So what’s the problem with investing in start-ups and how can entrepreneurs ensure their business is investor ready?
1. Inexperienced management team
Often start-ups can’t afford a good management team. The smart investor realises however that clever entrepreneurs will have three or four mentors who make up the company’s ‘Advisory Board’. An Advisory Board offers the “grey hair effect” bringing experience and intelligence to a team that may otherwise lack both.
To Do: Engage mentors and construct an Advisory Board with experience in what you are trying to achieve.
2. No proof of concept
Business owners don’t go to the trouble of proving the concept of the business model prior to asking for money. Even though this can be done with a free blog, through Facebook or with an inexpensive market research campaign, it’s hardly ever done.
When Nikki Durkin, a 19 year old, decided to launch www.99dresses.com.au, she created an Event on Facebook explaining the concept and inviting people to Join the Event if they liked the concept. Two weeks later she had 40,000 people saying “Do it”. Concept proven.
To Do: Find inexpensive ways to test and measure each layer of the business model before investing excessive amounts of money.
3. No cashflow
Often start-ups go to market asking for $100,000 before they’ve made a sale. This means that the valuation (see point 4) an investor will come in at is going to be significantly lower than if there is historical sales.
Rather than raising $20,000 now, getting some sales, and raising the rest later (perhaps from the same investor), business owners will often go after the whole amount now. Meaning they either don’t get an offer, or they do and it’s going to cost them 75% of the business.
To Do: Raise as little money as possible in the beginning. Prove the concept, establish a higher valuation, then raise more for less.