So you’ve got a great idea! Now you want to raise millions of dollars to start your venture. Excitement abounds! Then you should learn the sobering fact that institutional investors, such as venture capitalists, see hundreds (if not thousands) of business plans like yours and only a few companies get funded each year. The odds are stacked against you. You begin to think about all of the reasons not to pursue your dream. Not so fast. The good news is that there is plenty of capital out there. The challenge is finding the right investor and team to improve your chances of getting funded. Following are tips on what not to do as a startup for new entrepreneurs.
Tip 1: Don’t do it alone. Putting the right team into place can save you both time and frustration. Seek out professionals, such as successful entrepreneurs, retired business executives or champions of your industry, who have the knowledge, network and experience to round out your team. These individuals can identify the big markets and product opportunities that investors look for in an early-stage startup. Such individuals can also make introductions to investors, such as wealthy individuals, Angels or venture capitalists, depending on your capital requirements.
Tip 2: Don’t simply send your business plan; successful venture capital firms regularly receive hundreds of business plans like yours each month. An associate, analyst, or junior partner with little knowledge of your technology or market may screen your business plan first based on criteria set by the firm. In order to increase your chances of having your business plan reviewed by a decision-making partner, ask credible individuals, such as other venture capitalists or business professionals (e.g., corporate lawyers, executive recruiters or other entrepreneurs) to make an introduction for you directly. If possible, talk to the investor first to make sure that your company or product is the right fit for their portfolio. If not, use this opportunity to ask for referrals.
Tip 3: Don’t get frustrated when you don’t get a term sheet. Not every investor will be sold on your idea at first. Use the feedback as a learning experience to improve your pitch or business plan. In some cases, investors meet with entrepreneurs to learn about potential competitors to their portfolio companies, or to educate themselves about new market opportunities or technologies. Be selective and meet with investment firms that have partners who are knowledgeable or genuinely interested in your particular industry and market. Do some research first. Talk to your peers, advisors or other entrepreneurs about the investment firm. They may be able to shed some light on its funding status, its investment philosophy and its partners before you commit your time and effort.
Tip 4: Don’t necessarily take the first offer on the table. Congratulations, you beat the odds with a term sheet. Now what? Typically, the period given to review terms is just a few days. It is intentionally made short so that you accept the offer without the opportunity to negotiate or shop around. Now is the time to contact those investors that are still on the fence and let them know that you have a term sheet. If you have several smaller investors, the lead investor will take charge of the deal and may act on behalf of the other investors. Once you have all of your offers (even if you only have one), talk to your corporate counsel or advisors to determine if the terms, especially valuation, are reasonable in the current funding environment before you accept the term sheet.
If you are among the lucky few that are funded by institutional investors, you are on your way to the next phase of your business, along with all the pressure and stress to hit it big. If you are the majority that didn’t get funding, don’t give up. There are other funding sources besides institutional and professional investors, such as Angels. For smaller amounts of capital, bootstrapping, crowd-sourcing and small business grants/loans, such as SBIRs, are other potential funding sources. Although these are typically in the under $100K range, the funds will give you an opportunity to address the concerns and risks raised by venture capitalists. If you need a large infusion of capital down the road, you can always go back to institutional investors that turned you down as potential future round investors.
Charlie Chi, Ph.D. is an electrical and computer science engineer with more than 15 years of management, operations, product development, manufacturing and consulting experience in the medical device and high technology industries. Currently, Dr. Chi is a consultant to medical device companies throughout California. Dr. Chi is former president, CEO and co-founder of OtisMed (now part of Stryker Orthopaedics), a medical device company co-founded by Dr. Chi to address unmet clinical problems in orthopedics. Dr. Chi can be reached at [email protected].