For companies seeking investment capital in the current market, the margin of error is slim. Investor expectations have become moving targets. Angels sound more like venture capitalists; venture capitalists sound more like private equity companies; intermediaries like investment banks won't return your call unless you can absorb eight figures in capital at a bare minimum.
Yes, it’s tough. But this can be a very good thing for the majority of aspiring business owners. The reality is that most people pitching investors for capital today aren't ready. They are knocking on the wrong doors at the wrong time. The problem is that most people won't tell them what they really need to hear which is that they should stop asking for money and refine their business offering or perhaps do something else entirely. It’s the tough love that will save entrepreneurs and business owners precious time.
My first attempts at entrepreneurship did not turn into champagne wishes and caviar dreams but instead became "learning experiences." I wish someone would have had the courage to tell me that I was wasting my time because my business model was inherently and mortally flawed. My feelings may have been hurt back then, but they would have saved me time and helped me find the right endeavor far sooner than I did.
If you don't have a qualified person that can give you the tough love you need, give it to yourself. Ask yourself these three questions, and answer them honestly.
Do you have a proven track record of success in your job or in a previous venture?
It’s critically important for investors to know that you are someone that can accomplish goals in a business environment. This doesn't necessarily mean that you need to be a proven entrepreneur. If it is the first time you are venturing into the world of business ownership then it’s acceptable for you to use your track record as an employee as proof of your execution abilities. But if you've never run a company and you have had mediocre success with your job, then convincing someone that with a little money you can be successful will be very difficult. Prove yourself first in some way.
Have you been able to convince any relevant people to support you without money?
What investors look for is validation, meaning that relevant people support you. The most relevant of all are paying customers, but if you don’t have that, then another way to demonstrate validation of your business is to convince others to support you. This includes, among other things:
- Recruiting known industry players to an advisory board.
- Convincing executives to help you full-time or even part-time without pay.
- Having suppliers extend inventory to you on the promise of payback once you become successful.
- Working with beta clients who will publicly endorse you even if they aren’t paying.
The idea is to show that you are capable of attracting talented people. If you can't, then learn how to do so before asking for money.
Have you reviewed your business model with qualified people?
Companies that become great investments must have a business model that makes money. Anyone can create an Excel spreadsheet with revenue growth that resembles a hockey stick. But if a potential investor is able to find fatal flaws in your model within two minutes, you most likely have turned them off to supporting you. Have someone that knows about your industry examine closely your business model to ensure that your assumptions are realistic. If not, redo your model or create a new one before meeting with investors.
If you can answer in the affirmative to these questions, then go full speed ahead; you have the seeds of success planted in your business. If not, then you may need to reconsider what you are doing. I'm not saying throw in the towel; I'm simply saying you still have some work to do before you ask anyone for money.