As a business and startup lawyer, people often come to me with plans or ideas for starting a new business and ask for my help in obtaining financing. This is because they know that great ideas without the right financial backing rarely see the light of day. Unfortunately, getting an investor to finance your business idea can be challenging, and to a large extent, that first meeting will determine whether you get the funds or not. Nonetheless, the prep work you do before your first investor meeting can set you up for success and make it easier for the investor to back your business venture.
These are four key guidelines to follow in preparing for that initial investor meeting:
Solidify your Business Plan
Run your Numbers
Some investors are more savvy than others, and some are experts in certain aspects of business. When putting together a pro forma for your company, be prepared to explain your numbers. For example, your investor may have worked in the insurance industry or have specialized knowledge in business insurance. So, if you allocate $10,000.00 to business insurance, and the investor knows that this number is not correct, then it is likely the investor will assume that all of your numbers are similarly off.
The best way to prevent this is to provide the calculations or quotes behind your pro forma numbers, or at least be prepared to adequately explain them.
While oftentimes revenue projections involve a great deal of guess work, it is still important to run projected revenue numbers, if only to see what revenue you need to break even and how much profit you would make at different revenue levels.
Know your Ask
Here, it is important to talk to professionals in the field. Not just accountants and lawyers, but other business persons in your sector. You can get a good idea of what is a fair ask and what asking price will insult or drive investors away.
Know When to Walk Away
One of the biggest mistakes I’ve seen entrepreneurs makes is not knowing when to walk away from a potential deal. It’s important to remember that not every deal is the right fit. This mistake happens most often with clients who are starting their first business, or clients who fear they may be missing out on a business trend unless they act quickly.
Sometimes after trading several proposals or letters of intent for an investment, the arrangement evolves into something else entirely. Sometimes, this is caused by the fact that as the deal gets further fleshed out, unanticipated issues arise that cause the investor to change or restructure their proposal. Other times, an investor may simply decide to move the goalposts or ask for more, sensing a business owner’s desperation to get a deal done. For example, maybe the investor increases his or her equity ask, or adds a board seat requirement or other corporate governance restriction that give them too much power over the business.
Put simply, if it’s a bad deal, don’t take it, and the easiest way to ensure you don’t take a bad deal is to have other deals waiting in the wings. There is nothing wrong with talking to several investors at the same time – this isn’t a monogamous relationship, this is a business deal. They are likely evaluating several investments just like you are evaluating several investment sources. Focusing in on one investor or investment group can cause tunnel vision, which can lead to business people leaving money or equity on the table.
These four guidelines will help you prepare a winning presentation. While the investor may only listen to your presentation for a couple of minutes, having a well-laid out business plan, being armed with solid numbers, and knowing what you want and when to walk away is going to make your pitch effective and that much easier for the investor to say “Where do I sign?”