Funding Fairness Investors vs Founders Part 2 of 2 Planning for an exit

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Funding Fairness Investors vs Founders Part 2 of 2 Planning for an exit

Posted On : Jul-19-2011 | seen (155) times | Article Word Count : 1898 |

This article (in 2 parts) outlines some of the problems and pitfalls on the way to securing investment which contemporary start ups sadly must face. Not only is there a plethora of offerings, i.e. demand for funding by far outweighs the supply, but this very fact results in unfair business practices, the liberal belittling of talent and in a few cases plain theft of ideas.

Thus far we’ve established that investors can and will play hardball. They will probe and push to see just how solid is your idea and how prepared you are for the problems which will most certainly arise once the venture receives funding. And who can blame them? They are putting up the risk capital and wish to reduce the odds by thorough screening, but do you know what they’re screening for? They check if you are ready for the big deal, but are you ready to talk to THEM? Deals are made and broken at the first meeting/presentation and second chances are very seldom awarded, so read on and be sure you have all bases covered before striking contact or you may strike out before the play begins.

You seek funds, but ARE you prepared?
J postulated: “Here is a “key” word for you when you are looking for an Investor: INCENTIVE. You have to find a way to have your project stand out from the crowd, and give the potential Investor an incentive to even consider your project. Posting figures of potential returns without being able to back up a statement like that, or posting a statement that says “information will be sent after a Letter of Interest, or a Letter of Intent is received” does not excite an investor.

YOU need to be prepared to send information to the Investor for a proper review. Not the other way around. Any qualified Investor that reaches out to you, will have a way for you to verify that they are a real Investor, such as a website, or other ways of verifying their existence. If they do reach out to you, at the very minimum, you will need:
- A Full Business Plan
- A Pro Forma listing every possible expense and Income stream to the project.
- Evidence that you have a Contract for the sale of the product or service you are creating, or “undeniable” proof that you can obtain one.
- Evidence that any and all Permits required to operate that facility are either in place, or have been applied for and backed up with a letter from that authority stating that they are in process.
- Evidence that a qualified contractor has been selected, and has agreed, in writing, to construct your project.
- Evidence that proper Insurance Policies are in place, or a letter from a reputable Insurance Company that those policies can be obtained.

That is what you need to have on hand to START. No qualified Investor is going to spend months with you helping you get your business plan together, or otherwise spend time “educating” you on the industry. They want to deal with qualified Principals that understand their project and their industry.
And one other thing: DO NOT post a request for someone to fund your “time” to create your business plan, or otherwise pay for costs to put your plan together. You will NEVER hear from a qualified investor.”

I wrote: As always, there is another side to this, J. I fully respect and agree with what you say - it is the fund seekers who are petitioning the investors to first invest their time in skimming their elevator pitch before delving further, but even that time is precious. Clearly, there is a huge rift between the demand for funds and their availability, investors are overwhelmed by requests for consideration and the business scene is inundated with contact attempts from self-asserting entrepreneurs. It is hard to winnow the chaff from the wheat (but, as mentioned, this swings BOTH ways!). Ergo, investors too must resonate some understanding and accept that no serious entrepreneur is going to just toss his business plan and corporate secrets out into the open to anyone who asks. An NDA (Non Disclosure Agreement) means little in the digital age. Originality in business is crucial, so every project is akin to a patent and the seas are rife with unscrupulous "sharks" who would readily capitalize by goading gullible entrepreneurs into submitting their hard-polished mind gems for so-called review, but only keep the hopeful on the line to learn from him the intricacies of his strategy and then cut him out of the final deal. People looking for funds are right to be suspicious and careful, however, they must understand their role in the play and know when they are dealing with the real McCoy. In other words - if a guy on Linked In claims to be in charge of $100M fund, but gives just a @gmail address and upon checking his profile you find no photo or company reference, don't waste your time pitching - this is the same as those emails where someone you've never heard of claims you've won the lottery or they need to use your bank account to forward $28M leaving you 10% for the "service". Don't waste your life engaging these vagabonds in a discussion; much less send them any data. On the other hand, if you come to a VC or Angel through your Chamber of Commerce, Rotary Society, springboard or when on a road show, mind your ethics as the presentation/meeting is at least as important as the formalities of your business plan, etc. Be confident, respectful, knowledgeable of your competition, and above all show that YOUR CORE TEAM possess indispensable skills, vital to the success of the project. Investment is a 2-way street: first you rely on the investor for financing, then he must put his trust in you to deliver results. For most projects, imo it is folly to divulge all the secrets at once and if the "investor" keeps milking you for solutions to hypothetical problems for over 6 months - cut your losses and do something more useful with your time.

