Angel Investor FAQs: Preparation for investor meetings

Management should prepare strong, SHORT, consistent answers to the logical questions that investors are likely to ask.  SHORT answers enable investors to ask revealing follow up questions.  A long winded entrepreneur loses the opportunity to HEAR useful questions by informed investors. 

Conversations between entrepreneurs and investors are inherently uneven.  The investor has money.  The entrepreneur wants some of it.  So bear in mind that behind every stated question by an investor is the unstated question, “What’s in it for me?”  Effective answers should be attentive to the investor’s interests and concerns.

Explicit questions about the investor’s interests might be worded:

 “How is my investment secured?” 

“How long before the company is in the black?”

“What is your competitive advantage?” 

“Let me see the financial projections.”

“What will you do with my money?”
 

Implicit questions about “what’s in it for me” might be worded in a variety of ways.  Some examples of questions and approaches to answers:

“Tell me about your management team.”  This question is not about biographies.  What does the investor want to know?  Is this team going to be effective in this endeavor?  Is it going to make him rich or lose his money?  Consider answers that demonstrate why this management team is the best one to preserve the investor’s money and marshal it to a lucrative end.  Is the management team invested in this deal?  Consider the terms of the management’s compensation from the investor’s perspective.  Will its fortunes rise or fall before or after the investors?  Is this deal raising money first for management salaries? 

“Who is your competition?”  Never say no one.  This answer implies tunnel vision.  Rather, identify those companies that the public might perceive to be competitors, and then briefly explain either niche differentiation or your ability to deliver faster, cheaper, better, or with an enviable barrier to entry, or a low cost/high margin solution.  If an investor is interested in your industry but finds your answers weak, s/he might consider investing in your competition!  Besides, “smart money,” – investors who know your industry well - are testing your knowledge when they ask this question, and comparing it to their own.  Satisfied “smart money” investors do not have to do as much due diligence, and will often write a check sooner than investors outside of the industry.  Know what they know, about you, your competition, the market.  

“What is the structure of the deal.”  The investor wonders what he’ll be left with if the company’s potential is unfulfilled and the deal fails.  How attractive are the terms to the investor?  For example, what is the security of the investment, the use of funds, the seniority of the debt or equity, what are the interest payment terms?  Are there any tax write off advantages if he loses money?  Is his investment leveraged in any way, by the state, a grant, or other means.  The use of minimum/maximum funds raised will traverse what path to profitability?   Will the investor’s money pay salaries, buy assets or build inventory?  Does the state of incorporation protect the rights of investors?     

Naturally, entrepreneurs are optimistic about their future success; otherwise they wouldn’t be pursuing it!  Entrepreneurs are also ACCOUNTABLE for optimistic projections.  Written and verbal answers to investors ought to be delivered as though to the investor’s attorney, CPA, or banker, because sooner or later, they will be.  The bigger the deal, the longer the investor will spend on due diligence.  His research should mirror your research.  Verbs like, “believe, project, hope, anticipate, plan, expect” are to be expected in forecasting future business conditions.  Verbs like “will, promise, guarantee, know” could be construed, in retrospect by a disgruntled investor, as fraud or misrepresentation.  Also pay attention: the SEC holds entrepreneurs accountable BOTH for errors of commission (saying something that is false or misleading) and errors of omission (not mentioning something material to the investor’s decision making process).  Obvious examples of omission include suits against the company or members of the management team.  Less obvious examples might include “sweetheart” deals with friends and family of the management team for products and services targeted as a use of investor funds.  It is more appropriate to disclose this before you take a check, rather than afterward. 

By the time you are ready to approach investors, your company should have developed a due diligence file of documents about your own company that investors are likely to want to see.  By developing a logical list of “who, what, when, where, why, how” questions for these files, and prepping your management team on the appropriate responses to them, your company will convey an impression of knowledge, integrity, and full disclosure.

