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Investors just have a hard time believing that the entrepreneur is going to make anything of their idea. A lot of investors are tending to lean towards established companies or listed companies because the returns are great (at the moment) and risk is much lower.

So the key is to lower the risk for the investor. This will greatly increase the chance of getting funding.

How to lower the risk factor for the Investor…

In a typical situation, the entrepreneur or promoter has had little prior experience building a successful company. If they had, they probably would not need an outside investor. It’s sort of a catch 22 situation, therefore the most successful approach for start-ups is to:-

1. Take their idea/concept as far as they can with their own funds (if possible get some sales or at least pre-commitments of sales from worthy buyers)

2. Raise small amounts of money from people who are close to them at a reasonable valuation (most promoters value their idea too high which is a turn off to investors). Say $10k or $20k each from a number of friends/family who are close to them and believe in the promoters vision.

3. Use those funds to get the product into the market and get one years trading/sales behind them.

A year’s trading gives them a couple of things. Firstly it proves up the business idea and demonstrates that there is a ready market for it. Secondly it proves that the promoter can start/run a business to some degree, and thirdly it gives some figures by which a basic valuation can be done from (for the next capital raising).

All of this lowers the risk for the next investor, who may be asked to put up $250k or even $1m if the opportunity/technology is great.

The next round of funding may come from a wealthy individual, professional angel investor, or even an early stage VC fund (the latter is the hardest to get funds from). The next investor may also take out the first couple of investors giving the first group an exit.

There are many other factors which can affect the promoter’s ability to raise funds such as:-

• General capital market conditions (at the moment, they are pretty good – most investors have a bit of spare money to play with)

• Appetite for their particular idea (i.e. anything in the green or clean energy sector is pretty hot at the moment).

• The promoters ability to ‘sell’ their idea or concept

• The promoters track record

• The investors personal situation (they may like the idea but have funds committed elsewhere or may be about to go on holiday)

• Luck (promoter may by chance stumble across right investor at right time)

Typical criticisms of the Investor versus the Promoter/Entrepreneur…

Investor criticisms:-

• Poor investor presentation (sometimes no presentation at all)

• Too early stage – still an idea on a piece of paper

• Poor business planning or lack of

• Business model is wrong

• Promoter does not have the skills required to make it work

• Idea is not scalable – limited market opportunity

• The sector is not favorable

• Idea/technology is easily copied (no trade marks/patents in place)

• Projections are too high

• Value entry point is too high

Entrepreneur criticisms:-

• Investor does not understand their idea

• Investor does not get back to them with an answer

• Investor wants too much of the company for their investment

• Investor wants control of the company (more than 51%)

• Investor terms are too tough (i.e money comes with many stiff terms and conditions)

The best advice is for entrepreneurs to get as much knowledge on raising capital as possible. There are many books including many by Professor Tom McKaskill (www.tommckaskill.com).

Also, get a mentor involved in your business who has a track record of raising capital and building businesses. They may not invest into your business, but knowledge is far better than capital. This is because knowledge will attract capital.

© Reuben Buchanan, Integral Capital Group 14th August, 2007

www.integralcapital.com.au

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An angel investor will usually operate individually. They’ll invest their own money into the business rather than acting for third parties, and will often have a close relationship with the other partners in the business. They’ll offer a relatively modest sum of money (in business terms) and will have no problem in joining start-up companies to help them get off the ground.

They fill a much-needed gap between friends and family lending and venture capital financing. They’re far more suited to companies in the early stages of development, where their knowledge and experience can be essential to its success.

Venture capitalists, on the other hand, will rarely look twice at start-ups. They need to see a clear track record of success; something that businesses yet to begin trading clearly won’t have. They often act in networks or on behalf of other investors as well as themselves through venture capitalist firms, and while they too offer valuable funds to the business it’s on a much larger scale.

They have the capacity to invest a lot more money into a company, but they need to make sure it has the potential for huge returns. Ultimately, their aim is for the business to be sold off so they can reap their reward in a massive pay-off.

Both angel investors and venture capitalists can be hugely beneficial to any company. Which one you go for will depend on the level of financing required, the type of business you have and the long-term plan for the business as a whole. Whichever one you choose, you can be sure it will be a worthwhile decision.