Also remember: a business plan is hardly enough, investors want to see real RESULTS and turnover figures and milestones reached, in the absence of these, your idea must be simply revolutionary to get picked up from the maelstrom of fund seekers. So with this in mind, carefully consider if the time is right and do YOU have the time to keep your project from collapsing while you're kowtowing to your newly found investor demigod?

The “hook” - What more can they want?
After presenting the business plan to a prospective investor, many startups experience a rollercoaster-like peaking and plunging of interest – at first the investor seems excited and on board and once the fund seeker expects the first check to be cut, suddenly the investor stops responding to emails and calls. After chasing his tail, jumping through hoops and being led by the nose for a few months, naturally the entrepreneur feels frustrated or even duped and quickly sails past the point of no return by complaining too loudly about the sudden silence.
The devil, more often than not, is in the details of the offering, specifically: the exit strategy. Investors are not interested in growing a company for growth’s own sake – typically, by funding a venture, they are priming it for the big liquidity event. Thus, a deep understanding and prioritizing of the optimum exit plan on the behalf of the funds seeker is an essential catalyst to successful capitalization. Generally an IPO or at least a buyout/acquisition by a larger brand are the preferred modus operandi of most investors, however, the vast majority of startups will never achieve such altitude, hence, realistic goals must be outlined. Fortunately, even if the venture stands little chance of being bought up by a Fortune 500 company, alternative exit strategies are available to make the venture a relative success, for example revenue royalty financing also called revenue-based financing which essentially is a loan with a floating index tied to a percentage (a figure typically South of 5) of the revenue rather than an actual equity investment. Ergo, the payments will ebb and flow as the revenue rises and dips. This is a clear-cut model, however, the drawback is that the investor typically can expect a maximum cap of about 400% return on his investment. As an added incentive for the investor to pick up the project, offer shares in the company, that way even if the venture joins the ranks of Fortune 500, in addition to the 300 – 400% ROI, the investor will also be able to liquidate his shares at the peak time which may result in thousands of times more dollars than his initial risk capital put into seeding the company.

Since investors frequently use hopefuls simply for research – i.e. pretend to be interested but simply mine the entrepreneur for information in order as to use what they learn to benefit some other project, an NDA prior to presentation is prudent. After all, a business plan is not that far removed from a patent – if the idea is snatched up by someone else before you can realize it – you’re too late. Unfortunately, investors are often spooked and put off by requests to sign anything BEFORE full presentation & disclosure, i.e. just after reading the exec. summary and even if you do get them to sign, the Agreement would be worthless, as the only thing they would sign is a vague promise not to make an exact replica of your project, no one will sign that they will not steal just the good bits. So, what can entrepreneurs do to avoid offending/irritating honest investors, but on the other hand not leave themselves open to a shark attack? Imo perform a due diligence on the investor you are thinking of contacting BEFORE contacting him. Only contact serious people who’re specialized within your industry and ALWAYS a) show how the core team possess indispensable skills to the success of the project b) keep an ace up your sleeve – don’t give away the full operating secrets until the investor commits. Rather, focus on what concerns the investor most – self-sustainability and exit.

In summary
If you take up the gauntlet of navigating and circumventing the white water rapids of funding negotiations, check yourself before you wreck yourself – don’t go out in a paper canoe. Be prepared to walk the tightrope while juggling several legal, experience, business model, competitor, personal issues and amidst this perilous balancing act be assailed on all fronts AND manage to keep steering the venture, as the road to funding is a long, bumpy ride – unless you get lucky or win the lottery!
When the stage is 90% set (you have all the material and presentation ready), but in prelude to contact, perform a thorough due diligence on the investor – see which projects he has participated in and what fates those projects have met. Then put the finishing touches on your presentation, peppering it with insights and preferences gleaned from your research of the specific investor and take the plunge. In the end, keep your cool - don’t just slavishly accept whatever is proffered, be certain that you can work with this person, i.e. that it is a good fit both ways.

As time goes by, the stakes will become higher and your need for funding that much more acute, persevere and stay the course and you will break through the storm. Best of luck on your voyage!

Re-Publish this Article

<h1>Funding Fairness Investors vs Founders Part 2 of 2 Planning for an exit</h1> Author: <a href='http://www.articleseen.com/profile_Oleg K Temple.aspx'>Oleg K Temple</a> Thus far we’ve established that investors can and will play hardball. They will probe and push to see just how solid is your idea and how prepared you are for the problems which will most certainly arise once the venture receives funding. And who can blame them? They are putting up the risk capital and wish to reduce the odds by thorough screening, but do you know what they’re screening for? They check if you are ready for the big deal, but are you ready to talk to THEM? Deals are made and broken at the first meeting/presentation and second chances are very seldom awarded, so read on and be sure you have all bases covered before striking contact or you may strike out before the play begins.
 
