Q. Dear Zenagos, I have talked to some potential investors about getting funding for my business. I have a great business plan, but they don’t really listen to me. How do I convince people to take me seriously?
You need to offer funders a reason to believe in you. When investors give you their money, they want reassurance that you won’t fly off with their money – they want to get it back with a satisfactory payback (“return”). Very few investments provide a guaranteed return (and those that do, like savings accounts, provide a relatively small rate of return). People who invest in small businesses are chasing a much higher rate of return, and to pursue that benefit, they are taking a very high level of risk.
The game is rigged in favor of previous winners
What would you do if you wanted to get a high rate of return, but you wanted to manage your risk? You would try to find a way to pick winners, people who have proven they can land the plane. That is why, in a horse race, most people bet on the favorite. Your chances of winning with a long shot are very low, so you choose a proven winner. Why did Disney buy the Star Wars and Marvel movie franchises? Because they have characters and stories that are proven winners. If you were a Disney executive and your job depended on the decision, would you rather invest $50 million in a movie written and directed by someone who had just appeared out of the blue, or spend that same $50 million soaring through the next Star Wars spinoff? The Star Wars fans will all go see the spinoff, so you are guaranteed to reach a certain height of success right from the start when you go with the branded winner.
Thus, the investment game is rigged in favor of previous winners. Once you have notched a couple of wins (by successfully growing and selling a company or two for a high return), it becomes easier to land investors. Even though “past performance does not guarantee future results,” a past success makes you a whole lot more interesting than a blank slate does. So, unless you’re already a successful entrepreneur, you’re stuck in a paradox: The way to get noticed by investors is to notch a couple of wins, but it’s hard to get any wins without getting investment.
So, how do you convince potential investors that you are a winner? There are several strategies that can work:
Most entrepreneurs work their way up gradually by starting a very small company with their own money (“bootstrapping” or “shoestringing”), then selling that company successfully, and parlaying that small success into a second, bigger company that is funded by investors. If you can start offering a product or service and build a track record of collecting revenue and paying your expenses on time, then many banks and investors will start to take you seriously. Most funders like to see a minimum of two years of profitability, so this path takes a few years, but the time will fly by as you learn on the job.
2. Climb the corporate ladder
Venture capitalists and private equity investors put a lot of stock in the members of the management team when they make their investment decisions. For this reason, venture-funded management teams are often populated with 40- or 50-something executives who have been successful in large corporations in the same industry. Investors refer to these seasoned executives as “grayhairs” or “adults,” and they like to see at least a few members of the team with this kind of experience (particularly in the finance and operations leadership roles). For example, if you are trying to get funding for a new, big-box retail business, you might have a former executive from Home Depot or Target on the team. If you are already a successful executive, then you might try to build your team by hovering around some of your friends in high places. If you have no documented experience yourself, you could still raise your credibility instantly by recruiting such an executive to join your team.
If you want to be convincing to an investor, you need to have a convincing plan and explain that plan using the language of business. As with any field, businesspeople explain ideas to one another using specific jargon. If you don’t know that language, then investors are much less likely to take your droning on very seriously. You could go to business school to learn this language, but that will take at least two years, and probably more than $50,000. Recruiting one or more corporate executives for your team (as described above) is a shortcut to learning the language of business, since the executives will speak that language on your behalf. Alternatively, you could hire a business consultant or coach, who could help you build your plan and teach you the expected lingo. That may be a little faster and less expensive than business school, but it is risky – you could waste a lot of time and money if you choose someone who doesn’t have the right experience. If you choose an expert, make sure that you get a solid referral, so you hire a true expert.
This doesn’t work for everyone, but investors can definitely be swayed by “classic entrepreneurs,” people who talk fast, have a lot of energy, and have a quick answer to every question. How well this works depends on your personality and the investor – a lot of flapping and fluttering may turn off a serious person – but people with no experience have certainly landed big investments. If you find the right investor, you may only need to convince one person.
The bottom line is that if you want other people to give you their money so you can chase your flight of fancy, then you need to think like an investor. If you want things to start looking up, then you need to make a plan that shows a nice return for them, learn to speak their language (or bring in someone else who can), and convince them that you are a winner that they should bet on.
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