Five mistakes to avoid when seeking funds for your business

After the “love money” (provided by friends and family) is gone, start ups often turn to angel investors for their next round of financial backing.

However, several small and mid-sized business (SMB) owners unwittingly torpedo their own efforts to convince potential investors their company is a viable venture, says a top executive of a non-profit business support organization.

“Very often business owners sink their own boat by turning off potential investors,” said Catarina von Maydell, director, Investment Network at the Innovation Synergy Centre in Markham (ISCM).

The Markham, Ont-based organization offers seminars, forums and networking opportunities to fledgling IT businesses in the province. From now until September, the group is holding a series of seminars on how to get business funding.

The cavalier attitude to potential investors doesn’t help a new business, according to Stephane Attal, chairman and acting CEO of Ask Kinjo Inc., a Toronto-based company that develops geo-spatial mobile phone applications.

He says the pre-revenue stage – when a business is preparing to go to market with its product or service – is critical to the company’s development.

Attal, who has headed three other start-ups previously, is confident he “knows the ropes”, but says many entrepreneurs have very little idea of what they’re up against.

“Businesses need money to start research and development or to get their product to market. Venture capitalists, on the other hand, will rarely risk their money unless the company has generated some market traction.”

A typical mistake entrepreneurs commit is to forget about the investor’s side of the deal, said von Mydell.

“Some owners think it’s about the technology and fail to impress upon investors how they intend to make money with it.”

A Vaughan, Ont-based investor agrees.

“Some owners go on and on about their product but forget to provide us with details of their business plan,” said Scott McConnell, president of York Angel Investors Inc.

This is a critical mistake as investors, even if they are called angels, are in business to make money, he said.

There are some other things business owners should avoid when presenting to potential investors, say experts in new business funding. They are:

Talking up the product too much – Of course you’ve probably invested a lot of your time and your family’s money on developing your product. Your hope and those of your co-workers are pinned on it.

However, at the negotiating table, learn to set this aside and focus on how the product will appeal to the market and how the company, and investor, will make money out of it.

“Investors want to hear a business plan. We want to know if the business owner has really thought things out about how he’s going to make a profit out of his invention,” says Guy Kawasaki, managing director of Garage Technology Ventures, an early-stage venture capital firm in Palo Alto, Calif.

The thing to remember, Kawasaki said, is that investors want to back a product that will sell.

Refusing to let go – In the Canadian start-up business TV series Dragon’s Den, many entrepreneurs that pitch their businesses to a panel of investors fail – but not because they have an inferior product or bad business plan.

What sinks the deal is often the owner’s refusal to share control of the company.

“Investors putting their money on the line want to have a say in the company. Be prepared to offer them a reasonable share of your company,” explains McConnell of York Angel Investors.

“What would you rather own: 100 per cent of a company that’s making $1 million or 20 per cent of a company making $100 million?”

For tips on how to get funding without selling your soul click here.

Not having a good team – One vital pre-requisite for a successful business is having very capable players in key positions that match their areas of expertise. Investors will be looking for such people in you company.

Investors want to see if the business owner can spot talent, recruit the right people and build alliances.

Showing up unprepared – Missing documents, figures that don’t jive, or rumpled shirts with mismatched ties can be a huge turn off. Investors could read these as signs that you haven’t taken the time to prepare for your meeting, and by extension might not have placed the same level of attention to your business.

Coming to an investment meeting unprepared is a definite no-no. “It just shouts out that you either don’t have the skill to pull this off or you don’t care about the investor and just want his money,” said McConnell.

Think of the investment meeting as a courtship, which you hope will lead to a union. You’re there to impress so put out your best.

For surefire presentation tips click here.

Misrepresenting opportunities – Perhaps the opposite of coming to an investor meeting unprepared is showing up with a bunch of thoroughly “massaged” numbers.

“Sometimes people come to us with highly speculative figures. Don’t bother we can see through it,” said McConnell.

The investor said, it’s fine to be confident but owners must be careful no to overstate revenue expectations.

In an effort to win over investors, some owners present very optimistic revenue figures that are not based on solid numbers. The danger is, if the numbers don’t come through, the company loses its credibility.

“If a potential partner is trying to pull the wool over our eyes this early on, what other stuff could he be capable of later in the game?”

The important thing to remember, McConnell said, is that seeking out an investor essentially means you are looking for a partner and a partnership means sharing both risks and revenues.

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Jim Love, Chief Content Officer, IT World Canada

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