You seek funds, but ARE you prepared?
J postulated: “Here is a “key” word for you when you are looking for an Investor: INCENTIVE. You have to find a way to have your project stand out from the crowd, and give the potential Investor an incentive to even consider your project. Posting figures of potential returns without being able to back up a statement like that, or posting a statement that says “information will be sent after a Letter of Interest, or a Letter of Intent is received” does not excite an investor.

YOU need to be prepared to send information to the Investor for a proper review. Not the other way around. Any qualified Investor that reaches out to you, will have a way for you to verify that they are a real Investor, such as a website, or other ways of verifying their existence. If they do reach out to you, at the very minimum, you will need:
- A Full Business Plan 
- A Pro Forma listing every possible expense and Income stream to the project.
- Evidence that you have a Contract for the sale of the product or service you are creating, or “undeniable” proof that you can obtain one.
- Evidence that any and all Permits required to operate that facility are either in place, or have been applied for and backed up with a letter from that authority stating that they are in process.
- Evidence that a qualified contractor has been selected, and has agreed, in writing, to construct your project.
- Evidence that proper Insurance Policies are in place, or a letter from a reputable Insurance Company that those policies can be obtained.

That is what you need to have on hand to START. No qualified Investor is going to spend months with you helping you get your business plan together, or otherwise spend time “educating” you on the industry. They want to deal with qualified Principals that understand their project and their industry.
And one other thing: DO NOT post a request for someone to fund your “time” to create your business plan, or otherwise pay for costs to put your plan together. You will NEVER hear from a qualified investor.”

I wrote: As always, there is another side to this, J. I fully respect and agree with what you say - it is the fund seekers who are petitioning the investors to first invest their time in skimming their elevator pitch before delving further, but even that time is precious. Clearly, there is a huge rift between the demand for funds and their availability, investors are overwhelmed by requests for consideration and the business scene is inundated with contact attempts from self-asserting entrepreneurs. It is hard to winnow the chaff from the wheat (but, as mentioned, this swings BOTH ways!). Ergo, investors too must resonate some understanding and accept that no serious entrepreneur is going to just toss his business plan and corporate secrets out into the open to anyone who asks. An NDA (Non Disclosure Agreement) means little in the digital age. Originality in business is crucial, so every project is akin to a patent and the seas are rife with unscrupulous "sharks" who would readily capitalize by goading gullible entrepreneurs into submitting their hard-polished mind gems for so-called review, but only keep the hopeful on the line to learn from him the intricacies of his strategy and then cut him out of the final deal. People looking for funds are right to be suspicious and careful, however, they must understand their role in the play and know when they are dealing with the real McCoy. In other words - if a guy on Linked In claims to be in charge of $100M fund, but gives just a @gmail address and upon checking his profile you find no photo or company reference, don't waste your time pitching - this is the same as those emails where someone you've never heard of claims you've won the lottery or they need to use your bank account to forward $28M leaving you 10% for the "service". Don't waste your life engaging these vagabonds in a discussion; much less send them any data. On the other hand, if you come to a VC or Angel through your Chamber of Commerce, Rotary Society, springboard or when on a road show, mind your ethics as the presentation/meeting is at least as important as the formalities of your business plan, etc. Be confident, respectful, knowledgeable of your competition, and above all show that YOUR CORE TEAM possess indispensable skills, vital to the success of the project. Investment is a 2-way street: first you rely on the investor for financing, then he must put his trust in you to deliver results. For most projects, imo it is folly to divulge all the secrets at once and if the "investor" keeps milking you for solutions to hypothetical problems for over 6 months - cut your losses and do something more useful with your time.
 
Also remember: a business plan is hardly enough, investors want to see real RESULTS and turnover figures and milestones reached, in the absence of these, your idea must be simply revolutionary to get picked up from the maelstrom of fund seekers. So with this in mind, carefully consider if the time is right and do YOU have the time to keep your project from collapsing while you're kowtowing to your newly found investor demigod?

