Aug 262012

Dr. Earl R. Smith II
Managing Partner, The Federal Circle

Over the years I have sat in on dozens of presentations to investors. In this series I would like to describe some of the mistakes that are made and suggest ways that you might avoid them. Clearly, one of the most important factors in the success of any early-stage company is the arrangement of adequate resourcing to support its growth. One part of that resourcing involves arranging for inward investment. But, of all the areas which need attention, this one seems most frequently to the devil entrepreneurs.

One of the principal reasons that this is the case is that, often for the first time, entrepreneurs are required to speak in a different language and to consider a radically different point of view when analyzing their business. For the most part, they had been talking amongst themselves, to people who are involved in their technology and to either clients or potential clients. In fundamental ways each of these groups sees the company in roughly similar terms. That is not the case for investors. In this series and through a discussion of mistakes frequently made, my objective is to help you understand and better navigate the process of presenting to investors.

Mistake Number One – Assumptions and Presumptions

Most entrepreneurs expect that investors will see their company through roughly the same lens as they do. They expect that investors will enjoy the same “oh yes” experiences that they do. They expect that investors will be intrigued by their technological innovations or the “neat” solutions that they have come up with. And, and this is the most important, they expect it investors speak approximately the same language that they do when it comes to describing, analyzing and seeing the value in their company.

It is not an understatement to say that little of this is true. Certainly investors will be interested in the value proposition of the company, particularly when it relates to advantages over the competition. Certainly investors will be interested in the capability of the senior team, and their demonstrated ability to build a company. But, even here, the language is different. Entrepreneurs generally start from the assumption that they can do what they set out to do. The language they use is couched in terms of that assumption. But investors are approaching this fundamental issue from an entirely different point of view. They begin by questioning whether or not the entrepreneurs can accomplish what they set out to do.

This creates the “starting from paragraph two syndrome”. What the entrepreneurs accept as given turns out to be the fundamental question that investors are asking. In order to understand why this is so, it’s important to understand how investors approach the process of finding, analyzing and deciding which investment they should make. The average investor, assuming they are an active one, will see anywhere from five to more than a dozen opportunities during any given week. Each opportunity is put forth by entrepreneurs who are presenting themselves as capable of building a company, implementing their business plan and generating an attractive return for the investors. Based on interviews that I have done with investors, roughly 10% of those initial presentations make it through the initial screen. That initial screen is principally focused on the questions. In other words, investors decide in roughly nine out of ten times, that the team is not capable of doing what they say they are intending to accomplish.

Experienced investors expect this kind of result. Those who have been in the business of investing in early-stage companies know that there is no way around this kind of a statistic. In their world, it is normal to have to look at 10 companies in order to find one that you are willing to give a serious look.

It’s in this situation where the “manifest destiny” that generally drives entrepreneurs gets them in trouble. What they taken as given, that they are capable in the face of the challenges before them, leads them to use language which is based on that core assumption. What that means is that they are speaking a different language and proceeding from a different perspective than the investors.

Entrepreneurs that are successful in raising funding begin by understanding the worldview of the investors they are presenting to. For many, this is a very difficult process. It requires that they put their ego away and engage in serious discussions about their abilities. Many entrepreneurs dislike this experience and most that do try very hard to avoid it. One of the reasons that so few entrepreneurs successfully court investors is that they, from the very beginning, appear to be avoiding the very questions that the entrepreneurs see as fundamental to getting beyond the first stage.

If you take the time to digest this single point, you can radically improve your experience in arranging funding for your company. If you can bring yourself to start on paragraph one and meet the investors’ concerns, rather than attempting to avoid them, the reception you receive will be considerably warmer. The primary lesson you should take from this article is that, in the vast majority of cases, most entrepreneurs fail to get funded not because of their ideas or prospects but because they are insensitive to the concerns of the investors they are presenting to.


© Dr. Earl R. Smith II

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