Today, Enable begins a series of columns dealing with one of the hardest hurdles entrepreneurs face – raising the proper amount of capital, at a valuation that is fair for both sides. According to attorney Yitzhak Rosenbaum, this hurdle is a battle of nerves as well as a complex financial transaction. Entrepreneurs must realize from the start that the potential investors - "angels", family, friends, individual investors, seed investment funds, corporate strategic partners, or venture funds - already know how much you really need their money. They also know that you may be willing to give up a lot of your dream to get it.
The trick is to turn the tables on them and make them feel that they have to run after you, to get in early before the valuation of your company zooms. You must make them know that, later on, they will have to pay dearly for something they could have had much cheaper if they had only invested with you when you first came to them.
This is much easier said than done, and the following, contributed by Yitzhak Rosenbaum, manager of the hi-tech department at Zysman, Aharoni, Gayer, will help you turn the tables on potential investors.
Play It Cool
A television commercial that was popular a few years ago, showed an actor waiting in his apartment for a phone call that is supposed to be an offer for a role in a movie. As the camera zooms in on him. the actor looks up and says, "The most important thing is never let them know you are waiting for them to call, and make sure they don’t see the sweat above your lips when you come in to negotiate the contract."
Suddenly, the telephone rings, he answers and starts talking with someone, saying, "Sure, I’m willing to talk with you about doing the role, no, I can’t today, maybe tomorrow."
Landing a role in a movie and raising capital for a start-up have certain similarities. Both require that while you are working full time on one project, you are thinking about the next. Both require that the other side knows you exist. Both require that you have something unique to offer. Both industries burn a lot of money, and both industries are overcrowded.
Let us assume your partners and you have been working on your project at night during the working week and in your free time. You have reached the point where you want to work full time on it and you want to find the money to do so. You have already decided you are not going to mortgage your house or your future on this project, but you want to find other people’s money to make your dream come true.
However, we are rushing the story. You are not there yet. Your success is only in your head. You do not have the money and you spent all your time being a technical guy or company officer, not a deal maker where the investor is investing in you as much as the technology.
The Business Plan Is Your Ticket
For the money people to know you exist and have something worthwhile, they have to be convinced - in writing. To achieve this, you need a written executive summary, a chapter out of a business plan. This executive summary must be operationally rather than strategically oriented. It should demonstrate the market solution you have invented, and how much money you will burn a month until the product gets to market.
This is not easy to do. You need a professional business plan writer who knows what is required, who has done it before - successfully. Ask the business plan writer to give you some recommendations and some plans that have been successful in raising capital in the past. Money spent here is worthwhile. The costs can range from $5,000 to $25,000. If you do not have the money, there are small business organizations, technology incubators and other sources where you can get it. This kind money can be borrowed from family and friends.
Use a Mentor to Get to Investors
At the same time as you are writing the plan, make up a list of relatives, friends, and ex-employers who you think would be willing to give you the initial capital to work full time on the project. Show them an executive summary even before the business plan is finished, but make sure it has been "polished" professionally. Remember that these types of investors do not usually have the patience to read full business plans. They want to help you because they know you, they believe in you from other experiences they had with you, and this is a chance for them to make a nice return if you succeed. Once these kinds of investors put in their first money, they are willing to follow through with other funds if needed.
What happens if you have exhausted the "Angel" list and you still do not have enough, or you have begun with Angel money and spent it all. The time has come to go for the "big boys", the professional investors, the companies who might need your technology, the seed funds, and the venture funds. Where do you find them? Finding them is easy. The lists are on the Internet. Now what do you do? How do you get them to read your business plan, to see a demonstration, to talk about investing in your project?
Find yourself a mentor -- a person, who has done it before, knows your industry, appreciates your technological development, and who knows which investors will understand your project and you best. Finding this person is not easy. It will take a few meetings. The person is out there, do not worry. You met him/her through work, through professional meetings, or read about them in the paper. You will find the person. You need to find that person. In today’s market, the companies, the seed funds, venture money managers are all swamped with business plans.
What makes your business plan stand out from the others? Nothing. Your plan is the same white paper, with a little color on top. Only the phone call from your mentor: your lawyer, your accountant, your business plan writer who wrote winning plans in the past, will ensure your business plan gets read by the decision makers.
Next week, Enable will deal with the initial meeting and negotiations with potential investors. Meanwhile, remember, don't let them see you sweat.
Published by Israel's Business Arena on November 23, 1999