After 40 years of working in the investment business – in some cases, side by side with the kinds of people you want to fund your company – I really know them well. I am one of them, myself.
In general, I find that entrepreneurs are not even remotely ready for the kind of decision making process used by venture investors. Even entrepreneurs who have run their own companies, though at a greater advantage than those who haven’t, for the most part don’t apply what they know about running a business to the process of seeking funding. For some reason, they don’t understand that every venture investor is actually an entrepreneur running his own business and looks at potential investments in the same way any business owner looks at a capital expenditure.
Venture investors have backgrounds in accounting, law, business management for a major corporation, investment banking, or they have started and operated a company themselves. It doesn’t matter whether they are part of a venture capital firm or an angel investor. They are all very similar in what they look for.
Management. – Every venture investor wants to see a serious, emotionally mature, committed, knowledgeable, business-savvy startup founder. They also want to see the same qualities in the partners and key employees. No matter how friendly and casual they seem when you first meet, they are judging your character and potential. If you are anything less than impressive, you have just lost your chance. Also, they are judging whether you are teachable. Arrogance and defensiveness are very bad signs to a potential investor.
Business Model. – Of course they want to know what your company does. They may use terms such as “What is the pain?” when they want to know the details of the problem or need you have identified as an opportunity. In fact, they will ask you all kinds of questions trying to find out the logic behind your idea. If you have any creative assumptions or personal opinions, you have just lost your chance.
Marketing Model. – Every business owner knows that a company that can’t get customers is worthless. Again, assumptions and opinions will lose out. Investors want a detailed and logical explanation of why someone would buy, at what price point, when, where the point of sale will take place and how you will put all this together.
Build-Out. – Venture investors like schedules and benchmarks, but they will consider how realistic your goals are based on their own experience in business. Promising a fast build-out and early revenues might just make your plans sound unrealistic.
Contingency Plan. – Face it. The best business plans are really only fiction until the business is up and running successfully. Every entrepreneur miscalculates, misjudges and is guilty of wishful thinking. The real world does not bother to arrange itself to suit your delusions, so things happen. An investor will be most impressed if you recognize this and have several alternative ideas – not how you will start a coffee company if the software idea turns out to be a bad idea – but how you will alter the target customer, or the scope of the software, or the product roll-out. Showing that you can manage the risk of a startup will earn you a lot of respect.