Monday, December 5, 2011

Does your business have a bat problem?


Sometimes in the rush to get your start-up off the ground you cut some corners when evaluating prospective investors. An equity partner can provide the capital that you need to cushion your business from early shocks as well as provide fuel for growth. Selecting investors is tricky business, mainly because the budding entrepreneur isn’t usually in a strong bargaining position. The potential investor has something that we want,
while to them our business is one of many investment opportunities that they have. In the struggle to have our voice heard over all the others, we are naturally tempted to make compromises, which could be disastrous in the long run. What every entrepreneur should do as soon as they realize that it will take more than their savings to ‘start-up’ is to sit down and make a list of what they are looking for in an equity partner. This list should cover aspects like do they want someone who will be involved in day-to-day running of the business, or is it a silent partner they seek? Do they want someone with specific skills as well as cash e.g. an IT guy might want a partner with a financial background, or a financial services start-up might be looking for a partner with legal expertise. The list should basically describe your ideal partner for your business. Based on your financial projections you should already know how much your business should make, so use that to arrive at a reasonable return guideline for what you can offer your potential investor i.e. you shouldn’t even consider an equity partner who is demanding an impossible rate of return, not unless you want to end up working for them! If you can, try and mark which items on your list are deal breakers, i.e. the element that you will not compromise on at all (rate of return is a good one to put here). You could also think about what share of your business you are prepared to cede to the new equity partner, but I wouldn’t spend too much time on it since that is what your financial advisor is there for. Once that is done, take time to prepare your elevator pitch, have all your agreements prepared by a legal professional and get ready to hit the road running. Remember, if you rush it and cut too many corners, you may not notice that you are in bed with Count Dracula until the bleeding starts.

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