Published November 2005

Tips to make your best case
for investor money

Dear BizBest: We are really stoked around here. Our Internet venture is starting to cook, and we have ideas galore on how to make this business totally pop loose. My partners and I have tapped out our own bank accounts, however, and we’re targeting investors for a shot of cash. How can we make ourselves look good in the eyes of potential investors? — Ready for Prime Time

Dear Ready for Prime Time: Making the decision to pursue outside funding is a big move for a fledgling firm. Investors abound, but the competition is super keen. There’s a great deal to know before you jump into the money game.

On any given day, tens of thousands of existing small-business owners and start-up entrepreneurs are looking for funding to help them grow their companies. Here are 10 ways to gain an edge in the money derby.

1. Get connected. Never underestimate the power of personal introductions. Cold calling investors is a dead end. Connections are what count. Ask everyone you know for introductions to potential investors. It won’t guarantee money, but it might get you heard.

2. Dump your debt. For most would-be investors, debt is poison. There may be a few types of debt that won’t raise eyebrows, such as loans for vital parts or equipment. But loans for routine operating expenses or, worse, debt in the form of deferred salaries will hurt your case.

3. Don’t be in a hurry. If your business is operating, or you can bootstrap your way to operational status, consider carefully if the time is right for raising money. The more you grow on your own, the more valuable your business becomes. By waiting to bring in backers, you won’t have to give up as much in return.

4. Protect your ideas. Investors love businesses with intellectual property that can be protected with a patent or trademark. Take steps early to secure all possible IP rights.

5. Be deft at due diligence. Savvy investors will want to conduct a detailed investigation of the business before writing a check. Be ready to supply documentation of your claims and to survive some poking into your background.

6. Do your own due diligence. While investors are digging into your financial dealings, you should be doing the same to them. What is their track record and prior experience in backing businesses like yours? Do they expect to be involved in decision-making? What’s their reputation in the field?

7. Nix the NDAs. Nondisclosure agreements, or NDAs, are a surefire way to quash investor interest before it starts. Many novice entrepreneurs are needlessly skittish about others stealing their ideas and insist on receiving signed secrecy agreements in the form of an NDA. Venture capitalists simply don’t sign these things. Their offices are clogged with business plans, and NDAs subject them to uncertainty, risk and potential lawsuits. Who needs it. There is rarely a good reason for a money-seeking entrepreneur to demand an NDA.

8. Learn what backers are looking for. Sure they want to see a powerful marketing plan, and a great product or service. But they also look for a great team of people. That includes everyone involved directly in the business, as well as outside advisers, board members, strategic partners, vendors and potential buyers. Most of all, they want a value proposition they can fall in love with.

9. Show ’em your mettle. Looking for money to simply back a concept is futile. Demonstrate your personal commitment by investing some of your own money. Or, if that’s not possible, show them the kind of “sweat equity” you’ve already pumped into the project. Financial backers — be they friends, family, angels, bankers, venture capitalists or others — want to know if you’ve lived up to your word and your financial projections in the past.

10. Go a little Hollywood. Selling investors on your business in a competitive environment requires a little glitz, a little glamour. You need a powerful pitch, a gorgeous business plan, a drop-dead executive summary and enough passion and emotional appeal to get investors excited about what you are doing. Be realistic and believable, but by all means, set yourself apart.

Daniel Kehrer (dan@bizbest.com) is founder of BizBest (www.bizbest.com), which publishes “The 100 Best Resources for Small Business.”

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