I was meeting with Tom Williams, CEO of InnoGage, and he mentioned that Microsoft's guidance for it's employees for using social media is..."Don't Be Stupid". That got me thinking about early stage companies seeking investment capital. Companies can do all the things right to be successful in raising capital and it can all go out the window if they do something stupid. OK what if they think what they are doing is right but it is really wrong? When you are seeking investment you need to do like George Costanza said..."Do the Opposite". "If every instinct you have is wrong, the opposite must be correct." Maybe a better way to look at it is to take off your entrepreneur shoes (the ones that make you think the business is a can't miss) and put on the shoes of the investor (the ones that need convinced the business can succeed). What would you want to see in a plan or presentation? Investors are looking for reasons to say no sooner rather than later. The quicker they can find a reason to say no the quicker they are on to the next deal that might be a yes.
Aside from the obvious things (insulting the investor's mother, kicking their dog on the way into the meeting, etc.) here is a list of stupid things not to do when raising capital.
- Asking the investor to sign a Non-Disclosure at the first meeting: The first meeting is a get-to-know meeting. You need to generate interest and get to the next meeting. You don't need to reveal the secret sauce at the first meeting. Once an investor in interested they will gladly sign the NDA, until then, frankly it's annoying...next.
- Your total market is greater then the total population of the planet: Unless you are planning to scale and sell on other planets this could be a problem (I have heard this by the way)...next.
- Not being able to discuss the business proposition: If all you have is a technology and all you can talk about is the technology you still have a lot of work to do. Investors are interested in the "deal". You have to be able to articulate how you fit into the market, how you will succeed and how you will generate significant returns. This doesn't need to be totally complete but you should be able to talk about the business of your idea of how it will work. No saying "This is cool" is not enough...next.
- Not understanding what it means to scale a business: So many entrepreneurs think they can get to critical mass with one single investment then they are going to grow with internally generated capital. Funding is like gasoline, it makes the business go and go fast. If you really want to scale (Read "Go Big or Go Home" by Wil Schroter to learn what scale means) you are going to run out of gas with only one seed stage investment. As an investor I want the car to go fast not stall out...next.
- Every dollar of investor money isn't driving growth: Don't tell the investor you want to buy office chairs, give money to charity, payoff existing debt, etc with their money. When it comes to non-growth activities the investor will tell you how they want their money spent...next.
- Creativity: Creativity itself is a great thing but not in your business plan and for sure not in your financial statements. Good investors know what they want to see in a financial statement and their eyes go straight there. If you have some strange way you have structured your plan and they can not easily find the information they are looking for they may think you are hiding something...next.
- Valuation: You need $250,000 to build a prototype and your valuation is $20 million, get real...next.
What you need to do is be smart. Seek advice from those that have been there and done that. Focus on how you are going to execute. Do your homework. Be clear and concise. If you feel the urge to do something stupid...stick to the opposite.