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 the author of: Think Agile: How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon