What Should You Divulge When Asking for Investment Capital? by Terry Corbell

I thought to share this conversation between Terry Corbell and me, posted on his site.  ~joey

Terry Corbell, the Biz Coach

If your startup is the next big thing, but you want venture capital, you can start smiling. Yes, financing has been difficult to obtain in recent years. But entrepreneurs wanting venture capital have reasons for at least a small celebration – the money is starting to flow again after the Great Recession took its toll.

The National Venture Capital Association (NVCA) indicates the trend is upward, ostensibly, for multiple reasons: There’s been an improvement in exit markets and portfolio valuations, and VC performance has been better than the public markets. There are also other positives – indications of an increase in angel funding, and a boom in initial public offerings. NVCA based its conclusions on data from 1,290 VC funds.

For many startups, it makes sense to grow organically. But for others, the answer is to seek capital.

So how do you take advantage of this improvement in financing? Certainly, it’s critical to make the right presentation to investors.

Such entrepreneurs typically ask noted financial strategist Joey Tamer how much information they should reveal for venture or angel capital. They turn to her because she’s a strategic consultant to entrepreneurs in software, Internet, technology and digital media.

Ms. Tamer says entrepreneurs also typically express these concerns:

  • “I’m not quite ready for a big investment until I get more early traction.”
  • “Will I weaken my position by showing how much I need and how soon I need it?”
  • “Will what I’m looking for move around the community to everyone and shouldn’t I be selective in what I say?”

What’s her response?

“The answer is to stand up and lay out your plans and your rationale,” she blogged in explaining how much an entrepreneur should tell investors when pitching for capital.  “You must treat all investors as if they will become your partners, starting immediately. If you are taking a pitch meeting, you might as well pitch.”

She astutely reminds clients that investors of all stripes do their due diligence. She warns you risk not getting a second meeting, if you aren’t candid and informative.

“It is acceptable to take a short meeting — 20 minutes maximum – or two with potential investors, to get on their radar about your idea, even before you are ready to approach them for an investment,” she explains. “You can report back on your progress of reaching your benchmarks. This establishes an early relationship with them, and allows them to watch you deliver the benchmarks you promised.”

For an example, she suggests a possible scenario:

“Suppose you are looking for angel capital now, and you are presenting to an early stage boutique venture capitalist, who invests in revenue-generating companies, but who sometimes will step down to a seed round of a few hundred thousand dollars.”

Her recommendation:

“Pitch what you want now: say $250,000, and show what you will use the funds for, and what benchmark you will reach with that seed round,” she says.  “Your potential investor might provide it and add a deal structure to his position for the next round, giving him right of first look, or protecting his investment in certain ways, even setting aside all or part of your next round.”

What’s next?

“Next you say you want to raise a Series A round after some specified consecutive months of growth,” she asserts. “You say when you expect that moment to arrive (what Quarter of what year), and what benchmark you will reach in what Quarter of what year with that Series A round.

“You can say that you will look for a growth round following Series A, once you can track the speed of your growth, and can assess competition and market conditions at that time,” she adds.

Ms. Tamer says this illustrates that you understand the big picture – that you fully grasp investors’ concerns about scalability and their likely return on their investment.

“If you look to your investors as long-term partners, this early truth telling and planning sets your relationship on the right path,” she points out.

(Note: I’m very acquainted with Ms. Tamer’s expertise. She and I are members of an organization, Consultants West, www.consultantswest.com.)

From the Coach’s Corner, in addition to Ms. Tamer’s Web site, www.biz150.inmotionhosting.com/~joeyta5, here are informative resource links:

What No One Tells You about Raising Investment Capital

Eight Strategies to Consider Before Starting A Tech Business

“If you are beginning your company with Other People’s Money, it is good to have a strong relationship with the Other People and their Money.”

-Joey Tamer

__________

Terry Corbell, my close colleague and friend, is Seattle’s “Biz Coach.” He is a business-performance consultant and profit professional.   I wanted to share his article with you, and refer you to his site, where you will find hundreds of interviews and articles (http://www.bizcoachinfo.com), and where you can contact him for a complimentary chat about your business.

2 Responses to What Should You Divulge When Asking for Investment Capital? by Terry Corbell

  1. Sound advice. In my experience (with a company I founded before this one) there were a few back-and-forth discussions from the candidate investors regarding the projections and sales assumptions. It was critical to outline the dependencies upon which the forecasts were based, especially the dynamic considerations which were subject to change over time (quarter to quarter). Much of this requires deep, analytic thought, and it you can demonstrate this pre-emptively to the investors, it will be a true feather in your cap.

    • Ed- thanks for adding your experience. Yes, the investors are impressed with the entrepreneurs’ control of their assumptions, anticipated market changes, and the numbers that reflect these.

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