concept" (defined as cash paying customers successfully buying and using your product for a period of time) and has a scalable business model. That is, one that shows how, with proper sales and marketing and/or some additional infrastructure (the basis for your funding) you can make money.

2. Investors Invest in People Not Businesses.

No matter how good your business model, if the investor does not believe you and your team can pull it off, there will be no investment. An old saying - "they invest in the jockey, not the horse," still holds true. The more management experience (previous entrepreneurial or small company efforts) and industry (in your target market niche) credibility and experience you and your team bring, the higher your probability of success. If you've had experience with professional/institutional investors in the past, no matter your success, it heightens your odds, especially if you go back to them.

3. The Earlier the Investment, The Higher The Risk, The Higher Ownership Stake

Risk is highest in the early going. For anyone who comes in at this point, the odds of them losing most or all of their investment are very high (no matter how great you think your concept is). This is why, in the early going, you should bootstrap your operation the best you can. If you have some access to capital (your own, partners, etc.) manage it like you were never going to see another penny. But if you don't have much, you have to be creative. Wherever possible, get folks, suppliers, developers, sales people, etc., to work on an incentive basis or for equity. Otherwise, you may give up a sizable stake in your company for a small amount capital and will still need more money to fund your early growth.

4. Don't Run Out of Money While You're Raising Money

This is the corollary to the previous consideration. If you've been in operation for a while, but are now running out of cash, this is exactly the wrong time to raise outside capital. Investors, especially professional ones, can smell "blood in the water" like sharks. They can read this situation readily. If they like your business model, they will delay until the very last minute (if they even consider it) and strike an onerous deal because you are desperate. Better to tap every personal resource you have and/or every friend, every family member for a short-term loan and get your ship righted before you embark on an outside raise.

5. Do You Need Capital or Do You Need Specific Resources?

Too many entrepreneurs miss this one. Typically, when you're raising capital, you're doing it to go out and "buy" resources - people, systems, equipment, etc. Why not eliminate "the middle man" - the capital raise and the associated time it will take (another story for another time)? Find a partner or partners who might have complementary market presence and those resources already in place. Often a relationship can be structured on a revenue share basis that becomes a win-win for both parties.

6. There's No Such Thing As A Silent Investor

Finally, make no mistake, whether it's kindly old Uncle Bert, an angel investor, who simply likes to get small businesses off the ground or a venture capitalist, they will all, not only want to know what and how you are doing (with increasing frequency, depending on the overall financial markets). Depending on how "professional" (doing it for a living) an investor they are, they will be in your underwear! Many will require a board seat. No matter the promises of letting you run your business, they WILL be involved, even if it's a periodic phone call (that may be more or less inquisition-like). And with the first missed forecast, even if it's a monthly one, you can expect even more communication, physical presence and active involvement. They want to be sure their money is being used and managed properly.

Raising outside investment is a difficult and time-consuming process. It is not for everyone. But without some basic understanding, it can not only be extremely frustrating but could end in angry failure. Consider these six key issues before setting out to raise outside capital and your chances of success will increase, dramatically.

"The Entrepreneur's Yoda" knows these things. He's been there. May success be with you!


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