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Having correct answers key to getting investment capital

It is tough to raise investment capital in a hot market much less a tough one. For every one hundred entrepreneurs trying to raise a million dollar round for a startup, one might succeed. Investors will use a variety of analyses on a number of levels to eventually arrive at their investment decision, and the first analysis is very fundamental. Here is a set of questions that an investor is likely to ask an entrepreneur in a casual meeting, at a social gathering, or over lunch.

By H. Randall Goldsmith American Venture Magazine http://www.avce.com/

Question: What market problem does your venture solve?

Correct answer: …a big one. The problem must be big enough in terms of market opportunity and exponential return on investment that it justifies the investment.

Question: Why is this company the right one to solve the problem?

Correct answer: …it has the best product, best team, and best business model. Investors look to the venture as the solution, not merely the product. The product is like a surgeon’s scalpel. Without a trained physician, nurses, and a hospital environment, the scalpel is an incomplete solution.

Question: How much money are you asking for?

Correct answer: …enough capital to achieve milestones that increase the viability of the venture. For instance, a critical milestone is “breakeven”, or the point in time when there is as much money coming in as there is going out. Don’t ask for more than is needed but ask for enough to build the venture, build value and achieve clearly defined milestones on time and on budget.

Question: How much of your own resources do you have invested?

Correct answer: …enough investment of time and money that failure of the venture will mean significant personal loss. Investors will not invest in a “part time” entrepreneur with no “skin” in the game.

Question: Whom do you owe?

Correct answer: …all debt is convertible to equity. Investors do not want their proceeds used to pay off any debt or reimburse the entrepreneur and previous investors for their capital investments.

Question: When will you generate cash flow?

Correct answer: …in one year, two months and three days. Know the financials and be specific. Cash flow implies sales, and sales imply product and market validation. Investors want to know that the focus of the venture is to get product to market as quickly as possible without sacrificing quality.

Question: What is the use of funds?

Correct answer: …personnel, product development, customers and sales. Investors prefer that their funds not be used for real estate, equipment, other hard assets or marketing gimmicks.

Question: Who is on your team?

Correct answer: …seasoned professionals. Investors want to know that management is or will be an all-star team along with a board of directors that has significant business contacts and experience.

Question: What is your competitive advantage?

Correct answer: …a monopoly. Investors look for venture features that give the business an unfair advantage over the competition. Intellectual capital, an innovative business model, exclusive vendor and/or client relationships, and regulatory controls can achieve the objective.

Question: Who is your competition?

Correct answer: …specific companies. “We have no competition” is always a wrong answer. Someone somewhere addresses every problem in the world. Investors expect the entrepreneur to know their competition inside and out – their products, pricing, market, customers, management, strengths and weaknesses.

Question: Do you have a business plan?

Correct answer: …yes. Entrepreneurs simply do not raise money without one.

The specific questions will vary with investors, and the exact answers will vary with entrepreneurs, but the important thing is to have well thought out answers to each type of question mentioned above. Don’t embellish and be honest. If the investor is interested, due diligence will eventually reveal the reality of the opportunity and the character of the entrepreneur. Don’t try to impress the investor with “techno-talk, market lingo, or legalese.” It will have an opposite effect to that which is desired. The entrepreneur’s answers to this initial set of investor questions will determine whether more in-depth discussions will follow.

http://www.avce.com/

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