Submitting investment proposals “Over the Transom”
Raising money is all about building credibility with investors. No investor wants to invest in a deal that nobody else is interested in pursuing. Investors are very herd-like and often need the validation of others investing with them before they will “pull the trigger.”
Given the herd mentality of investors, you should never attempt to raise money by purchasing or collating a mailing list of VC firms or angel investor groups and then just mailing a proposal in the hopes someone will contact you to set up a meeting.
This is not to say that there are not many entrepreneurs who, in fact, do mass mailings. The point is that such an approach is likely to be D.O.A. Venture capitalists and serious angel investors are often deluged with unsolicited proposals, which sit in slush piles waiting to be opened. The only real reason they might be opened is that a friend or professional acquaintance has alerted the investor that the proposal deserves a read. In other words, someone has acted as a reference or provided a recommendation, preferably before the proposal has been delivered. Only then do you have a serious chance at receiving that special phone call.
Discussing valuation too early on in the negotiations
The courtship ritual of most couples does not start with a discussion of how much each person will be worth seven years from their first date, and how it will be divided between them if and when they part. And neither should an investment presentation begin with a similar discussion.
The reason an entrepreneur often seeks an investment from VCs and experienced angel investors is to get a reliable indication of the value of their startup, which is what experienced investors do for a living. So there is no real point in preempting the process by insulting the VC or angel investor with an unwarranted starting point for a valuation.
As some would say, you should just “let nature takes it course” and wait for the investor to begin the discussion of valuation and pricing with a term sheet. Any other approach risks an early termination of negotiations.
Failure to listen
You need to “leave your pride at the door” when making an investment presentation and be open to the investors’ suggestions. The fundraising process can be grueling because experienced investors tend to ask numerous questions that likely have been posed to you before; questions that test your business model and technology platform so all parties might realise the best way of structuring an investment.
Most of the time, the questions are offered in the spirit of openness to justify the investment of such a large sum of money. Rather than viewing the questioning process as an exploration of alternatives by an investor who is obviously interested in the startup (otherwise why else would the investor have met with the entrepreneur in the first place?), some people reactively resist suggestions to consider changes to their business model or technology platform. Such a reaction is likely to cause a thoughtful investor to move on. You should instead take the time to consider the investor’s questions and suggestions, and view the process as useful insight into his or her thinking.
- Additional Info: Forbes
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