Investors come in a wide range of types and backgrounds. There is the group sometimes classified as “Dumb Money”; i.e., those that do not know your business and typically do not do extensive diligence. The fund managers that fall into Hedge Funds, Cross-Over funds, and Venture Capital, will certainly do more of an examination of you and your company. Beefing up your company to entice the big money from the more sophisticated investors is a must; that is if you really want their money.
The Business Plan you prepared for a technology company or different type of business was a great first step. Now that you are in the execution phase and building the business, enhancing the various parts become important. There is no question you will be graded on all aspects and, be required to deliver nearly every document you ever prepared for the business plus some as part of a full review.
Be prepared in advance of your search for funding. Spend the time to get things optimized because it will pay off later. A few areas that can help improve the odds of getting funded are:
Management Team: Investors will review every key employee and their backgrounds. It is often said that investors prefer an A-Team and will sacrifice a bit on the technology if they must. Many companies with A-teams can better overcome obstacles, get deals done, find partners, and re-invent the company when disaster hits. Some investors have even invested in companies because of the team, even though they did not like the technology. So, try to get the best management team you can. By the way, the CEO/founder is a key member. If you are the weak link, you may want to consider alternatives.
Technology: The technology needs to be exciting. If you have a “Platform Technology” that has added value. A platform technology is one which allows for multiple product opportunities from the same technology. A second consideration is the speed and cost which you can convert the technology to a product. Spend the time to explore these aspects so you can properly present them to investors. Also, do the best you can on your limited budget to shore up the IP situation. Demonstrate you can develop a “Moat” around your company!
Budget: Plan to demonstrate that a product will make it to market in the most efficient way possible. Do not add lots of extras to your budget and inflate the expenses; keep it “Lean and Mean.” Be prepared to show or discuss the valuation inflection points relative to your projected spend. Investors will often seek to invest lesser money and try to get to an inflection point before having the company raise added capital. This increases the chances of profit and lowers the investment risk. Also, DO NOT request too little capital. A rule of thumb is to raise enough money in a given round to get to a valuation inflection and still have enough capital remaining to seek an added financing round. You will be in a difficult position if new investors know you are desperate. Most likely you will experience a “CRAM DOWN ROUND” if you get money at all. The investor you pitch for funding will be aware of your projections, timelines, and when you plan to seek new funds. They do not like the Down Rounds. Make sure you can justify the numbers in your budget and demonstrate your understanding of the business.
Product Potential: It really does help to understand your market(s). You will be questioned and your facts will be checked and cross checked. Do you know if your projected end users will actually want the product? How will you market to them and what kind of sales program is required? Understanding the market will become a part of demonstrating the size of the market which becomes very important. The market potential will help with your overall valuation and can help create more enthusiasm for your company. Be able to explain why you believe the customers will buy and demonstrate an ability to capture significant market share. Finally, you will want to really spend time planning the development timeline. The product needs to make it to market as quickly as humanly possible. Every day the product is off the market is a day of lost sales while your IP is still protecting it.
Don’t be surprised if you have the greatest product, management team, and plans and the investor does not make an investment. Keep in mind that they see hundreds of prospects each year and make select investments annually. For each investment, some of the sophisticated investors will set aside additional funds for follow on investments. Also, the investment group may have decided to only invest in a few key areas in this year, because they invested in your area last year. The key is to keep up the search and not give up. It only takes one right type of investor or investment, to put the wind in your sails!
Taffy Williams is the author of: Think Agile: How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon