Common Mistakes

The venture capital community is like a small town in many ways. It is helpful if a venture capital investor is able to refer a prospective deal to another fund or contact. Such a recommendation opens doors very quickly. 

Some common mistakes frequently seen among entrepreneurs that are likely to hinder raising capital for that business include:

Sending the business plan in a scattershot approach - Sending the business plan to any and all investment funds regardless of their investment criteria or focus is impersonal, and sends a negative message to the particular investors who may have a real interest in the business. Investors dismiss this approach.

Shopping (taking it to investors) - Shopping the business plan too early and too widely may indicate the company is in a cash flow crisis. A poorly prepared business plan sent to many investors, may kill any potential interest. In the highly competitive venture capital market, there are always a large number of companies that have done things well and are better prospects.

Many entrepreneurs are too emotionally involved with their company - Many entrepreneurs are too emotionally involved with their company or they intend to pass it along to children or other family members. The entrepreneur must have resolved those issues before seeking outside investors. Unresolved personal issues surface during due diligence or negotiations over term sheets. Investors will quickly walk away from the deal.

Entrepreneurs who do not understand the equity investment process often express negative attitudes about giving up a portion of the ownership of their company - Equity or venture investments are not collateralized loans, therefore the investor takes a portion of ownership represented by stock for the use of their money. There are venture firms that state the minimum percentage of ownership they must have to initiate a deal. Other firms are willing to negotiate that percentage when negotiating the valuation of the company. The entrepreneur must decide the type of venture firm is best suited to his/her plans for the company and be fully informed of the process. Entrepreneurs are not giving away their companies nor do investors want to take your company and run it.

Entrepreneurs often do not recognize their own limitations - Some people are better at starting and setting up companies. Others are better at taking a company through a rapid and high growth phase. Some people who have developed an outstanding technology are not best suited to manage or run a company. Many entrepreneurs are not financially knowledgeable and would benefit by bringing on a Chief Financial Officer (CFO) early to have someone who focuses well on the financial health of the business. The successful entrepreneur is one who recognizes where other skilled professionals would be the best solution for the business.

Many entrepreneurs do not solicit reputable, experienced and knowledgeable professional resources - Many entrepreneurs do not solicit reputable, experienced and knowledgeable professional resources such as lawyers, accountants or consultants early enough. Consequently, the business is not set up properly or efficiently. A venture capital investor will not be willing to invest in a company that needs extensive restructuring before moving forward. Without a strong foundation and informed corporate governance, investors are not likely to commit to a company. Many very skilled, reputable and experience professional services providers are willing to negotiate fees or defer fees for early stage companies with the expectation that the company will do well in the future.

Presenting a poorly organized and written business plan that lacks key analysis and strategic planning - The business plan is a living, dynamic document and something that is continually being revised and updated as market conditions change, actual numbers replace projections, new markets develop or new applications of a technology emerge. Most investors use the business plan for screening out companies while determining which few will be invited in for meetings. Make sure it is letter perfect and contains all the information an investor expects to see in a very well written plan.

Hiring a consultant to write the business plan can be fatal - During the writing of the business plan, the management team has the opportunity to work out the issues among themselves before putting their decisions on paper. The preparation of the business plan is the opportunity for the key management players to buy into or commit themselves to the direction and strategies of the company. Too many business owners have lost investor interest because they did not know the details of what was said in their business plans. Once the plan is written and the issues resolved within the company, it is possible to hire a consultant to polish the language, or design the format of the pages, or put charts or graphs into sophisticated graphic presentations although that is not necessary to attract investors.

Too many business plans do not provide the assumptions on which all the projections and planning for a business are based - Too many business plans do not provide the assumptions on which all the projections and planning for a business are based. The investor needs to put this business in some context to understand the foundation of the plan or to see the benchmarks from which your business will develop.