Internal "Reality Check" Financial Planning for Entrepreneurs

Entrepreneurs are, by nature, visionary and optimistic.  Their company valuations are high and prospects are rosy.  Perhaps as a result, many may be wooed by pie-in-the sky investment discussions that never result in bona fide term sheets while discouraging realistic but less complimentary offers, which, in their estimation, undervalue the business and their management skills. 

For these reasons, I recommend that the entrepreneurial management teams discuss the following five tough questions amongst themselves and update a file of written answers for their eyes only as the company fortunes wax or wane. This “reality check” will help them ask investors and investment bankers discerning questions earlier than they might otherwise do, and will enable them to determine in advance the value of particular offering terms at various points in the company’s future.

Question 1:  If the company has no other clients or revenue sources other than those currently active, how long can it sustain its burn-rate?

Analysis:  Entrepreneurs may project fantastic valuations after “this” or “that” milestone, but investors and other financial sources also evaluate the present, so entrepreneurs should, too.  The more immediate a company’s need for money, the less sense it makes to spend time and effort seeking private equity and the more sense it makes for the company to spend time hawking its widgets to paying customers or increasing its profit margin.  Due diligence will always take longer than a financially strapped company wants, and its financial vulnerability will be obvious to the investor, who will either regard that deal as risky enough to abandon or risky enough to offer less than the entrepreneur needs or at terms the entrepreneur will likely regard as onerous.  

 To Do:  Figure out how long the company can remain in business with no investment and nothing other than organic growth.  Calculate the cost of the number of months required to turn a profit and repay debt.  This is the amount of money the company needs (vs. wants).  How much of the company would you sell to an investor or how much interest would pay on a loan that carried you through this time period?  

Question 2:  How time sensitive is your financial need? 

Analysis: Some companies face seasonal or cyclical highs or once-in-a-blue-moon marketing or sales opportunities they must hit or they are doomed.  Others enjoy a competitive advantage that is significant, but not for long, so they could make more money expanding rapidly now than growing organically later.  In such cases, money invested or loaned now is worth much more than money invested or loaned later.  Calculate a bonus value for the money.  

To Do:  Look at a calendar and identify a date before which investment is highly valued. Determine what you are willing to give up or pay to get an offer by that date.

 Question 3:  Under what investment terms are you willing to sell 51% of the company, step aside from a management role, or give up a Board seat?     

Analysis:  Many investors have a clear and public preference for roles, such as majority or minority control, a Board seat, their own management team in place.  Know their preferences and what you will accept.  Also, smart money is worth more than “dumb” money – that is to say that investors who know the industry, and have sales, merger, or vendor contracts can bring terrific value in addition to needed dollars.

To Do:  Think about all the resources the company needs to grow – not just money.  Calculate the time/cost to achieve goals on your own vs. inheriting professional resources with investment dollars. What is that worth to you – what percentage of the company or what management role? 

Question 4:  What upcoming milestones will make the company cash flow positive?  How much time and money are required to meet the minimums?  

Analysis: Most private equity sources will not invest all promised funds up front.  Rather, they will release a portion to be followed by later tranches if the company meets identified milestones, usually in sales revenue or development. These increments and goals should be negotiated in the contract.

To Do:  Figure out various fast and cheap tracks to profitability.  Calculate the barebones cost to each and add 20% for extra time. Accepting less money in a first tranche decreases the likelihood of meeting the milestone, which means it decreases the second infusion of cash, and thereby increases the likelihood of losing the investor or even the company under the terms of the offering agreement, since the entrepreneur probably won’t have other potential investors in queue.

Question 5:  If all goes well and the company grows, at what point will expansion exceed the competency of current management?

Analysis:  Many entrepreneurs are great at starting companies but weaker at maintaining or growing them.  The success of the company may depend on recognizing management’s strengths and weaknesses.  For example, running a public company is different than running a private one.

 To Do: Develop a graceful transition and departure plan based on realistic self and company-assessment. 

You will notice that several of these questions approach the same question from different perspectives.  The gist is this, “if you cannot achieve your goals without investors, then the most important valuation to acknowledge is not how much the market will value your company when it is successful, but rather, how much you value the money to take you the first, steep step to get there.   

