Investment for business: 5 mistakes to avoid

Investment for business is crucial. Whether you’re seeking an investment from your Dad, the Dragons, or anything in between; there are a number of things you need to look out for. The world is full of would-be entrepreneurs who’ve stumbled in their search for investment. Many requests are denied. When investment does come, it can often do so with unacceptable strings attached.

Part of the problem is the nature of the startup. Freshly minted entrepreneurs are typically major risks for lenders because they lack business experience, collateral to secure the loan or both. Noone wants to lose their investment. You can’t blame them for not wanting to take a risk on a venture without a reasonable probability of return. On the other hand, many financing efforts fail because of avoidable mistakes that are made in pitching potential lenders, structuring the agreement or managing the money once the deal is done.

Both in obtaining startup funds and keeping the money flowing, be sure to avoid these blunders:

1. Poor Business Plans
There’s nothing worse than going into a meeting unprepared. If you haven’t put the time and energy into writing a full-blown business plan, the people with the cash won’t put the time into evaluating your proposal. VCgate, a venture capital directory, outlines its importance.

In your business plan, you should be able to see your own project through the investor’s eye. Your plan must be able to answer all the concerns of a potential contributor.

The Dublin City Enterprise Board site has a good business plan section, offering a practical guide and tips. A good business plan will also soothe any nerves.

2. Too Much Emphasis On The Idea
It’s simply not enough to persuade potential backers that you’ve come up with the next Angry Birds. You also need a great team that can generate revenue to repay a loan or provide an exit strategy for a VC. Essentially, your great idea needs great people to implement it. AccessLegal’s blog offers a good example of the founders of Stripe, and how big name investors invested in the people behind the idea

 [T]hey are some of the most well respected technological minds in Silicon Valley. Not only did they all put money into Stripe without much hesitation, some invested at levels that are untypical for their portfolio. They all believe [the Stripe founders] are not only smart, but can execute on a difficult problem.

It’s also a given to show investors where and how you plan on making their money back for them, this is after all, what they’re all about.

3. Too Many Investors
One of the hazards of securing financing from multiple sources is managing too many relationships and expectations. It takes time away from your core business. These not-so-silent partners may have conflicting interests or demands and the consequences can be devastating. Startup Lawyer’s blog points out that

A low number of investors will reduce your startup company’s transaction costs and headaches associated with raising funds.

This is particularly true when raising finance from friends and family, which we’ll delve further into in a future post.

4. Insufficient Legal Agreements
As we outlined before, life is better litigation-free.  Every lender or investor eventually will need his money back, and a legal document covering everything from the terms to the timing can avoid that hassle. Let’s take convertible notes as an example. Convertible notes are investments that start off as debt and morph to an equity share if the startup after a “trigger event”. While not common in Irish investment at present, Paul Graham predicts they are the way forward

Different terms for different investors is clearly the way of the future.

5. Poor cash flow management
New business owners can burn through their seed money too quickly. Some causal factors, such as late product deliveries, may be beyond control. But other things, such as controlling expenses, can be easily managed. A bit of a cheeky plug, but we’re pretty good for that kind of stuff. Financial sponsors don’t take kindly to that sort of mismanagement. And if they turn off the tap, all of your hard work may go down the drain. To help keep expenses in check, check out our previous blog post on the topic.

There are other pitfalls to avoid, but the bottom line is this: Play by the lenders’ rules to get them to open their checkbook, but protect yourself at the same time.