Getting Started: Preparing for the world of entrepreneurial adventure (Early Stage Financing)
Published by CPA Canada in CareerVision
One thing that most start up companies have in common is a lack of resources, including people, capital, and “stuff”. The root of this shortfall (or the thing that can resolve it) is money, something that can be hard to come by in the startup world. Once entrepreneurs have exhausted their own funds, and often that of friends, family, and anyone else they can convince, the only remaining option is to find an investor. This is a big step for many young companies, as it represents the first time that the money ask goes outside of “the circle”.
There’s another important reason why approaching an investor is such a significant step, and it is simply this: most entrepreneurs have no idea what investors need to know in order to make an investment decision. Put another way, investors, be they experienced angels or institutional funds (such as venture capitalists) have very specific expectations in terms of the information they require. This includes content and format, as well as fitting within the investor’s particular mandate. While it might sound simple, it’s anything but, and most of what investors receive doesn’t meet their needs at all.
Life in a corporate job usually doesn’t involve spending time in this area, especially in terms of just how critical it is to success. Financing matters are typically handled by others, and access to this type of external party is limited. In this series, our focus is on understanding the significant differences between a startup environment and the corporate world so that you can place a greater amount of emphasis on developing some of the skills that will serve you well in advance of when they’re actually needed. So far, areas we’ve considered include risk, rejection, and money. Understanding the expectations of early stage investors couldn’t be more important!
Why it Matters
Entrepreneurs tend to show a lot of confidence when discussing the topic of investors. They’re excited about the product/service they’ve developed, and generally expect that others will be equally impressed. Comments like “so-and-so wants to invest” or “is ready to cut a cheque” are often heard, but as the process moves forward, these seemingly slam-dunk situations tend to fade. Impressed or not, entrepreneurs are often left to wonder where the money went.
A big part of the reason for this is that young companies lack the ability to package an investment opportunity in a manner that meets the needs of investors. Be it the business plan that lacks context, too much emphasis on the product, or a financial forecast with questionable assumptions (or none at all; startups can’t forecast!), investors aren’t buying. Entrepreneurs tend to respond by offering up information that is used to run the business, or even worse, more technical information, in the hopes that the tide will turn. No such luck.
Not understanding the needs of early stage investors is a very common problem in the start up world. Rise above it by taking the time to understand what investors want to know, well in advance of when the bank account is empty:
- Research the topic of early stage financing: Venture capital and angel investing are specialized areas that are not understood well, and reading about it in a text book isn’t sufficient. Tap into resources produced by investor networks, associations, and similar sources to understand how it works and the preparation that is required.
- Recognize that investors have specific needs: Many entrepreneurs simply do not do this. They believe that all they have to do is provide “what they have” and the investor will adapt. In a world where deal opportunities vastly outnumber the supply of capital, this isn’t likely to happen anytime soon.
- Learn how to write a business plan: Bypass the folklore that “investors don’t read business plans”; they do. In addition, they challenge entrepreneurs on their business model, target markets, and the financial outcome of implementing the plan. All of these areas are very difficult to address well in the absence of having developed an investor ready business plan.
- Network with experienced advisors: Those who specialize in the area of early stage financing have a clear understanding what is needed to raise the likelihood of getting to yes. Although there are no guarantees in life, their expertise can be invaluable. Look for those with a demonstrated early stage financing background, such as a former venture capitalist.
- Practice accepting rejection gracefully: As simple as it sounds, doing this well can be the difference between ultimately receiving capital and burning your bridges. Chances are, you won’t raise money on the first (or even on the tenth!) try, so learn how to make the most of these interactions by asking questions, seeking out network contacts, and leaving a professional impression. Too many entrepreneurs do the opposite.
Thinking that your product or service is so great that investors will line up to put money in is a path to failure. If there is a scenario out there where all of the stars will line up to secure easy capital, chances are, it won’t be your company. These are rough lessons that are best learned before they happen, so take the time to understand the complex world of early stage investing and prepare for it.