Who Wouldn’t Want a Licensed Broker-dealer?©

Unlicensed investment brokers across the country are scurrying to Kaplan review courses and Sylvan Learning Centers in order to pass required license exams and become registered with the FINRA.  Those who, for years, have said that they didn’t need the license in order to get clients, fund deals, and collect commissions have concluded that now, they do. Why?  Certainly, in the wake of financial scandals and investor mistrust, both public and private companies are undergoing more rigorous scrutiny.

In addition, both investors and entrepreneurs have become much more savvy about the protection that policing organizations like the FINRA (www.finra.org) and SEC (www.sec.gov  can afford them, and those organizations are vigorously pursuing complaints, perhaps in part to rebuild public trust.  The resulting penalties for offending investment bankers include fines, jail time, bans from working with any other broker-dealers, and public disclosure of their actions and sanctions.  (See www.finra.org and www.sec.gov for details of recent judgments). 

What is the value of a license?  Perhaps a better question is, what are the dangers for any or all parties (the investor, entrepreneur, and investment banker) if the latter is not licensed? 

1)            Right of rescission:  Melinda LeGaye, President of MGL Consulting Corporation in The Woodlands, TX, provides FINRA required compliance auditing services for broker-dealers.  She recommends that "entrepreneurs seeking equity capital in the form of a private placement “…”utilize the services of a broker-dealer firm that is registered with the FINRA, the SEC, and with the states where the offers will be made.  Otherwise," she warns, "There are potential rescission issues associated with sales by non-registered dealers.”  In other words, a deal can be revoked and funds returned, even after it has closed.

2)            No back end fees:  According to the SEC and FINRA, unlicensed fundraisers (who therefore have not agreed to be bound by the code of ethical conduct) are not allowed to be paid a percentage of funds raised from accredited investors.  They can be paid a retainer or a consulting fee, but not a “back end fee” or commission.  In the past, many entrepreneurs did not know this, so they paid the successful, unlicensed fundraisers anyway, pleased to have the capital.  Now, however, the word is out.  An unlicensed money raiser could walk away from a closing with no commission at all.     

3)            Deal transparency:  Licensed broker-dealers and their representatives swear to interact with clients according to a code of ethics outlined for the public on www.finra.org.  These rules pertain to both internal and external conduct.  For example, the list addresses what can/cannot be promised verbally or in writing, reasonable fees, what services can and cannot be rendered, and full disclosure of deal terms, personal involvement, and timely introduction to “promised” investors.  At the office, all records must be accessible and audited, and even a complaint book must be kept available for any clients who request it.  Unlicensed money raisers may determine their own higher or lower standards of ethics.  Warning:  If a fundraiser sounds too good to be true, s/he probably is (unlicensed)!

4)            Public records: The public can check for free the professional background of any FINRA licensed representatives or broker-dealers (www.finrabrokercheck.com).  This resource includes such information as prior employers, number of licenses, and any sanctions or complaints.  All entrepreneurs and investors should check out all investment bankers they consider.  If the names are not on “Broker Check,” the people are not licensed.  Why hire them?

5)            Recourse:  If disgruntled investors or entrepreneurs seek recourse against an unlicensed investment banker, they have access to the court system of course, but that process is often expensive and time consuming.  Sometimes the legal fees alone are larger than the amount disputed.  In increasing numbers over the last decade, clients (and investors) are turning to FINRA arbitration.  (See www.finra.com for statistics and information.)  Clients have access to 1-3 arbitrators in a binding process that is very reasonably priced from the very agency authorized to punish, ban, and publicize the offenses of the broker-dealer – a powerful ally.           

How much does it cost to become a licensed broker or registered representative? Are financial considerations alone prohibitive enough to discourage ethical fundraisers from becoming FINRA licensed?  Consider the following prices to become a registered representative in Texas:  $235: each licensing exam (#63 – state, #7 or 79 – national, #24 -supervisory); $150 – 500: each study guide or class; $200 - 400: to register with the state: annual continued education courses ($100 – 500), and $20 to be fingerprinted.  Cost: about $800- 4000.00.  Why wouldn’t someone do this to protect himself, his clients, and the deal! 

