An investor and entrepreneur meet for the first time. In a few minutes, the entrepreneur explains what they do and a little bit about the company. The investor is interested and asks for more information. They exchange business cards.
Over the phone, the entrepreneur discusses more points and answers a few key questions from the investor. The entrepreneur also asks the investor some questions about their history and background in investing. The investor requests an executive summary and it is sent promptly via email.
The next day, the investor invites the entrepreneur to give a presentation to their review board in two weeks. They also ask for the business plan, which is also promptly sent via registered mail.
The entrepreneur and two other staff members show up for the meeting. During the initial twenty minutes they present the major points of their business plan and why they are there. More importantly they know what the investors need to see and present that information as well. After about 20 minutes of exciting question and answer, the investors have a brief discussion, nod their heads and say they would like to see more.
Over the next two weeks, they have more meetings and decide they need to go into due diligence. After about a month of reviewing the business plan in detail, confirming many elements (including background checks on the entrepreneurs and follow-up on their references) the investors give the entrepreneurs an offer and a term sheet. After some negotiations, and review by their respective legal teams, the terms sheet is signed. That day, the entrepreneurs get their first check from the investors.
In about 90 days the entrepreneurs and investors met and made a deal. Now the entrepreneurs can focus on their business plan and meet regularly with the investors.
How did the entrepreneurs do it? The steps:
- Initial meeting.
- First in-depth discussion.
- Delivery and review of executive summary and then business plan.
- Formal Presentation
- Follow-up Q&A (which can take weeks).
- Due Diligence
- Offer and Terms Discussion
- Signing Agreement and Receiving Investment
It is very hard to get to step 6. Most people never get past steps 1 or 2. If they do, then they are very likely to fail on step 3 and they never get to the presentation. Consider that typically, investors only invest in 1 out of 100 pitches they hear. The failure rate is high for entrepreneurs.
Over the years, I noticed a trend in what investors would say as positives and negatives about entrepreneurs’ businesses. There were specific qualities that got entrepreneurs past steps 1, 2 and 3 so that they could be seriously evaluated in steps 4 and 5.
Over the last few years, working with investors, the SBDC, startups, and others, I developed criteria for companies that seem to get funding (and those that do not). I realized the criteria fell into fourteen categories, which each categories made up of one to several aspects. The current list is made up of 14 categories (aka Points) and a total of 36 elements. If any Point is in trouble (1 of the elements under that Point is bad), then the investor will most likely ask the company to correct and come back to them in the future. If two or more Points are in trouble then the investor will not ask the company to come back with the “corrections”. Multiple elements under one Point that are bad, only count as one bad Point.
The 14 Point List:
- Pitch – 3
- Corporate Structure – 2
- Business/Marketing Plan – 8
- Legal Protection – 1
- Existence of Prototype – 1
- Existing Customers – 4
- Manager’s Experience – 2
- Ability to Execute – 2
- Personal Risk – 2
- Finance/Burn Rate – 1
- Rich or King Syndrome – 2
- Exit Plan – 1
- Valuation – 3
- Plans for Use of Funds – 4
The numbers after each Point are the elements.
Conclusion:
To get the investors attention, there are 14 points the entrepreneur must possess. For investors to have a chance to be successful they must see 14 qualities in the entrepreneurs and their business.
