Investors continue to receive many investment proposals containing business ideas that have intuitive merit, yet the proposal cannot be invested in because either the business is not Investment Ready, or the Business Owner, CEO or Entrepreneur promoting the business is not Investor Ready. As a result these Owners, Executives and Entrepreneurs waste time and effort, suffer financial loss, and potentially suffer reputation damage.
There are many potential points of failure along the capital raising process pathway, but at a high level there are four key reasons:
The business itself is not investable. This could be due to poor environmental and economic conditions, or a type of business that doesn’t lend itself well to investment, such as one that is highly dependent on the owner (eg a dentist practice), or one that has low margins or poor prospects.
The business is not Investment Ready. This is a big issue and so we have devoted an entire article to this concept. Refer to this article to understand what it means for your business to be Investment Ready and evaluate your own business against this criteria.
The Business Owner, CEO and/or Entrepreneur (the promoter) is not Investor Ready. This is also a huge area to cover so we have devoted an entire article to this concept. Refer to this article to understand what it means for you the promoter to be Investor Ready and evaluate your own preparedness against this criteria.
An unrealistic valuation. Whilst there are some businesses that would make a poor investment at any price, there are many businesses that make a good investment at the right price. In fact, for an investor, the price is sometimes the difference between a good investment and a bad investment. Inherently, business owners and entrepreneurs tend to value their businesses more highly than investors, often pricing themselves out of the market once they have gotten the investors attention and interest – in fact one investor has claimed that after the entrepreneur or business owner has successfully completed all the work to get him interested and convince him to invest, 75% of deals fall over because of disagreeable valuation. Whilst you the promoter don’t want to give away more of the value of your company than necessary, the investor must be allowed into a position where they can share in some of the upside. It is important that the promoter seek input from the investor/s as to their view of the value of the business, and/or be able to provide to the investor some justification for the valuation being proposed.
No exit strategy. Not in all cases, but generally speaking, equity investors are looking for capital gains over dividend returns. Therefore one of the key things they are evaluating when considering your idea or business as an investment opportunity is how they are going to achieve an exit – that is to say, how they are going to be able to sell their equity stake in return for cash. If you haven’t thought this through to the point of having a credible answer, you may not succeed in your capital raising efforts. Oh, and an investor is looking for a lot more than simply “we are going to build the business for three years and then list or trade sale”!
If you would like to know more about why capital raising fail and what you can do to avoid the pitfalls and increase your success, read our other articles and give us a call.
Intellix are leading authorities on getting businesses and business owners ready for raising equity.
This article is based on research and opinion available in the public domain.