Just as in the real estate profession, a newly registered representative cannot work alone, but must affiliate with a supervising broker. This is a firm which assumes liability for supervision of the representatives by experienced professionals with more licenses (at least a Series 24).  This supervision includes the representative’s correspondence, accounts, sales, contracts, and fees.

A broker-dealer firm must conform to additional requirements designed to protect clients which cost money that unlicensed fund-raisers do not incur.  For example, registered broker-dealers must have independent audits ($5,000+), an internal or external compliance officer , an internal or external Financial Operations officer ($10,000 part time +), FINRA fees ($3-5,000), fidelity bond ($250+), SIPC fees ($1000), and a net capital requirement ( $5,000 - $250,000).  Additional fees for firms that want to protect their clients and investors include those for e-mail supervision and background checks of employees, potential investors, and entrepreneurs.  The range of fees reflects the number and types of investment banking services and transactions.  To open a minimal service, two person broker-dealer requires an initial cost of $60,000 the first year (not including normal office expenses) and three months to be approved by FINRA.

 These costs and delays might provide a disincentive for many unlicensed people to embark on this path mid-career.  But as an investor or an entrepreneur, why on earth wouldn’t you find one who has already done so?  Why wouldn’t you want deal transparency, public records, arbitration services, professional exams, and a published code of ethics? 

Ready to Raise Private Equity?

Ready to Raise Private Equity?

Over the past several years, we have watched hundreds of companies solicit angel and institutional financing in cities throughout the U.S.  We have helped a hundred of them present their value proposition to the marketplace.  During that time, the market responsiveness to those companies has shifted.  We have seen too many companies spend valuable resources in search of interested investors, only to discover, many months and dollars later, that the current market didn’t see their value proposition as clearly as they did.  Some of these companies deserved serious market consideration, while others approached funding sources with unproven technologies, idealistic management teams, or an immediate financial need that dissuaded financiers.  Still others had small, profitable ventures that might have better invested their time in sales development than in investor marketing, including the service providers they paid along the way.

We recommend that companies undergo a four-part self-assessment process before spending money in search of private equity.  (They can do so without spending a dime, or they can hire professionals to help them.)  The companies most realistic and prepared for financing options know the answers to the following four questions.  Do you?   

How do financiers see our company?

Financiers of any kind, whether banks, angels, institutional investors or factoring firms, will expect certain documentation of “corporate readiness.”  These items are included in a rather daunting list of about 50 due diligence requirements.  Assembling and organizing this information is useful for any management team, whether or not it is seeking funding. 

Observations: We have been surprised to encounter executives who could not state their profit margin or what their patent covered.  Such companies are not ready to approach finance sources.  We’ve also heard conflicting answers by various members of management teams.  Not good.  Many companies rely on the “atta boy” cheers of paid service providers who write and rewrite business plans, patent applications, and SEC documents, but are, themselves, not funding sources.  

Whom does the market see as our competitors?

A company should NEVER say that it has no competitors.  That sounds naïve.  What companies and products does the market perceive to be competitive?  While customers care about product or service superiority, financiers care about competitive profitability.  To attract financing, a company should know whether it is able to deliver its value cheaper, faster, better, and more profitably than the other guys, and how it plans to preserve its competitive edge or be attractive enough to be acquired.     

Observations: Particularly, but not only, in technical companies, we have seen entrepreneurs spend personal and investors’ funds to develop fine products before asking relevant commercial questions, like “will people buy it?” and “at what price?” and “what is our profit/loss above/below certain prices.”  Business school case studies are littered with examples of superior products that did not sell because they were too expensive or ahead of their time and not marketed well enough to educate and then attract the customer base they needed to stay in business.   

What is the cost of outside funding?

