The run up to making the presentation for your first capital injection is a nerve wracking process no matter how many times you go through it. There are countless factors to consider and a number of processes that need to be well under way.
Some of the most important things you can consider in preparing for your pitch are also frequently overlooked or underrated. If you work through these three concerns before you get too far down the road to securing investment, you will find yourself much more pleased by the outcome.
I. Develop a board that will invest, not simply advise.
A board of advisors can be a crucial group of contributors to your business. Or they can simply be impressive names that go into your business plan. The commitment of the individuals that you select will radically impact how much support you receive through the process of developing your business.
A board member can wear numerous hats. They might be a strong source of minor capital injections either before or after class A investors come on board. They might be a sounding board for the next steps you plan to take or new initiatives you take on. They can help you understand the trends your industry is currently operating under. And of course, they can make relevant introductions and lend credibility to your decisions.
Deciding what you will expect from your board on the forefront will help you decide whether a particular person is the best option. In my experience, a board that primarily consisted of highly committed individuals who were potentially less well known was far more valuable than a board filled with glamorous names that were primarily just waving the banner.
II. Be creative with your deal structures.
Most entrepreneurs assume that there is a one size fits all standard to how venture financing works. And it involves giving away an enormous amount of equity for less capital than they were looking for. But the truth is that investors are highly flexible for how a deal is put together.
Don’t make the mistake of assuming that investors are only concerned with maximizing their profits. There are enormous risks involved in investing and mitigating risk is oftentimes an even larger concern than how startlingly successful your business is going to be.
With this in mind, there are several ways that deals can be structured to incentivize the entrepreneur’s success, while making the deal less risky for investors. These deals might include various structures that give the entrepreneur a means of purchasing back portions of the equity early, contingent upon the performance of the business.
Do your research on what specific deal structures have been used before by startups in your industry.
III. Be humble about what you have created.
Now that it’s clear that there is more than one way to go about creating a financing deal, it should be said that you are going to undoubtedly give up more equity than you expected to. This might seem like a slight contradiction to what was just said, but it is important to prepare yourself for the fact that the process of securing funding is not going to be painless.
Every entrepreneur that walks through an investor’s door is expecting exponential growth for their venture. If there wasn’t that potential, they wouldn’t be pursuing the idea. However, the businesses that actually go on to experience truly exponential growth come around once in a decade. The rational expectation is that you will neither do as well as you hope nor go completely bankrupt.
Accepting this, you should be willing to settle for a valuation that is below your best case scenario. If you are uncomfortable with what you are having to give up, refer back to the second point and be prepared with potentially more satisfying alternatives to what the investor might come up with.
Creating a wildly successful venture involves being sure that the right individuals for the process are included in more than just your leadership team. And your knowledge of how that venture could be financed will greatly affect how much personal wealth you gain from the business’s success. Realistic expectations on the forefront will make the experience of looking for capital infinitely less painful.
As a final note, if you have truly found the right people for your board of advisors, they won’t stop at simply correcting your wildly optimistic expectations. They will actively enable you to come closer to that best case scenario dream.
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