Raising Capital is Tough When There's Rust in the Trunk

Posted by Warren Bergen on Friday, November 25, 2011 Under: Business

Normally, when I'm asked to give my How to Raise Money presentation, I wear a tie and direct attention to my powerpoint presentation. I have the advantage of at least 60 minutes and my listeners are usually rewarded with snacks and booze at the end. Assuming you have less than 60 minutes and you're already drinking, I'll keep my posts short.

Capital for early stage companies is in short supply. Yes activity is up recently, but demand far outpaces supply.

Why? Because returns have not been good. Upper-quartile performing funds are getting restocked with cash, but others struggle to raise the capital they need to do the investing they want to do. So that means it's a lot more competitive to find capital and a lot of entrepreneurs are approaching investors like nothing has changed. Part of the issue is that many are putting themselves in front of investors before they're ready. The trick is to not to do what most others are doing and to be better prepared than everybody else, which leads us to answer the question of "How do we raise money in this difficult environment?" Part of the answer is that we need to change the view we hold of an investor to match the view we currently hold for our customers. Countless hours are poured into product research, design, development, testing, focus groups, redesign, redevelopment and retesting. They interview prospective customers to learn about them. They learn what they like, what they hate and how they buy. What is really important and what is just window dressing. They go to these great length so that there is no way that they can turn us down when our product is ready for sale. This product is so great, they will be unable to stop themselves from giving us their money. The investment opportunity in your company is your product that you must sell. Make sure it is just as compelling and just as well suited to the needs of this prospective investor who is really another customer.

Imagine you are selling your car privately. You seek someone with the money who will acquire your asset. You dress your asset as best you can to achieve the sale. You wash it, vacuum it out. Hang a pine-scented piece of cardboard from the rear view mirror. The car looks good, drives well and has a lot of the options the buyer wants. But, there is a problem. It turns out your car has rust. You can’t see it just by standing nearby. The potential buyer peeled back the carpet in the trunk and there it is. The potential buyer says, fix the rust and I’ll buy the car. Your business is not different from this used car. It turns out your business needs something that the investor feels is either missing or wrong. The investor says, fix the trunk and I’ll buy a piece of your company. Most times, the entrepreneur says, buy my car and I’ll fix the rust. Who would buy that car? Nobody, unless it was nearly free. And yet, that is what people are trying to sell everyday.

The entrepreneur says, give me the money and I’ll get a team, a patent, a customer, a product, a reseller, an employee… Listen, you have something to sell. You are selling an investment. The investors are your target market. Devise a business plan to approach the investment community. Not every being on the planet is a target prospect for your product. Likewise, not every investor is a target for your company.

There are thousands of young companies in North America seeking investment capital. 90% of the business plans look exactly like this:

1. We have a unique product
2. We have an enourmous market
3. We have no competitors or our current competitors are slow and lazy
4. In 3 years, we will be rich, fat and happy

Don't be like everyone else. Fix the trunk.

In : Business

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