Top 7 Small Business Investor Turn-offs

Strategies for Avoiding the Most Common Reasons Investors Decline Startup and Small Business Investments

Q.  I am currently preparing my business planfor an online service.  It's a great idea and I need angel investors.  I am a 25 years old and don't know what I don't know. Can you help?

A.   In any region of the country, the competition for funding from wealthy patrons called "angel investors" and venture capital funds is intensive.  Not only are entrepreneurs developing impressive business opportunities but they are also boosting their funding potential by packaging their deals in ways that reduce perceived investor risks. 

Whenever entrepreneurs can strengthen a company's strategic position, fundraising becomes easier. As such, they are taking extra time to demonstrate the workability of a new technology, identify first customers, or line up high traffic Web sites as partners for new Internet technologies.  First-time entrepreneurs are also stacking their startup management teams with individuals who have succeeded in other entrepreneurial settings.

Another factor that influences investor decisions is their own investment track record.  You can imagine that the big money losing deals are always a sore point in their memories.  Just last week, I spoke with a particularly agitated angel investor who swore "never again."  I'm sure this investor will be forever wary of any new deal that sort of looks like, sounds like or acts like another goose egg investment.

Here are some areas that investors say are on their lists of never again investments.

*   Product feature emphasis.  First-time angel investors all eventually learn the painful lesson that cool products by themselves don't necessarily lead to investment success.  Product features can be copied by competitors or become obsolete in fast changing markets.   Lasting investment gains are made in companies with smart branding, ongoing customer relationship building, profitable sales, reliable distribution -- not just innovative features.   

*   Husband and wife teams.  Investors need to count on board members and top managers to put the needs of organization before personal loyalties.  It's hard enough when stress-filled startup or early stage companies have to replace founding board members or executives or cut back salaries when money is tight.  But when spouses are tied up in troubled companies, investors say the troubles and resentments magnify.  Equally, no one wins when young, vulnerable companies are tied up in troubled marriages.

*   Off-site CEO.  Startup organizations require a high level of constant collaboration.  While certain functions can be outsourced anywhere on the globe, there is no replacement for onsite leadership.

*   Bad recordkeeping.  Angel investors are more likely to be exposed to entrepreneurs who don't yet understand the importance of thorough recordkeeping than venture capital funds.  There is a long list of troubles that can come out of the woodwork of poorly administered companies including unrecorded shareholders, liabilities or litigation; questionable intellectual property ownership; unpaid payroll taxes; and more. 

*   Lack of management financial expertise.  Should an accomplished technologist run a company?  Not if the technologist has no understanding of basic accounting, financial statement elements, pricing decisions and no desire to learn.

*   No competition.  It's wishful thinking to believe that a new business will face no competition or resistance in the marketplace.   Smart investors don't believe the hyperbole; soon-to-be-sorry investors do.

*   Investing in common stock.  When businesses don't grow according to plan, it's better for investors to own preferred stock than common stock. 

"Work around" is an expression software code writers say when they are confronted by a problem or recurring bug.  Now that you know what can scare off investors, make sure you don't make it easy for investors to give you the fast no.  Be flexible and creative.  You can do it.

Write to Susan Schreter at susan@takecommand.org for great funding tips and resources for entrepreneurs during their first 24 months in business.

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