There comes a time in almost every entrepreneur’s life when s/he needs money. Absent a rich, crazy uncle or a winning lottery ticket, this means convincing a stranger to put up cash.
Banks might seem like the obvious first option, and the current low interest rates are appealing. However, in the wake of the financial meltdown in 2008, the banking industry is highly regulated, risk averse, and, in the case of many institutions, still rebuilding their resources.
This column has looked at several types of venture capital and investment firms in the past, and for many startup enterprises, these are frequently the best route to take. Now let’s look at the road map that will help you navigate that route.
To do this, I recently spoke with Barrett Cooper, the chief operating officer of ERG Enterprises. ERG is a fully diversified investment company, working in everything from real estate to entertainment, oil and gas to health care. Cooper emphasized that his firm, like most investors, considers itself a partner in the ventures it backs.
“A partner has more skin in the game than someone who just puts up the money,” he pointed out; as a consequence, along with the funds comes valuable experience and expertise that can be exceptionally useful to a new enterprise.
“Most of our day is getting approached by people who have a business idea,” he said, adding that the initial pitch is truly make-or-break for most entrepreneurs. In this context, “a great idea, poorly proposed, gets you nothing, but a good idea, properly proposed, can get you everything.”
Fundamentally, before you ask someone to invest in you, you should invest time in researching your potential funding sources. What kinds of businesses have they invested in previously? What dollar ranges do they typically operate in? How do they typically structure their deals?
According to Cooper, this last question is the key to a successful pitch. Most investment firms value more equity over a preferred return status. “Initially, most revenues are going to be reinvested in business anyway,” he pointed out, “so preferred return status has little meaning. We’re looking for the bigger, long-term payday.
“Remember that your investor has needs and priorities too,” he adds. “Our money wasn’t just found, it was hard-earned. Don’t treat us like a cash cow. Once you take someone’s money for your business, treat them like your top priority.”
Cooper stressed that the only reason investors are going to fund a project is because they think they can make money from it. “They’re not in it for you to make money, but too many proposals are structured in such a way that the entrepreneur is going to realize a high return and the investor is not.” Those proposals, he stated unequivocally, do not succeed.
Cooper also recommended that proposals be very, very focused: detailed but concise, with no flowing prose or worse, layers of bovine excrement. Describe what your product or service does, why there is a market for it, and how you will get it to the market. Don’t dive down into technical details, personal histories and the like.
Finally, show where the big payoff comes. Generally, this means selling your company, ideally in about five years. As Cooper observed, “you can’t project what the future will hold. Something that is in demand now may be obsolete in 20 years.”
For many entrepreneurs, this is a very difficult reality to face. Their idea is their baby, and they can’t stand to see it leave the nest.
“Separate yourself from your idea,” Cooper urged. “Recognize that your investor is your partner, and the objective is to make money. Structure your proposal from that perspective, and you have a good chance of success.”
Keith Twitchell spent 16 years running his own business before becoming president of the Committee for a Better New Orleans. He has observed, supported and participated in entrepreneurial ventures at the street, neighborhood, nonprofit, micro- and macro-business levels.
