Your deal may not get funded because investors saw or felt something that really wasn’t there. The hard truth is that venture capitalists listen to so many pitches that only the real cream rises to the top. Here are some of the key mistakes that entrepreneurs make when presenting to venture capitalists.
1. No niche market focus:
To an entrepreneur, a product, service or technology that’s applicable to everyone is Nirvana. Imagine the glee you’d have if you owned, say, the rights to sell oxygen. But to an investor, this sounds like trouble. The fact is, there may be many markets for a product or service, but even well capitalized giants have trouble selling in multiple markets. Thus, for start-ups or companies expanding into new markets, the critical questions on the investor’s mind are: Which market will you pursue with my money? How will you do it? What does it mean if you succeed? Investors fear that, without a specific niche market focus, the company will be focusing on so many different things that it won’t be able to carry out the most fundamental purpose of the business, which is to create value and wealth for its shareholders.
2. No clearly defined exit strategy:
How do the investors get their money back and earn a return commensurate with the risk? There are really only two exit strategies. The company is acquired, or it goes public. If an entrepreneur refuses to commit to one of these options, the investors usually walk away.
3. No willingness to surrender control:
Having a control freak at the top of the organization is a problem. It’s expected that entrepreneurial genius brings with it some unique character traits, but this one can lead to disaster. If the person running the company cannot or will not surrender control, there is little likelihood they’ll be able to successfully orchestrate an exit strategy for the investor. Why? "Because ultimately an exit strategy in the form of selling the company or going public is about a change of control.
4. No reality based business valuation:
This refers to the overall worth or dollar value an entrepreneur places on the business. Valuation is vital because it determines ownership positions for the entrepreneur and the investors. That is, if a business is valued at $10 million and the entrepreneur wants to raise $4 million in equity financing, it’s likely going to cost 40 percent of the company.
All companies seeking equity financing are valued in comparison to similar publicly traded companies. When an entrepreneur sticks to a valuation that is totally out of sync with the valuation yardsticks of their peer companies, that deal becomes unfundable.
Here’s an example. Suppose publicly traded restaurants, on average, are valued at 17 times their earnings. Suppose further that you have a restaurant chain that you’ve valued at $5 million. If your company earns $100,000, that’s a multiple of 50 times earnings–way off the mark. If you stick with that figure, you’ll get nothing from investors.
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