Entrepreneurs raise money from a range of sources. Initially, funds may come from family and
friends but eventually the funding requirements escalate. Road shows become commonplace and visits to a
large number of funding sources becomes a major activity. Entrepreneurs receive feedback from the
investment professionals and often there are statements of interest. One such statement is a bit misleading: “I
will invest in your company once you identify a lead!”
This comment alone brings great joy and excitement to
entrepreneurs, including the veterans and first timers. It is hard to imagine that someone expressing
a willingness to invest in your company should bring anything other than excitement. However, there is a catch.
In a recent article,
several questions were listed that may help you in your attempts to raise
working capital. One of these is, “Do
you lead or only follow?” Your visits to the funds must include a mix
of those willing to do the heavy lifting and lead transactions. It is possible to spend large amounts of time
identifying followers and never find a lead.
The result is that you fail to close on a financing.
Failure to find a lead becomes an easy way for followers to weed
out the crowd of companies seeking money.
It is easy to express interest and not conduct diligence until the data
is presented by a lead they trust. If no
lead shows up, the follower is done with you!
In fact, even with a lead, they still may not invest. Their seeming willingness to invest if you
have a lead is exciting, but it is a maybe and NOT a
firm commitment! It is amazing
how many times the statement of interest is pronounced. Nearly every entrepreneur will hear this form
of investment interest multiple times in his or her career. The interest disappears later when a valid
lead appears. One hears excuses like “we
recently invested in a different company in this space.”
Keep in mind that a lead investor may never step up. In this case, you may have many potential
followers but never get them to invest. A
valid lead investor may not wish to have your followers as part of the syndicate. Many times, lead investors want other known
investors working alongside them.
The point of this article is that you accept the statements of
interest with cautious optimism and place more emphasis in finding investors
that will lead a transaction. Entrepreneurs
have reason to be enthusiastic, but should not go overboard because the
statement of interest is not a true commitment.
Especially, do not make the common mistake of bragging about all the
investors you have lined up. Think
of it as a bunch of definite MAYBEs!
Approach the remainder of your fund raising tour with a realistic understanding
of the situation. Remember, your financing is not
complete until the money is in the bank!
Taffy
Williams is on Twitter by @twilli2861. Email
questions to twilli2861@aol.com. More is
available via his company
website , photo website, or “LIKE”
ColonialTDC on Facebook. You can also find him in the group
Startup Group on
Linkedin. Other articles are in the Charlotte,
NC- small business section of Examiner.com.
Hi Taffy,
ReplyDeleteGreat post. Just wanted to get your thoughts on something if I could. Say you do get the line "I'm waiting on a lead". Have you seen in your experience someone managing to turn them around in that short time that they're talking to the investor? Or do you think it is more that for them to even reach the point of saying "I'm waiting" is an indication that they aren't going to be initially convinced by what you're presenting?
I have seen deals close in as little as a week! I have seen them never close. The case where they take a long time is usually where one sees the company with lots of followers and no lead.
ReplyDeleteGetting the lead quickly is when you will have a rapid close. Commenting that they are waiting for a lead is like saying NOT NOW. They will really look at the deal once it is priced and diligence done.
It is rare that a fund that never leads will step up and do it.
Hope this answers the question.