|When you talk to an investor about your business and your offering, he or she is usually listening with an ear of how to eliminate you from consideration. Unfair yes, but true. |
After all, the investor is risking his or her children's inheritance on your business, and they are very sensitive to any percieved "danger" signs.
Here are the 10 most popular "danger" signs. Say anyone of these things and you will very likely eliminate yourself from any possibility of an investment.
1. "I have no competition". or anything indicating that you are too casual about the competition. After all, the only way there'd be no competition is if nobody wanted your product or service. The competition may not address the needs of your customer as well, or as economically, and that's what you should address.
2. "We will capture a high percent of the market". It is not realistic to expect your start up business to capture more than a few percent of the market (and even achieving that goal is a challenge).
3. "We can achieve our exit strategy with your investment alone." All start up companies need more than one round of financing. In fact that should be part of your business plan. You should only be asking for enough capital to achieve the next milestone that will increase your valuation. Otherwise you risk giving up to much of your company.
4. A Business or Growth Plan that is Unrealistic or not well-thought out. You're going to have a difficult time convincing an investor of the viability and worthiness of investing in you if you use unproven revenue models, distribution schemes, or marketing plans.
5. Not Describing your Product or Service Concisely and Clearly. If the investor can't understand what you are doing, he or she is not going to invest. And even if they have to struggle to understand your concepts, they will be concerned about the clarity of your thinking.
6. Ridiculously high valuations. For example, if you are starting a company with just an idea and some market research, to ask for $100,000 for a 5% share of your company, you are valuing the company a $2 Million. To an investor this indicates you are unrealistic and you may be a difficult person to deal with. You will not get a chance to negotiate this down, because your number is out of the ball park.
7. "I am going to use part of the capital to pay off past business or personal debt." The investor wants their funds going toward growing the company, not bailing you out of past mistakes.
8. "I'm only willing to give up 5% of my company" At an early stage to be unwilling to give up reasonable amount of ownership for a large investment that is essential to achieving your milestones also pegs you as naive, or unrealistic, and gives the investor the impression you may be difficult to deal with. Actually, if you think about it, this is just another way of saying that you need to have realistic valuations to interest investors.
9. Complex Ownership or Stock Structure. When you are starting out, do not make promises to early investors for small investments that is going to complicate your ability to raise large investments. For example, notes convertible to large % of ownership, critical patents owned all in part by 3rd parties, etc.
10. Misrepresentation. If an investor even gets a hint that you are not being completely honest and open about all aspects of your business, it's Game Over! You need to completely disclose all your skeletions including bankruptcy, previous business failures, legal disputes, etc. Failure to do so, can constitute fraud and get you in financial and legal trouble if you go ahead with the investment. When in doubt you should consult a securities attorney.