Entrepreneurs Approaching Potential Investors - Part 2

Reasons an investor may not invest in your company.

If any particular investor does not invest in your company, even if your company truly is ready for funding and it is ready to explode with sizeable growth, there are a myriad of reasons you can be rejected. Listed are a handful:

The Investor:

• Perceives weak management. You may not have a sufficient team in place. Perhaps you (as the founder / CEO) are not ready to lead the company to a larger size. Perhaps you are better at the technology aspect and are better suited to be the lead engineer. Maybe you need to create an advisory board or add to the board strategic industry-experienced people.
  
• Believes your idea and company is not scalable and/or does not have a competitive, defensible position. Is the potential market large enough? What patents, trade secrets, etc., do you have?
  
• Is out of money to invest. A common phrase is “out of dry powder.” The fund is maxed-out on commitments and can not make any more commitments to promising companies such as yours. The investor may very well be in love with your idea.
  
• Already has an investment that is substantially similar to your company. In this case, you would rather not pitch the investor since you may give your competition insight into your company. Before an introduction is made on your behalf, be sure the targeted investor does not have an investment similar to your company.
  
• Has hit the commitment ceiling for the industry sector in which your company is classified. Even if the investor does not have a substantially similar company to yours, they still may have industry allocation issues. This is particularly true for diversified Funds that invest in multiple sectors.

Bryce Hansen, CPA

Entrepreneurs Approaching Potential Investors - Part 1

A month ago, I left the Utah Fund of Funds. Overall it was a great experience and compliments nicely my finance analyst and auditor experiences of the past. While at the Fund of Funds, I was heavily involved with entrepreneurs as well as with venture capitalists and other private equity groups. I sat in on or met with over 80 entrepreneurs to hear their pitches. I also met with over 80 private equity investment groups. I personally introduced 25 – 30 companies to potential investors. A few nuggets of wisdom I gained from my experience:

The Entrepreneur / Company should:

Have an executive summary. It needs to be short, concise, and effective. The shorter the better. Anything over a page long is too much. You need to grab the attention of the investor. They just don’t have time to read more than a page. Three-fourths of a page is even better.

Have a business plan. A finished and polished business plan in PDF form ready to distribute is important. From my experience, investors will ask for additional information if sufficient interest is gained from the executive summary. They will almost never read a business plan without first looking at the executive summary. And even then, they may skip the business plan and seek an in-person pitch.

Follow-up. If an email introduction or phone call introduction is made on your behalf from any source, give the investor a day or two to contact you. If they don’t contact you, then you need to follow-up yourself and make contact. Remember that any given investment group is screening hundreds or even thousands of deals each year. If they don’t follow-up, it may be due to them just not getting around to it. You should follow-up.

Know the investor has many options to choose from. You may have the coolest business idea and revenue model out there. Just remember, that every other entrepreneur thinks the same way about their own business as you do about yours. Also, many entrepreneurs pitch similar businesses and ideas without knowing that the investors have seen similar pitches already. I saw this scenario play out multiple times at the Utah Fund of Funds, when companies would pitch us. I also saw this same attitude manifest itself in many VCs who were pitching the Fund of Funds for money (The Utah Fund of Funds is an LP in 26 VC/PE funds). Some funds thought that their approach was unique and different without realizing that we had already seen many other funds with similar strategies.

Bryce Hansen, CPA