Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Stretching the Truth May Ruin Your Chances of Securing Funding from Potential Investors

Many times when entrepreneurs meet potential investors they do so for the first time.  With a blind introduction, a cold call, or recommendation from a colleague, entrepreneurs need to quickly gain credibility with their potential investors.  This is not an easy task, and is especially true when presenting to potential professional investors (e.g., venture capitalists) that “know their space” and are looking for the next exceptional business deal, with a credible and fundable team. In this situation, the worst thing that an entrepreneur can do to ruin the potential of securing funding from these same investors is to “stretch the truth” regarding any aspect of their business, the business opportunity, or their current state of development.  This approach to trying to “impress” your potential investors will only come back to haunt you, and in a worst case scenario it will ruin your reputation as well as your chances of receiving funding from any or all investors. Remember, the financial community is small and information regarding “bad” deals or non-credible entrepreneurs will get around fast, ruining any chances or receiving funding in the future.   

Increase Your Credibility by “Knowing” Your Business

The best way to prepare for investor meetings is to know your business.  As such, you need to do months of business planning and preparation just to get to the point where you are truly prepared for meeting potential investors for the first time.  Winging it will not go too far, as you will lose any potential interest from your investors if they know that you are not fully prepared, and trying to skate through the funding process. Remember, professional investors usually specialize in a given “space” (e.g., biotechnology, IT, wireless), and as such they are very well read in this area of focus and know all of the players and the current and future trends in the industry.  You need to be just as “knowledgeable” as they are, as you are trying to convince these same potential investors that you and your start-up company offer a unique technology, product or service offering that can create a long term sustainable competitive advantage in the market. This is no small task, but by “knowing” your business you will have required knowledge to create a credible story line for your technology, product or service offering.  Therefore, before you call one investor to set up a meeting, make sure you have taken the time to “know” your business, as this will substantially increase your credibility with your potential investors.

Don’t Stretch the Truth, Just Say “I Don’t Know”

When presenting in front of potential investors for the first time, many entrepreneurs want to always appear knowledgeable on all subject matter and all questions that are posed to them.  If you are well prepared, you will most likely be able answer 99% of the questions or subject matter posed to you during your first meeting with potential investors. That being said, there will always be one or more questions that you either don’t know the answer to, or did not prepare for.  This can be compared to preparing for a test, as you know you are ready, but it is that one thing you did not spend much time on that will catch up with you at test time.  To get through this many entrepreneurs try to “stretch the truth” or their “knowledge base” in a real time fashion in front of their investors. This can be a real untenable situation. In the worst case scenario, your investors know you are “stretching the truth” and you will instantly lose all credibility.  Alternatively, this approach will lead to more follow-on questions regarding the same subject matter and again you will be out on limb, just hoping to be able to get through the line of questioning without getting caught.  These scenarios can be easily avoided by just telling the potential investors, “I don’t know and I will get back to you.”  This is the best approach, as in this scenario you do not put your credibility in jeopardy and you still have to ability to impress your investors with your follow-up answer.  Remember, sometimes investors are just asking you questions to see how you will react.  So again, do not put yourself and your reputation out on a limb by “stretching the truth” in an effort to appear knowledgeable, as this approach will not work with potential investors.

Investor Due Diligence will Validate Both You and Your Start-up Company

Finally, as an entrepreneur, your “credibility” needs to stand up through the investor due diligence process. Therefore, any half-truths, or “stretching of the truth” during your investor meetings will be invalidated during the due diligence process. For professional investors, this due diligence process can take three to six months.  Therefore, during this process, you need to be careful to represent you and your start-up company in a truthful manner at all times. Accordingly, this due diligence process will require you to address all aspects of your start-up company, including:

  • The development status of your technology, product or service offering,
  • The members of your executive staff and their participation in your company,
  • Any and all invested capital, and company debt,
  • Strategic customer relationships,
  • Market size and growth potential,
  • Customer development status,
  • Corporate capitalization, and
  • Other

By truthfully and fairly representing your start-up company’s investment opportunity you will be fully validated through the potential investors’ due diligence process. This will also provide them with the assurance that they are dealing with a first class, reputable team, making your start-up company a much more favored investment opportunity for potential investors.                                                                                                            

Most entrepreneurs and potential investors do not know each other when the meet for the first time.  As such, the onus is on the entrepreneur to quickly gain credibility with these same potential investors. This is accomplished by knowing your business, never “stretching the truth” and presenting an investment opportunity that will stand up to thorough due diligence by your potential investors.  By doing so, you will increase your immediate credibility with you investors and the potential of receiving funding from these same investors.  So, take the high road and present you and your start-up company in a straight-forward, honest manner, it will serve you well with your potential investors.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

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April 26, 2010 - Posted by | Venture Capital | , , , , , ,

1 Comment »

  1. Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!

    Cheers
    Christian, iwspo.net

    Comment by dikerhive | May 28, 2010 | Reply


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