Today we have a post from a friend of mine here locally. Local doesn’t mean Ken isn’t a legit expert, though. Ken is an award-winning entrepreneur, author and speaker. He earned a Business degree from BYU and an MBA in Entrepreneurship & Finance from the University of Georgia. He founded CFOwise®, which has helped entrepreneurs raise over $100 million in debt & equity financing in the last 5 years. He currently the President and CFO of Aribex, an Inc. 5000 company. Ken tweets a lot of great content as well @_KenKaufman.
Ken has some great advice about raising money and what NOT to tell investors while doing that.
Raising money is tough, but you’ll make it almost impossible if you say one or more of the following things to prospective investors. In some shape or form, I’ve heard each of these expressed to investors only to watch them shoo the entrepreneurs out as quickly as possible. Practice, ask others and refer to this list often so you don’t make one of these deal-killing mistakes.
1. Getting customers will be the easy part. We need money to perfect our product with feature-rich bells and whistles that we’re sure our customers will love. Actually, getting customers is usually the hardest part. Waiting to get feedback from prospective and current customers until you think your product is perfect is a bad idea. They are parting with their hard-earned money for a reason, and you need to understand why. In addition, creating lots of features for your product without user feedback is dangerous. You’ll likely waste the investors’ money, and they’re smart enough to see that train wreck coming before you’re done with your pitch.
2. We’ve had a few other investors, but we didn’t bother with all the legal paperwork. A handshake got the deal done. No other statement will make prospective investors turn and run faster! Before they invest, they need to understand who owns what and how their investment fits into the overall equity structure of the firm. And they’re wary of promises made to investors where the appropriate legal contracts and agreements were not utilized. It will be their money spent to resolve the shareholder lawsuits and other contingency claims to which you’ve exposed your business.
3. If we could just capture 0.05% of the market. What you are really saying is that you have spent NO time understanding your target market and customer segments and you have no idea who will really even buy your product. You must do research in this area to speak credibly and have valid lead generation and customer acquisition assumptions, not pie-in-the-sky wishes, hopes, or dreams. Customer validation early and often will not only help you raise money, it will help you figure out more quickly what your company will actually sell.
4. We don’t have any experience in this industry, but we think this is a great idea that will become a great business. Besides, we’ll outsource to experts where needed. Every business needs to have a core competency that can generate positive cash flow. Just having a great idea is never enough. Outsourced partners have their own agendas, not yours, as their focus and priority. If you don’t have any industry experience, then go get some. The more experience you and your team have with the customer segments you are targeting and with the products and services you plan to offer, the more confidence investors will have in your ability to use their money wisely.
5. We are raising $1M dollars. This tells investors that you don’t have a real financial plan. Without a plan, what can you even commit to do in terms of building your company? You need to build a business model and a plan that flows into a financial model or projection that expresses how much cash you need and what every cent of it will be used to accomplish. Every investor knows your assumptions and forecast are not perfectly accurate, but those assumptions become the basis for understanding performance and how to improve it in the future.
Saying these things will certainly turn most investors’ interest off, but actually believing them will seriously impede your ability to build an investor-worthy business with an effective business model. Even if you don’t plan to raise capital, understanding and applying these concepts will better empower you for entrepreneurial success.