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Monday, September 7, 2009

The One Skill An Entreprenuer Has To Have

I have had the opportunity to work with many entrepreneurs and startup businesses and there is a consistent theme associated with the ones that have been successful. Startup companies face a myriad of challenges and attract extremely talented, motivated and intelligent people. These individuals have preconceptions about what is really going to make the business successful and they do have great skills that will help a business succeed. However, there is a skill and talent that stands above all that is absolutely essential for the success of the business.

The ability to raise investment capital and to do it over and over again is the magic bullet skill all successful entrepreneurs have. You may argue that the business has to have great potential, that the product needs to be innovative, the market for the product or service large and growing, the business owners need to be hardworking and bright, you have to have a great marketeer, etc. Sure these are great to haves. However, many companies led by accomplished entrepreneurs with great products or services have failed because the company was missing the key ingredient.

So what are the qualities, skills etc. that make for a good fund raiser?

Pitching/Selling: Raising money is all about how you present the business, yourself and the team. Pitching an early stage company is different from pitching an existing product or service because the product or service either does not exist or is in some form of development. For this reason potential investors will be focused on the entrepreneur trying to determine if that individual is capable of creating and operating a business.

In the initial few minutes of the elevator pitch the investors will concentrate on the presenter. Who are you? What is your background? What successes have you had? How are you qualified to run this business and manage the initial investment. The presenter should lead by answering these questions before he or she gets into the details of the business. Establish creditability early in the exchange.

Dealing With Objections and Rejection: Investors are more likely to object or challenge the fund raiser then to agree with their suppositions. This should not be taken as a negative. It is a way for the investors to dig deeper into the business. Respond in a positive way and answer the challenges with facts and figures. If you do not have an answer be honest and indicate you can not answer the question now and will get back to the investor. Never take a challenge personally. Rejection is always a big part of the process. A good fund raiser will always learn from each rejection or challenge and build responses to them in future presentations. Politely, acknowledge the challenge at the time of the challenge and commend the potential investor for pointing out any potential deficiency in the business.

Determination: A fund raiser has to be tenacious because the fund raising effort will require endless hours and repeated calls, pitches, etc. The investment community will be looking to see how the fund raiser handles the long and difficult funding process, requests for additional information, etc. Fund raising is a sprinting marathon requiring the fund raiser to be prepared for long and challenging effort.

Success History: The fund raiser has to have a history of success in some capacity. It could be academic accomplishment, business success, startup experience, etc. The fund raiser also has to emphasis accomplishments in a way that is not perceived as self aggrandizement. The accomplishments should be noted in the interest of explaining their relevance to the business. The success background expose should be interspersed with other information about the business indicating that the information is important but not the sole reason to invest in the company.

Investor Networking: The concept of networking yourself to success is a bit of a cliche in this day and age. Networking for the purpose of fund raising is different then hanging out in social networks and letting people know you are out there. Fund raising networking requires some serious face to face time with potential investment sources. In a perfect world this form of networking should begin well before a entrepreneur decides to raise funds. This method will result in a more fundamental bond between the fund raiser and the funding source. When the time comes for actual money raising the request for funding will be coming from a person that the investor already knows and has some confidence in his or her ability to deliver on expectations.

Multiple Fund Raising Source: The law of averages requires a fund raiser to have a multiplicity of funding sources. Before heading out on the official funding road you should have a portfolio of between 10 and 20 pre-qualified investors ready to pitch to. You may find that that you have to pitch and work with an even larger amount of investors before you successfully land a round.

Research: Dig into the backgrounds and portfolios of the potential investors. What are they investing in? What was their most recent investment? Talk to an entrepreneur that has worked with the investor before? What are the most likely question the investor will ask?

Flexibility: You certainly have to be agile when it comes to raising funds. Do not get hung-up on the amount and structure of a deal. You should have an amount your are looking for and a specific purpose for the funds. However, be prepared to take a greater or lesser amount of capital. During the process you will have to be willing to change your business model, change your schedule at a moments notice and be anywhere the funding source wants you to be.

Personal Investment: It is very unlikely that anyone will invest in your business unless you have invested your own money first. Certainly time invested in the business counts for something but good old hard cash ranks much higher.

Commitment: Raising funds is a full time job. . Do not kid yourself into believing that you can effectively tend to other business needs during this period. Everything else will be secondary during the process until the deal is closed.

You Are Always Fund Raising: One common thread amongst all good fund raisers is that they are always raising funds even when the business does not need the funds. During every business meeting, customer visit, conference, family and friends gathering think about how this might be an opportunity in the fund raising process.

Trustworthiness: This is where salesmanship differs from raising money. You can be a really good sales person even if your character is somewhat in question. This is not the case for a fund raiser. You have to legitimately be above board and have a trustworthy reputation. This means you actually have to believe that you can deliver on what you are promising and you make it perfectly clear to the potential investors what the risks are. Most investors will understand that there is risk to any investment. What they do not want to deal with is risk generated by a questionable business partnership.

Sources Of Capital: Many entrepreneurs waste their time seeking investment in the wrong places. This is a difficult one to sort out if you have never been on the funding road. The right funding sources are dependent on many factors; what is the business, what is the state of the business, what is the state of the economy, geography and how much you need all dictate what sources are best for the operation.

Timing: Like many things in life timing has a big impact on the success of a venture. Raising money to fund a company is no different. The current economic environment is a classic example of a time that is sub-optimal for raising funds. Even the most accomplishment fund raisers have been challenged by the events that have occurred over the past year. Sometimes it is better to hold back and get on the funding road at a different time. A good indicator of the right time is increased deal flow represented by a growth in investor's portfolios, IPO activity, M&A activity and public attention being focused on a specific economic sector that is associated with your business. Windows of opportunity open and close quickly so continuous research is required to hit it just right.

In conclusion, closing a round of funding is a skill and talent. When you are fortunate to have an investor interested in your business it is important to close as soon as possible even of you have to modify the deal terms.

Good Luck!!


Innovation@Work said...

Good article. Can you throw more light on different kind of fund providers like venture capitalist, finanacial institutions, individual investors, etc and the ways of dealing with each.

Kevin Flood said...

There is a big difference between a VC pitch and a pitch to a small investor or a family member. On the the small investor and family member it is important to understand their financial situation and gear your pitch to an amount that makes sense for them. You should also get to know them personally and offer to have them participate in the company operation. Even if they are not interesed they will appreciate the acknowledgment. Getting to know them will help you understand what really motivates them to invest.
The VC is different. You should try not to approach a VC independently. Get a reference or be referred by someone that knows the VC. Take a look at their portfolio before have a meeting. You are interested in the portfolio of the individual partner you are meeting with not the company portfolio. Pitch to the partners interests.