An entrepreneur’s need for capital at the concept stage is predominantly to develop the product, to fund marketing and advertising and to develop a sales force. The entrepreneur must understand deeply “why the capital is needed” and “how much is needed”. If the entrepreneur does not have a well-thought plan for what the capital will be used for and demonstrate how it will create new wealth, capital will not flow. The estimation on how much is needed is equally important as a source would want to know the maximum amount he is going to risk and entrepreneur will not come back asking for more infusion to rescue initial investment before a significant value is added to the investment.
Just as an entrepreneur as an individual when investing in an instrument will seek balance on the equation risk—tolerance, reward-demands, size limitations and time- horizon preference, an entrepreneur should be ready to build this equation for the sources of capital with empathy. Those entrepreneurs who show this empathy land funding faster than others.
Raising capital at concept stage is difficult because the entrepreneur seeking it and source providing it must fit together like a lock and a key. If they do not then while a lot of talks will happen, funds will not flow. The four key parameters for lock and a key to fit together are Risk-Reward-Size-Time.
Risk
It does not matter how nice the entrepreneur appears, presents, and provides reasons for her deep passion or feelings for a product, investors need to feel confident about the person they are entrusting money with through factual data points such as (a) previous entrepreneurial success stories if any. (b) Prior, significant and relevant work experience in similar product or market. (c) Experiential things done to identify understandable product/service need, reading reports do not count. (d) Commensurate and tested business and marketing plan and (e) clarity of positioning in the marketplace. Even when it is said that friends and angels invest on a person for honesty, drive and straightforwardness they rarely will be able to overcome risk perception without data points above.
Rewards
Investors need a clear mechanism to estimate rewards and entrepreneur must provide these estimates by way of the total size of market, growth rate post product development stage, projected income and cash flow, likely multiplier which can be used to value the company and companies which might be interested in acquiring the company. All this must be thought by the entrepreneur prior to having a meeting with an investor as no investor wishes to be invested with the company perpetually, as least at the time of making the investment. Post this investor should be suggested the mechanism harvest the reward through interest or dividends on convertible bonds or preferred stocks as the case may be.
Size
The size of the investment (interlinked with a number of investors) is another factor to find a fit between entrepreneur and the source. Most sources such as friends and family, angels etc. are limited by capacity or willingness on the size of investment they can take on. Awareness of capacity helps knowing the number of investors entrepreneur needs to approach.
Time
As the entrepreneur is busy convincing prospective sources on more fundamental aspects of attracting money; she should never forget and proactively answer the dimension of Time. The time to exit or make a harvest out of the company is an important dimension for every source including entrepreneur herself. For sources, the time to exit should be treated as the duration for which money is at risk. The entrepreneur should be able to demonstrate the major milestones when such exists can be made possible to all sources including friends and family and angels while many times they may not ask for it.
Moreover, the surest way to raise capital is to make a risk-reward- size profile of sources (and their interest areas for investment) and match with what you can deliver.
Looking for Investors: Angels & Venture Capitalists
If you are a concept stage entrepreneur, who has evaluated and acted upon all self-financing options as advised above, the only investor with a high tolerance for risk and willingness to consider funding you are an Angel. Angels are either professional who have built and sold companies or they have inherited wealth. Typically the first kind of Angels, provide time, advice and talent along with Money to the entrepreneur however without diluting their expectation of return over a fixed time period. (An emerging sect of angels is well-paid and ESOP awarded executives in top corporations who could also be former professional colleagues/ friends. You may have to decide whether to approach them as friends & family or as angel depending on distance).
Angels are hard to find. An entrepreneur should always look at friends, business acquaintances, community leaders and successful entrepreneurs in the immediate business area. Other places to look for are certain industry bodies (as per your area of startup), venture fairs, technology showcases, incubation centers, investor- entrepreneur matching services, angel funds and networks. Be convinced that to land right Angel requires iterative legwork and you are always ready to provide elevator pitch, short pitch, and long-format formal pitch anytime anywhere with or without presentation aids.
No comments:
Post a Comment