Negotiating the deal
Separate in your mind economic issues from issues of control. It is not uncommon to sell more than 50% of the economic interest of a business while maintaining effective control. Decide on the kind of investors you want – do you want passive investors who will provide capital and then let you get on with building the business or do you want investors that can help you with strategy and connections. It is critical that investors and entrepreneurs be aligned as to the goals of the company. Think through your long-term capital needs, and make sure that your investors are prepared to continue to invest in the company over multiple rounds of financing, if that is what is required. It is hard to raise capital from new investors if the old ones are not putting more money in – the new investors will assume the old investors know something they don’t. In valuing your company, investors will take into account a number of factors: revenue and revenue run rate; the fundamental economics of the business – revenue and profit from the average sale and the cost of sales; the experience of the team; the competitive landscape; the value of similar companies when they have been acquired or have gone public; the valuations of similar companies. They will look at your current capitalization table and debt outstanding.
You may be asked: What value do you place on your company? Don’t fall into the trap of answering this. The appropriate answer is ‘whatever it takes to secure the deal.’ Make sure you have good data to negotiate from. Ask the investor to make a proposal, and then negotiate from that – ‘I appreciate your proposal, but we’re just like companies X, Y, and Z, and they were valued this way…’]
Embrace your errors
Making mistakes, and owning up to those false starts, shows that you’ve been working to perfect your ideas and that you understand that failure is part of success – but it must also illustrate that you take a practical, reasoned approach to this process and that your failures have been learning experiences. Investors want to see that you’ve done your product homework by testing out alternative ideas and approaches.
Don’t dwell on your failures, or exaggerate. Investors only want to know you’re not afraid of failure or of trying out new ideas. Showing that you’re reckless, or overly cocky or that you haven’t considered your personal strengths and weaknesses in a fair and clear-minded way hurts your credibility. There is nothing that kills an investor’s interest more than finding that an entrepreneur has provided misleading information – either overtly, by making statements that aren’t true, or by omission. Investors will do a great deal of research and reference-checking before investing, and there’s a good chance they will uncover anything material that you have omitted. You’ll be much better off by addressing all issues up front and openly.
The magic of marketing
Developing a successful and sustainable business requires offering a product or service that is compelling to your customers. But even the best mouse trap won’t succeed commercially unless you can reach customers and get enough of their attention to make the case for your product. You can maximize the worth of your ideas, and diminish the gamble of a new venture, with an effective marketing strategy that starts small but also takes into account the potential future growth for your venture. This is where your lean startup assumptions and minimal viable product planning really come into play. If you’ve got that nailed, that means you’ve already tested your product’s appeal and slimmed down both your product and your overhead – and you are more than halfway to a winning marketing strategy. Investors will test how innovative and forward-thinking you are about your market, how well you’re already doing, the depth of your understanding of your potential market — and whether you have thought about setbacks and how to handle them.
Don’t skimp on market awareness, preparation, and strategizing. Don’t treat marketing as an afterthought.Products don’t sell themselves! Don’t slip-slide over the details. They matter. Don’t assume that others’ marketing success will work for your product.
Lean Startup Methodology
Having a great idea for a product isn’t enough. It has to solve a customer’s problem and be a significant enough improvement over alternatives that will make people willing to pay for it. Show that you’ve thought about the marketing issues and taken steps to test your product’s appeal with disinterested folks.
Don’t get trapped into the ‘my friends love it, it’s the coolest thing ever, if they want it, everyone will want it’ hype. Back up your claims with as much data as possible.
Have more than just a business plan
A viable business plan for a start-up isn’t just about making the dollars add up, although that’s important. It’s also about problem-solving – anticipating drawbacks, evaluating challenges, understanding your product’s positioning and then coming up with the solutions that will help you cut back your ambitions to a more reasonable level via a “lean startup” strategy.
Investors will test financial/cost issues:
* Your level of debt
* Your financial assumptions
* Your costs and how they compare to your competitors
* Salary projections.
* Your financial projections and whether they include realistic sales and marketing expenses
But they also will probe your “lean startup” assumptions and how well you have modeled for various scenarios. What are your assumptions behind your revenue projections? Back up forecasts from a top down and bottoms up perspective. Top down means describing the total addressable market and the reasonable increasing share of that market you expect to secure over time. Bottom’s up means modeling the costs associated with sales, how long it takes to get a sales person up to speed, how many leads they can generate, the percent of leads closed, and the revenue per transaction. Selling is hard and costs money – build a financial model that fairly shows the cost as well as the revenue side – the two are closely linked.
Don’t show squeamishness about the numbers. Be forthright, not evasive. And don’t talk only about numbers and not about startup assumptions that are equally, and usually more important. Don’t shrug off the challenges or oversell the prospects. Be clear about the costs initially, including human capital costs, and how you plan to manage them. Don’t lay out forecasts that call for faster growth than companies that you’d consider models for your business.
Sell your venture, not yourself
Be specific about your role and your leadership even as you play up your team and the assets you bring as a group to the venture. If you are asked about your own experience, make it clear what you did. It is much more powerful if you can say “I led the sales team that expanded the business from zero to $10million in revenue,” rather than “We expanded the business from zero to $10 million in revenue.”
Don’t talk about ‘me’ when you need to present a team profile for the most impactful and cost-effective launch. Don’t try to sell yourself instead of your product or your idea. Don’t dissemble about difficulties.