Next in importance is the strength of your management team.
"Investors more than ever want to invest in people," says
Lydecker. "And they want to invest in people with a track
record. If you are starting a fast food restaurant franchise, does
your management team have experience in both fast food and
franchising?"
Gaps in the management team are a sure sign that a company is
not "ready for prime time." I once performed due
diligence on a company that was launching a "community"
Web site for stay-at-home mothers. The founders were all former top
consumer marketing executives with Rolodexes full of super business
contacts. There was only one problem--and it was a big one--the
company, which planned to target mothers, had no women on its
management team. The company is not around today.
Next, never, ever tell a potential investor you have "no
competition." "I wince whenever a client tells me
[that]," says Lydecker. "Every business has competition.
You have to be honest with yourself about who your competitors are,
the likelihood that you will beat them in a fair fight, and the
strategies you will use in confronting them."
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What about financial projections? "They should be simple
and straightforward," he advises. "You should make your
projections on a cash basis, and be sure that you've really
thought through your assumptions. Investors want to know where your
revenue, cost and income projections have come from and how
realistic they are."
If you are not sure about this, present your investors with
three separate projections under the headings "best
case," "worst case" and "our
expectations," preferably side by side in columns so the
investor can make an easy comparison.
When selling your company to investors, it's helpful to
remember the "three Cs" of successful business plans:
1. Compelling idea: The appeal
of your products and services to the marketplace should be direct,
obvious and immediate; if an investor has to ask you why people
will buy your stuff, the ballgame's over.
2. Competent management: Do your people thoroughly
understand the technology and, more important, the market?
3. Cash flow: If you are not making enough money to pay
your electric bill each month, don't expect your investors to
pay it. It may take longer to generate profits, but revenue (the
number of things you sell multiplied by the price per thing) should
be sufficient to cover your basic operating expenses and pay you
some sort of salary within your first 12 to 18 months in business.
Ideally, you should not be talking to investors (other than your
partners, friends and family members) until you have reached this
point. In business, nothing says "success" better than
piles of cash rolling through the door.
Cliff Ennico is host of the PBS television series MoneyHunt
and a leading expert on managing growing companies. His advice for
small businesses regularly appears on the "Protecting Your
Business" channel on the Small Business Television Network at
www.sbtv.com.
E-mail him at cennico@legalcareer.com.
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