Tuesday, November 11, 2008
Posted by Darrin Redus
I recently facilitated a workshop to a group of about 100 entrepreneurs called "How to Prepare Your Business for Investors." What struck me as a major stumbling block for many entrepreneurs was that they didn't consider the "motivations" for private investors (commonly referred to as Angel Investors or Private Equity firms). The room seemed to collectively have an "ah-ha" moment when I asked a few questions:
- What if it was your money you were investing?
- If you were the investor that the entrepreneur was coming to see, what would you want to know about that company?
- And if you, the investor, could be reasonably well assured of earning 10 to 15 percent under typical stock market conditions with mutual funds or well-known companies, how much would you expect to earn by taking on substantially more risk by investing in a relatively unknown entrepreneur or unproven business concept?
Recognizing that no investor desires to lose money and that the best scenario for an investor is to take on very little risk and still receive a high return, you as a business owner must learn to package your business as an "investment option." Your business is fundamentally competing with bank CDs, mutual funds, treasury bonds, large and mid cap stocks, etc., when an investor is considering whether or not to invest in your company. If the investor cannot see a clear plan to get their money back with a return that justifies the risk, your journey in raising capital will likely be long and painful. By being prepared to answer many of the questions that you would likely want to know yourself if you were writing the check, the process of raising private equity becomes far less mysterious.
Darrin is Chief Economic Inclusion Officer of JumpStart. He founded and ran his own strategic planning and management assistance firm and spent 16 years in the commercial banking and finance industry. Darrin has an MBA from Baldwin Wallace College and an undergraduate degree from Mount Union College. He has led a series of workshops and seminars on matters of economic development and diversity.