The Entrepreneur has just finished their presentation. They are feeling good. It came off without a flaw. They think the hard part is over – or is it?
Investor: Ok, nice presentation you didn’t bore me as much as I was expecting when I saw you walking in the door. You seem to have a natural flair for presenting things. That’s well and good, but now let’s get down to business. I have a few questions.
Entrepreneur: Fire away.
Investor: How do I know that your product is as awesome as you suggest? Are there users that I can call up to get their opinion?
Entrepreneur: Well we have an Alpha version. There’s a few bugs but if you use it and can see past the bugs I’m sure you will see how this product can be a success.
Investor: I’m not your target market. I would like to hear what your target market has to say about your product. If you had some reviews or testimonials I would have a much better idea about your product.
Entrepreneur: I understand. Unfortunately we are not at that stage just yet.
Investor: Moving on, are you sure that you looked at your competition hard enough? It seems hard to believe that only two other businesses are currently involved in what you believe is a lucrative niche. It makes me think that either you haven’t done enough research or your niche isn’t as lucrative as you believe.
Entrepreneur: We searched Google for the main keywords of the niche. Those two companies are all that showed up.
Investor: Hmmmm. I have another meeting in 25 minutes so I am going to move quickly on. Let’s take a look at your financial projections, they seem a bit far fetched to me. How did you come up with your sales figures?
Entrepreneur: We looked at the overall market and estimated that it was worth a total of $200 million per year. We estimate that we can get 1% of this market in year 2. We have used this as a base for out sales assumptions.
Investor: Do you know how many businesses I have seen that project a 1% market share by year two or three? Let’s move on.
Investor: Looking at your expenses. It seems to me that you have completely missed the mark on how much you need to spend on marketing. Those sales figures are unobtainable based on your marketing spend. Look, I’ve been in this game a long time and you are trying to get water from a stone with these projections.
Entrepreneur: Thanks for the advice. We thought that our marketing expenses were okay. Our Accountant produced the figures and that’s what he believed would be sufficient to generate the sales in the plan.
Investor: I’ll tell you straight up. I don’t like your founding team. You guy’s don’t have the level of experience that can take your idea and turn it into a business that I would be prepared to invest in. Right now, I’m not going to invest. You need to work on your business more.
Entrepreneur: Wow, err, well thanks for your time
This scenario plays out countless times all over the world. First time entrepreneurs do not realize what they need to do in order to construct a viable investment proposal to Business Angels and Venture Capitalists. If entrepreneurs understood what was required to get investment from the very start, they would be able to structure their business model in such a way that would make it easier for them to get funding to scale.
It’s not complicated. In fact, it’s much simpler than many first time entrepreneurs believe. Get traction, become cash flow positive and make profits. Experienced investors will be able to judge the benefits of their investment to your business and get a more realistic appraisal of the potential returns.
Sadly, many entrepreneurs don’t put themselves in an investor’s shoes. However, if they investigate what makes a good investment for a Business Angel or Venture Capitalist they will be able to fit their business model into this criteria. It’s like looking down the sight instead of just firing wildly from the hip.
In order to avoid the above scenario, entrepreneurs need to focus on creating a sustainable business model that will generate returns for investors. There is no need for window dressing. Remember, investors don’t invest in an idea they invest in a business. So, build a business.
Check out this free Ebook called “Target Series A: From Idea to Investment” that shows first time entrepreneurs how to position their business for investment.