The “hook” - What more can they want?
After presenting the business plan to a prospective investor, many startups experience a rollercoaster-like peaking and plunging of interest – at first the investor seems excited and on board and once the fund seeker expects the first check to be cut, suddenly the investor stops responding to emails and calls. After chasing his tail, jumping through hoops and being led by the nose for a few months, naturally the entrepreneur feels frustrated or even duped and quickly sails past the point of no return by complaining too loudly about the sudden silence. 
The devil, more often than not, is in the details of the offering, specifically: the exit strategy. Investors are not interested in growing a company for growth’s own sake – typically, by funding a venture, they are priming it for the big liquidity event. Thus, a deep understanding and prioritizing of the optimum exit plan on the behalf of the funds seeker is an essential catalyst to successful capitalization. Generally an IPO or at least a buyout/acquisition by a larger brand are the preferred modus operandi of most investors, however, the vast majority of startups will never achieve such altitude, hence, realistic goals must be outlined. Fortunately, even if the venture stands little chance of being bought up by a Fortune 500 company, alternative exit strategies are available to make the venture a relative success, for example revenue royalty financing also called revenue-based financing which essentially is a loan with a floating index tied to a percentage (a figure typically South of 5) of the revenue rather than an actual equity investment. Ergo, the payments will ebb and flow as the revenue rises and dips. This is a clear-cut model, however, the drawback is that the investor typically can expect a maximum cap of about 400% return on his investment. As an added incentive for the investor to pick up the project, offer shares in the company, that way even if the venture joins the ranks of Fortune 500, in addition to the 300 – 400% ROI, the investor will also be able to liquidate his shares at the peak time which may result in thousands of times more dollars than his initial risk capital put into seeding the company.

Since investors frequently use hopefuls simply for research – i.e. pretend to be interested but simply mine the entrepreneur for information in order as to use what they learn to benefit some other project, an NDA prior to presentation is prudent. After all, a business plan is not that far removed from a patent – if the idea is snatched up by someone else before you can realize it – you’re too late. Unfortunately, investors are often spooked and put off by requests to sign anything BEFORE full presentation & disclosure, i.e. just after reading the exec. summary and even if you do get them to sign, the Agreement would be worthless, as the only thing they would sign is a vague promise not to make an exact replica of your project, no one will sign that they will not steal just the good bits. So, what can entrepreneurs do to avoid offending/irritating honest investors, but on the other hand not leave themselves open to a shark attack? Imo perform a due diligence on the investor you are thinking of contacting BEFORE contacting him. Only contact serious people who’re specialized within your industry and ALWAYS a) show how the core team possess indispensable skills to the success of the project b) keep an ace up your sleeve – don’t give away the full operating secrets until the investor commits. Rather, focus on what concerns the investor most – self-sustainability and exit.

In summary
If you take up the gauntlet of navigating and circumventing the white water rapids of funding negotiations, check yourself before you wreck yourself – don’t go out in a paper canoe. Be prepared to walk the tightrope while juggling several legal, experience, business model, competitor, personal issues and amidst this perilous balancing act be assailed on all fronts AND manage to keep steering the venture, as the road to funding is a long, bumpy ride – unless you get lucky or win the lottery!
When the stage is 90% set (you have all the material and presentation ready), but in prelude to contact, perform a thorough due diligence on the investor – see which projects he has participated in and what fates those projects have met. Then put the finishing touches on your presentation, peppering it with insights and preferences gleaned from your research of the specific investor and take the plunge. In the end, keep your cool - don’t just slavishly accept whatever is proffered, be certain that you can work with this person, i.e. that it is a good fit both ways.

As time goes by, the stakes will become higher and your need for funding that much more acute, persevere and stay the course and you will break through the storm. Best of luck on your voyage!
About the Author: Oleg K. Temple is a consultant advising various <a rel="nofollow" href="http://www.cornerstonesworld.com/directory/country/USA/state/Illinois/category/Business-Finance">start-ups</a> about <a rel="nofollow" href="http://www.cornerstonesworld.com/directory/country/USA/category/Business-Finance/state/California">business plans</a> over 12 years. This article outlines the problems on the way to securing <a rel="nofollow" href="http://www.cornerstonesworld.com/directory/country/USA/state/New%20York/category/Business-Finance">investment</a>
 Article Source: <a href='http://www.articleseen.com/Article_Funding-Fairness-Investors-vs-Founders-Part-2-of-2-Planning-for-an-exit_67282.aspx'> http://www.articleseen.com/Article_Funding Fairness Investors vs Founders Part 2 of 2 Planning for an exit_67282.aspx</a>

Article Source : http://www.articleseen.com/Article_Funding Fairness Investors vs Founders Part 2 of 2 Planning for an exit_67282.aspx

Author Resource :
Oleg K. Temple is a consultant advising various start-ups about business plans over 12 years. This article outlines the problems on the way to securing investment

Keywords : investment, investors, financing, business plan, business strategy, start-ups, founding a company, business investment, secur,

Category : Finance : Finance

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