Common Mistakes

Few understand or appreciate just how competitive it is to land venture financing. Entrepreneurs hear of the company that did exceptionally well and fail to realize how few companies actually receive venture capital each year. In the entire U. S. each year, there may be no more than 3,000 to 4,000 deals completed. (The Internet Bubble Years of 1999-2001 when the number of companies funded spiked unrealistically, are now considered a total aberration - a hundred year flood, never to be repeated.)There are estimates that several hundred thousand companies that are actively seeking investors at any given time but never successfully find venture capital. Entrepreneurs do not realize how many other companies are competing for a limited amount of equity investment dollars. The total number of completed investment deals each year is small.

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

Business owners almost always underestimate the time it will take to attract investors - Business owners almost always underestimate the extended time period it will take to attract investors, perform due diligence and negotiate and sign the agreements before money can actually be disbursed. It is helpful to talk to other companies who worked with equity investors, or at least read voraciously about others who have experienced this process. The entrepreneur can shorten this timeline by anticipating what documents and information is required during due diligence, but it is still a lengthy process measured in months, not weeks.

Entrepreneurs do not realize that venture capital investors know ahead of time that around 30 to 40 percent of their investments (portfolio companies) will fail - Another 40 to 50 percent will survive but never meet their anticipated rate of return. The venture capitalist hopes that 10 percent of all the investments made will reach super star status that has a significant impact in the marketplace.

Entrepreneurs don't revise and update their plans - It is apparent when the business plan and the data contained is dated. In that case, the investor assumes that the business plan was pulled from a file and a new cover sheet was attached. The most current information on what is happening in your market today is what is relevant. Current information wins out over decorative bindings.

Ignorance of legal requirements and securities regulations on state or federal levels as well as sound corporate governance practices. - Improperly presenting your company and its assets can "poison" the deal (run afoul of securities regulations) to the point that no angel or venture capitalist can ever get involved with the company. Many industry sectors that are attractive to investors also involve some of the most highly regulated sectors such as the biomedical-lifesciences, communications, energy, environmental, and others. Finally, after several high profile examples of public company mismanagement, Congress passed the Sarbanes Oxley legislation to tighten corporate governance practices for publicly traded companies. Although the companies backed by venture investors are still privately held and not publicly traded stocks, the practices and requirements of this legislation is influencing policies and practices investors seek within their portfolio companies.

Click here to view a Financial Chronology of Amazon.com

Unwillingness to provide full disclosure during due diligence process. It is strongly advised that entrepreneurs consult an experienced attorney familiar with the securities laws of all applicable states in order to develop a securities law compliance plan specific to the proposed offering. - Companies wishing to offer their securities for sale must provide full disclosure of all material information so that investors can make informed investment decisions. Failure to be forthcoming in providing information can subject the entrepreneur to serious legal consequences. The 'anti-fraud' provisions in both federal and state securities laws mandate that the issuer of securities is legally responsible for any false or misleading statement or omission, whether oral or written. Additionally, an investor who purchases securities without receiving adequate information from the issuer may seek legal action against the issuer, including refund of the purchase price. The government regulators may also pursue claims against issuers, including criminal sanctions, for violating any aspect of federal or state securities laws.

It is strongly advised that entrepreneurs consult an experienced attorney familiar with the securities laws of all applicable states in order to develop a securities law compliance plan specific to the proposed offering. It is critical that all legal requirements be complied with before the first contact is made with any investor. A mistake made in the initial offer will not only cause potential liability to the entrepreneur, but it can also "poison" the deal, thereby affecting the company's ability to obtain further equity financing in later rounds.

Unwillingness to work cooperatively with investors - In addition to liabilities under the securities regulations, management must be willing to understand and accept the role of the investor for the benefit of both. Investors have different styles and make sure that style fits with the management of your firm.

Lack of understanding of how a venture capitalist determines a pre-investment valuation of the company and an unwillingness to negotiate with investors - Many entrepreneurs enter negotiations with a fixed idea of a monetary value of their business and decide that number is fixed and cannot be changed. The ultimate price or value agreed upon is the valuation of the company reached through a complex process involving give and take discussions between owners and investors while evaluating similar companies, market accessibility and financial modeling (pre-money valuation).