I had the pleasure of sitting on a panel at the National Academy West for the Cleantech Open (http://www2.cleantechopen.org/) this last weekend with Ron Flavin, Larry Kelly and Ian Gardner where we debated the biggest mistakes that entrepreneurs make when raising capital. A great event! I will set forth in this first of a series of 10 posts some of the mistakes that were presented and discussed.
#1 (not in order of importance) Pitching to the Wrong People
Entrepreneurs seeking capital are turned down almost all the time. Statistics on bank loans show 95%+ of the applications get turned down and statistics on angel submissions show that 98%+ of the submissions get turned down.
Entrepreneurs often fail to recognize that all investors are different. Each investor has their own criteria and reasons for how and why they invest. In addition, each investor has their own experiences in investing which will influence their selection of possible investments. Bottom line – each investor is unique.
To look at this from a different perspective, treat each investor like a customer candidate. However, instead of selling them your product or service, you are selling them part of your business.
In the same way that you cannot reasonably expect everyone to be a customer for your products or services, you cannot expect everyone to be an investor in your business.
In the same way that you have some customer candidates for your products or services who are more likely to purchase than others, you have investor candidates who are more likely to invest than others.
In the same way that your customer candidates will consider purchasing the products or services of your competitors, your investor candidates will consider investing in other businesses.
The lean startup approach advocated by Steve Blank (http://steveblank.com/)calls for meeting with 100+ customer candidates to learn if what you have to sell is wanted and by whom. Even where a new product or service is desired, there are those customers who are early adopters and those who are last to purchase. This same approach is true for investors.
If you pitch an alternative energy business to an investor who only invests in food production, you will get rejected.
If you pitch a start up with no revenue to a bank that requires five years of operating history, you will get rejected.
If you pitch for $5 million dollars to an investor with only $100,000, you will get rejected.
If you pitch for money and the investor doesn’t have any at the time you ask, you will get rejected.
If you pitch the sale of stock in your company that requires that you get acquired (build and flip) to reach a cash exit and the investor prefers an exit in the form of a royalty, you will get rejected.
The list is almost endless. There are as many reasons for getting rejected as there are investors. Back to my point: all investors are different.
In order to reduce the number of rejections and to accelerate completion of your capital raise, you need to pitch to those investors who are most likely to invest the type and amount of capital within a type of capital transaction that fits you.
Don’t assume that everyone with money will invest in your business. Ask. Survey. Get recommendations. Study.
Ask for a debrief when you get rejected. Each time you get rejected, you should pivot and get more precise in your search.
You need to engage in investor profiling. Who will benefit most from investing in your business? What would your optimum investor look like? What criteria will they have for making an investment? Who else will use all or part of these criteria? Start with those who are most likely to invest. Know who they are and why they love you or what you are doing. Find those investors who need you to meet their own goals.
It is possible you are pitching to the right investor candidate and that you are getting rejected for other reasons. Those are some of the other common mistakes entrepreneurs make.
Talking to the wrong investors and other common mistakes in raising capital will be addressed at the upcoming workshop on Building Capital that will be presented by the Colorado Capital Congress on July 9th in collaboration with TIE Rockies (http://rockies.tie.org/), the Rocky Mountain chapter of TIE, one of the world’s largest entrepreneur organizations. For more information on this workshop, go to: http://www.coloradocapitalcongress.com/event-1922132