Financing options have different costs, based on risk to the financier.  Debt based loans or investments are cheaper because of they are based on identified collateral or receivables.   Equity based investment is more expensive because it relies on a company’s unproven potential.  Investors who lost money in far more established companies are shying away from start-ups now, and are taking more time to scrutinize due diligence.  This means that the better organized a company’s records are, the faster it can get a “yea” or a “nay,” and for any company, time saved is money earned if well spent elsewhere.   Disorganized companies, or ones that choose to obfuscate unattractive financials or management history will definitely prolong the funding process and may doom it. 

Observations:  (1) It is a buyer’s not a seller’s market.  We have seen companies turn down investors who asked for a larger piece of the company than the principals were willing to give or turned down a price lower than they were willing to accept.  (2) Some management teams overvalue their company due to sentimental attachment.  Others base valuation formulas on future earnings estimates that cynical buyers don’t believe, rather than current revenues and assets that are easier to defend.  Step into the buyers’ shoes before engaging in negotiations.  What’s obvious in the spread sheets and resumes and background checks? (3) Companies should carefully read the financing terms.  We’ve seen companies brag about a term sheet until someone in their firm read it carefully and saw that it is contingent on achieving certain milestones that the company was hoping an investor would help pay them to achieve or sometimes a surreptitious service provider contract, masked as an investor.  If one manager tends to be optimistic, make sure that others more cynical read the terms before signing.  Taking too little to accomplish a required goal, while giving up a hefty percentage of the company if that goal is unmet is often shorthand for selling it at a deep discount.      

What do investors want?

Investors are not philanthropists. They are interested in profit, sometimes in particular industries and sometimes in diversification.  Since capital is scarcer than companies seeking it, it is the job of any company seeking funding to target the appropriate funding source and address this understandable self-interest.  While the questions may vary, the gist is, “why should I invest my money with you instead of with the other companies clamoring for my attention?  About twenty frequently asked questions (FAQs) should be anticipated by companies, and answered well.   For example, “Who owns the intellectual property?“ “What are the terms for first and second round investors?”  “What’s your burn rate?”  

Observations: We have seen companies spend all of their initial investment on product development and wait for second round funding to assess the commercial prospects.  This requires several “leaps of faith” by investors and bankers.  Unless the company has a management with a track record of start-up brilliance in similar endeavors, this is often a death knell.

Conclusion:

Seeking equity is not for the faint-hearted company.  It requires more time and more money than companies often expect, often paid to service providers who earn money whether or not the company gets the funding it seeks.  Knowing the answers to the four questions above will enable management to differentiate between realistic funding sources or funding finders and time wasters, and to allocate their own time to customer development, cost cutting, or financier wooing, as appropriate.        

Entrepreneurial Goofball Statements

Entrepreneurial “Darwin Award”© Nominees

Laura Emerson

laura@starlightinvestments.com

 If there isn’t a “Darwin Award”© for entrepreneurs, there should be, for people who would benefit business most by leaving it.  I’d like to nominate the speakers of the following, eye-popping quotes in response to logical, due diligence questions. The responses may elicit “you must be pulling my leg” reactions; however, they are all true or abbreviated responses by entrepreneurs or their investment bankers. A single hour’s research per company uncovered most of the underlying issues.  Following the quotes are several free and useful research websites and search tools by which investors can research entrepreneurs and by which entrepreneurs can research board members and service providers.   If you tend to be trusting by nature, verify, too.

 ·                     “Litigation is just a cost of doing business,” said one CEO regarding more than five current suits, judgments and settlements I found against companies in which he was listed as a director or president, including, sadly, a “charity” of his not listed with the IRS.

 ·                     “He wasn’t a very involved director,” said a company president, regarding one of his directors, who was indicted for bribery and fraud as a director of another company. 

 ·                     “I don’t think the IRS tax lien will really discourage investors.  People will either love or not love our business.”

·                     “We don’t think of it as a conflict of interest.  We think it is efficient that our major suppliers are also owned by members of our management team and Board of Directors.”

