Edison Ventures Community: Mistakes to avoid when approaching Investors - Edison Ventures Community

I was recently asked to chair a panel at a venture forum targeted at helping entrepreneurs with raising capital to fund their businesses. The panelists included a mix of angel and venture investors as well as investment bankers. Instead of the typical panel format of asking questions of each of the panelists on how entrepreneurs should approach capital sources, I decided to turn it around and explore the approaches and behaviors that really annoy investors with the hope that this would help entrepreneurs to avoid them.
To inform the discussion, I sent out a single question to several dozen VCs and angel investors. “What are the top 10 mistakes that entrepreneurs make when trying to raise capital?” It was a free form question because I didn’t want to presuppose the results by giving a range of choices. But the answers were remarkably consistent with only a few outliers. Here are the top issues:
1. Downplay or understate competing products and companies – Entrepreneurs will often say that they have no competition and no one else does exactly what they do. Investors look at hundreds of companies each year and have a fairly good grasp of the markets in which they make investments. It is much better to map out the market space and contrast your company with the others in the space and perhaps explain the problems that you solve that the others cannot.

2. Don’t do homework on investors – Every VC has a profile of the type of investments that they target. Sure exceptions are made but all firms have a focus or theme. The vectors are usually along several dimensions: industry segment (digital media, interactive marketing, financial technology, healthcare, biotech, real estate, etc.); customer (consumer, B2B); stage of company (pre-revenue, early, growth, EBITDA positive, later stage); and size of investment (<$1M, $5-10M, >$20M, etc.). Most investors have this information on their web sites along with a list of their investments which provide further guidance to entrepreneurs. Research investors to find out their investment interests and refer to those interests when you contact them. For best results use a referral source to get to a VC.

3. Poor presentation or incomplete materials – Come prepared with a deck that tells a compelling investment story—why the world needs what you do, how you fit in the market, how much money you are seeking and what you will do with that money. Keep it under 25 slides (including financials).

4. Don’t understand the customer or the customer’s problems – There is a lot of great technology but the most successful companies aren’t the ones with the best technology but those that understand their customers needs best. Use cases are very helpful in understanding the value of your offering.

5. Unrealistic or incomplete financials – It is hard for companies, especially early stage companies, to predict their financials with any degree of accuracy. But investors are looking for a logical set of assumptions as the basis of a financial model. Hockey stick revenue growth without increases in SG&A would be one example of an unrealistic assumption. Focus on Customer acquisition cost and gross or contribution margin to show you really know what drives your business.

6. Withhold or delay negative financials – Before any investor completes an investment, they will conduct due diligence to uncover any negative information and confirm your financials. It is better to be upfront about any issues and describe how you’ve handled them or will handle them. Hiding them will raise a question about your reliability.

7. Unable to differentiate your product or service – It is helpful to be able to answer the question: “What problems does my offering solve that no one else solves?” Most entrepreneurs try to differentiate themselves in terms of their unique technology. The impact on your customers is the key to bringing your uniqueness to life.

8. No evidence of sales DNA – It is very helpful for a management team to demonstrate the ability to sell. For the most part, technology does not sell itself. The team needs to demonstrate that it has a grasp of what it will take to market and sell the offering. What is the go to market plan if you are an early stage company?

9. No evidence of revenue or customer momentum – This varies by stage of company but it is valuable to demonstrate to investors that there is a demand for what you are offering or are planning to offer. Happy customers are the best evidence. Beta customers or those who have agreed to test your offering might work as well. For products on the drawing board, an advisory council of people who look like buyers could be helpful.

10. Unrealistic management team assessment– Very few companies have complete management teams that can lead them through the years of rapid growth that is anticipated and expected by investors. Investors will be looking for openness to adding senior managers that can help bring the company to a successful liquidity event.

Hopefully, avoiding these “bad” behaviors will help to be more successful when you are seeking investment capital.