The mating dance that entrepreneurs do with prospective investors--venture-capital firms, angels or even just friends and family members--has obvious parallels to the dating scene.
On the one hand, you don't want to seem so eager for a term sheet that the investor thinks you're desperate and tries to low-ball you. On the other, you don't want to appear so aloof and arrogant that the investor passes on your deal because he doesn't think you need his money.
With the stock market rallying and banks beginning to lend again, the
market for early-stage capital is once again showing signs of life.
While last year I was urging my clients to keep knocking on doors until
they got a meeting, this year I'm busy advising them on the finer points
of equity vs. convertible debt. Though it's too soon to know if our
clients will get funded or at what valuation, they're starting to line
up meetings with investors--and, in the case of one client, three
meetings this week. So, while the experts expect the market for angel
financing to remain flat this year, at least the fish seem to be biting.
Here
are some things to keep in mind when you walk into the shark tank:
1.
Do your homework. It's not enough to go in with a well-researched
business plan, slide deck or financial model. You need
to study up on each investor you pitch and find out what kind of deals
he's looking for. For example, does the investor prefer B2C or B2B
business models? What types of deals has his firm funded in the past? Is
the investor looking for immediate cash flow or is he patient enough to
watch your company grow over time?
2. Know
your bottom line. It's hard to negotiate a good deal if you don't
know what you want to get out of it. While it may be tempting to jump at
the first term sheet an investor sends over, you need to make sure that
the terms are reasonable (no unattainable milestones, no overly
dilutive liquidation preferences, etc.) before you sign on the dotted
line. Because pre-revenue companies are difficult to value, you may be
better off doing a debt deal (that is, borrowing money from the investor
at an interest rate of, say, 8 percent to 10 percent) if you think your company can
ramp up quickly rather than sell a big chunk of equity at a low price and
regret it later.
3. Play the field. In order
to get the best deal--debt or equity--you need to talk to more than
one investor. While you may find someone who loves your deal so much
that he's willing to write the whole check, it's more likely that you'll
have to piece together your funding from multiple sources. And, unlike
the dating scene, you can dance with several VCs at the same time
without risking your company's reputation--and possibly get a higher
valuation to boot.
Read more stories about: Financing, Business plans, Entrepreneurs, Investing, Small business consulting
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