 ·                     “No; we don’t want an escrow account with an independent bank and a second signature before releasing investors’ money. Yes, we are raising money to start a bank.”

·                     “Those two corporate bankruptcies were not my fault,” said an entrepreneur seeking investment by showcasing his financial management skills.  Unfortunately, the state and county also list five recent personal liens and judgments against him by businesses and taxing authorities. 

 ·                     “I learned my lesson,” shared a serial entrepreneur, questioned about evidence that he had served time as a white collar felon for duping investors.  “Different investors.”

 ·                     “Yes, there is another company with the same name that owns the IP we are describing in our documents as our company.  That is because we want to raise money to buy them.”

 ·                     “I know that the money we want to raise now is not enough to fund the business model I have described.  Our plan is to raise enough money from individuals to buy a public shell or go public, and then raise money from stock purchases to start the real business.”

 ·                     “Oh, I didn’t realize that another company’s website says to report anyone else trying to represent the product our client wants to raise money for, but he plans to sell it in Mexico, not here.”

 ·                     “That journalist hates me,” admits a president regarding an article in his hometown business paper that cited lawyers and investors suing him for a prior business deal very similar to one that company press releases were currently touting.

 ·                     “Yeah, we’re updating those filings now,” affirmed a CEO of a pink sheet company in 2006.  (The most recent filings were from 2000).  The company specializes in managing other companies.  

 ·                     “I haven’t done anything in real estate development before, but I ran a very successful dry-cleaning business,” said a young and enthusiastic entrepreneur. 

·                     “I don’t know why they are suing me.  It was my dad’s store,” said a man charged with 65 counts of petty theft and 27 counts of forgery, hoping to find investors for a new business venture.

These quotes prompt two questions:

(1)   How many knuckleheads do these entrepreneurs and investment bankers think are out there?

(2)   Are people really willing to write a five or six or seven digit check for a well told tale without a bit of research?  

Each of these responses resulted from questions after research that took one to three hours per company, from publicly accessible documents, reading the Private Placement Memorandum (PPM), or just attending the investor presentation.

Most entrepreneurs like an audience, and if you ask the right questions, you’ll get an illuminating earful. Then hide your wallet until you hit the Internet.

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Below are extremely useful, free websites and Internet search tools that potential investors, investment bankers, and even employees can use to review a business prospect. 

Useful Search tools:

Internet searches are harder for common personal names, company names with generic phrases like “Beautiful Flowers” and initials, like “ABC Corp.”  Researchers would do well to try several combinations, such as name and city or name and industry.

Useful websites:

*          www.sec.gov              This site is for public companies.  One can search for individuals who might be major stockholders or prior directors or managers, or if a company has been sanctioned, has changed names several times, or is a wholly owned subsidiary. 

*          www.irs.gov              

            www.charitynavigator.org                  Anyone who donates money to a charity or religious organization should see if it is listed with the IRS as a 501C3, which allows for a tax credit.  If the charity is not listed, why not?          

*          www.finra.com           This website (See Broker Check section) lists every currently licensed individual and broker-dealer in a very easy, searchable system, which includes any disciplinary disclosures and prior employers, too.  It also lists people who left the industry as long as ten years ago, perhaps under a cloud of sanctions, which are also listed.  The website lists the code of ethics and rules regarding most types of investment sales by which all registered people are bound.   People not listed here are not registered but call themselves financial service providers.  

All three of the above websites have a “wall of shame” section, too.

*          www.bbb.com                        Visitors can search for companies and charities affiliated with the BBB and for company complaints filed with the BBB, by city.  This site is less useful for financial industry firms and more useful for companies that sell some kind of inventory or other service.

*          www.yahoo.com/finance        A number of websites, such as Edgar and Hoovers, require log-in and membership to access information more easily available, for free, through Yahoo.  A visitor can search for press releases, and access public filings and stock price histories.  Anyone who has served as an officer of a public company should be searchable.

*          www.google.com        The most highly used search engine is very user friendly. 

