Recently a business owner approached our company with a vending machine idea for which he was seeking funding. He believed he could get vending machines into airports where he would sell tagging materials to travelers at a significant price.
He had totally missed the basic concept— investors want to invest in ideas that will make money.
Before approaching us he should have asked several questions:
* How much money is needed?
* How much money is really, really needed?
* When is the money needed?
* How will the money be utilized?
* What will be the outcome if you are granted all the funding you seek?
* How do you know that will be the outcome?
* How much equity are you willing to give up?
* How long will it take to pay back the loan?
Critical Point: Venture capitalists spend eight minutes, or less, looking at a business plan. If these questions are not addressed, it either goes in “the round file” -in other words, it has little to no chance of being funded. Time is rarely taken to advise the individual who proffered the plan that it has been rejected.
After discussing the project with the gentleman, I asked him, “What assets do you have to provide for collateral for the loan?”
He was surprised at this question. He did not want to put up his assets to secure his idea. He gave the same response almost all would-be entrepreneurs give – he thought his idea was so fantastic that everyone would want to fund it.
He was wrong.
If an idea is not analyzed and/or if the entrepreneur is not willing to invest his own money in the project, and if there are criminals in the management team, why would anyone invest money in either of these projects?
We did not help fund his idea. He needed someone without investment knowledge or business experience to fund naïveté.
If an entrepreneur is seeking money for an investment he should pursue the following options in this order:
* Personal assets.
* Family and friends personal assets.
* Crowd funding: are there people around the country who would invest in your company?
* Angel investors: Talented, experienced, accredited individuals.
* Small Business Administration or Incubator loans for start ups?
* Banks or credit unions.
* Private equity partners/venture capital partners.
* IPO if business is significant enough to attract a large number of investors.
The following is a partial list of useful ideas those seeking funding should consider:
1.Ideas have no value. Ideas are as common as water. Everyone has them. The person to put his or her ideas into action is as rare as the most valuable diamond. Only ideas put into action—and that are generating income— have value.
2.As the dot.com bubble retaught investors, a business that does not generate revenue and profit is worthless. Without the possibility of dominating a market, creating excellent revenues and high profits, no one will invest for the long term.
3.There must be a sufficient market of customers for the business to grow exponentially and generate demonstrable profits.
4.Investors seek to invest in a proven management team which can generate profits. Proven management teams know how to generate profits because they have been in the trenches and know the procedures. In other words, they’ve been there before. They’ve done that.
5.Integrity is as important as the management team.
We recently received a business plan from an owner of a moderate volume gold mine that was producing gold. We were interested in the project but after doing background investigation we found that one of the partners had a past filled with fraudulent events. Further, one of the owners was draining cash out of the company to purchase a large farm in southern Utah. It goes without saying we did not fund the mine.
6.It takes twice as long and three times as much money to succeed as is projected in the business plan. In a business startup, consider Murphy as your partner, and as an optimist. Rarely does anything proceed as you think it will.
7.Business plans are crucial because they show that a person has considered the business idea from many different angles. However, business development rarely follows the structure of an initial business plan. Business owners must change and adapt with new information. Hence, the inevitable “pivot” that often occurs as a plan is executed. Do not be afraid to pivot your plan as required.