Are You a Fit?
Before you apply, consider the parameters of taking other people’s money
Taking outside capital is a statement that you are serious about building a growth company, that you respect the risk incumbent in that path, and that you are raising your own expectations.
People who are thinking big, who are problem solvers with market-changing technology or discoveries, who expect to work hard and make sacrifices – including total control – those are the ones best suited to receiving a venture investment.
Here are some guidelines and some challenges in considering taking other people’s money:
Ensure that your business model is right for outside investors.
Most businesses are not right for venture capital. Venture capital investors, and most angel investors, have return on investment expectations and risk profiles that target very high-growth businesses in narrow categories. These investors look for ideas/companies with unfair advantages in the market place that drive fast growth, such as patented medical devices and drugs.
Venture investors love businesses with fat gross margins, like software. Venture investors do not like service businesses, restaurants, retail concepts, consumer goods, and entertainment. Outside investors also will expect liquidity, almost exclusively through an acquisition in the foreseeable future, within five to seven years.
Understand the value of outside capital and be comfortable with selling part of your company in exchange for the fuel needed to build a significant business.
Outside capital, whether from an angel investor or a venture fund, represents the opportunity to enter and compete in a high-growth, high-risk business venture. Seeking outside capital from somewhere other than a bank is an admission that your idea/company has little in the way of tangible assets and is inherently risky. While you may not like the idea of taking outside capital to grow the business, you should respect the role of angel investors and venture funds in your plans. You should seek outside angel/venture capital because you want to build a significant business in a market where competition and market dynamics argue against success.
Respect the money as belonging to someone else and have a mature attitude about what might happen.
Every dollar contributed to a new business by an angel or venture fund has been earned by someone else. Capital is the most precious resource in any business but especially in a new, pre-revenue business. It is more likely than not that the investors will lose money on an early-stage investment. Before taking money from anyone – friends and family, angel investors, venture funds – visualize three possible outcomes: the money is lost and the business fails; the investment loses value and more capital is required; or, the investment generates a substantial return.
Of these, the last is the least likely to occur. Having a healthy respect for other people’s money will make you a better steward of the business.
Expect and embrace a higher level of scrutiny from investors.
Experienced early-stage investors expect your business to encounter turbulence and difficulty. Both the investors and the company benefit from consistent interaction around progress, problems, and proactive intervention. This level of scrutiny is uncomfortable to many entrepreneurs at first, but it will force you to raise your performance standards and expectations. This is not to say that your investors, usually represented on a board of managers or directors, should micro-manage daily activity. Rather, they will track progress to milestones, provide experience-based advice, connect you with other advisors/experts, and hold you accountable to plans/milestones. Your chances of success will increase as a result.
Adopt proactive communication and problem-solving to deliver bad news.
The easiest way to lose the confidence of investors is to withhold bad news. The easiest way to wreck an early-stage company is to live in denial. Early-stage investors expect some bad news in the process. In fact, the absence of bad news is an early warning sign about management and the company. If you take outside capital you should be prepared to deliver bad news, seek counsel, and act decisively to address inevitable challenges to the business.
Building a growth business will require talents that you don’t have and people you’ve never met. A by-product of outside investment is the imperative to grow and advance the company beyond the scope of control of any one or two people. Building a team of experienced professionals in all areas of the business will be a requirement of outside investment. This team will not include relatives, friends, college roommates, or neighbors. It may include a handful of past colleagues or employees, but only if they meet the job standards. Expect to meet new people, to be challenged as a leader and manager, and perhaps not be the person ultimately in charge of the business at an executive level.