Searches reveal information about individuals as varied as book reviews they have written, blogs they have visited and political candidates and charities they have supported. 

The websites of counties and states across the country vary widely in their web-readiness.  Some have committed years and millions of dollars to filing documents electronically for the convenient access of the public.  Texas and Alaska have very open records policies.  California has stricter privacy policies.

·                     http://www.cclerk.hctx.net/cccourt.htm  On the Harris County Civil Court website, visitors can search for incorporated and DBA companies, for civil suit dockets according to plaintiff and defendant (and read the outcome) by company and individual names.   

·                     www.hcad.org   On the Harris County Appraisal District website, visitors can search for property records, including ownership and tax payments.  An investor might want to assess whether the entrepreneur owns property or is a flight risk if a deal goes sour.  Similarly, an entrepreneur might want to determine if a potential investor owns or rents that mobile home or a mansion.  In both cases, the inquirer can see if tax payments are current.

·                     http://www.nasaa.org/QuickLinks/ContactYourRegulator.cfm       All states have a secretary of state website.  Although the customer friendliness varies broadly, these are good sources for checking out any licensed professional, many incorporated companies, and other useful information about white collar crime prevention.

·                     www.bizjournals.com             This website enables visitors to search through city business journals from Albany to Wichita, which may have articles about an entrepreneur or investor active in that city.         

The Three “Be’s” for Inventors and Entrepreneurs Seeking Investors

“People don’t hand over money for good ideas.  They invest in businesses that can make them more money than other uses of those funds.”

“If you don’t look serious about your business, why should someone else be serious about his/her money?”

Bryan Emerson  (Managing Principal of Starlight Investments) offers the following three pieces of advice for entrepreneurs hoping to commercialize their inventions: Be prepared, be patient, and be flexible.

Be Prepared (be Realistic)

Although family and friends may support inventors because they trust and respect them, “that is too much to expect from anyone else.”   Serious consideration by other investors requires four items:

1)            a working, tested prototype (preferably with paying customers),

2)            a succinct executive summary (2-4 pages),

3)            a full business plan which demonstrates knowledge of the costs, profit margins, sales pipeline, competition,

4)            an investment-oriented PowerPoint presentation.  

Technical people who do not regard themselves as skillful business writers familiar with what the investment community wants to hear should hire someone to convey the commercial logic of the invention.  Emerson observed that a common misconception by inventors is that investors are interested in a product per se.  This is not true. Investors are interested in scalable, profitable or potentially profitable companies, preferably with multiple revenue streams that aren’t all vulnerable to the same market fluctuations.  Emerson recommends that entrepreneurs find a mentor who has successfully commercialized an invention, preferably in their niche.  Why make costly mistakes when a mentor can warn you in advance?

Be Patient and Proactive

“Launching a business, seeking investors, and finding customers all take longer and cost more than one might expect.  Take a long term view and use that time well,” says Emerson.  Work at getting visibility in the finance and investment community.  Although investors may be cautious now, they may be more interested in a year, especially if they have gotten to know you and your business in the interim.  Also, set technical and commercial milestones and achieve them.  Build a prototype, test it, write expert commentaries, etc.  Follow up with people you have met to let them know what you have accomplished since last time you spoke.  Some people may suggest goals because they are serious about your business enhancements; others may set goals to get rid of you.  Learn to tell the difference by ascertaining whether they have really invested in this space or are just talkers.  

Be Flexible about financing

Ask a financial professional familiar with start-ups about all financing opportunities.  Should you locate in an adjacent county since government grants and loans vary by district? How much money do you seek to raise?  Consider angel groups for less than $1 million and investment bankers for more.  Should you consider receivables financing?  Companies with assets and cash flow have more financing options than those without, including both debt and equity-based loans and loans based on factoring inventory or receivables.  Vendors, customers, and partners are also funding source options.

Inventors and other entrepreneurs have many resources available to them, including time, documents, public information and professionals.  Explore them and use the ones that make sense to ensure that your worthy invention becomes a viable business rather than a tax write off.