This blog post was written by Gonçalo Araújo Fernandes, CEO of Smart Equity. Gonçalo works as a Consultant for Strategy, Finance, Corporate Planning and Control. This post focuses on how entrepreneurs should adjust their message to get investments for their projects.
It is not the first time I hear saying that there is always cash available to invest in good ideas… even I say it a lot. However, I usually say that there is always cash available for “good ideas that mean good business”. Truth be told that many entrepreneurs still struggle to get investments for their projects even though liquidity is not an issue in Portugal and abroad. Base on my experience and on personal belief, this results from the “lost in translation” factor, meaning a communication gap between the message conveyed by the entrepreneur and how the investor interprets it.
Take, for instance, the following conversation between an entrepreneur and an investor. Many of the readers have experienced this and realize that what they said is often differently interpreted by the other party:
Entrepreneur: I want to find someone to finance my project.
Investor: Dear sir, there is a BANK X BRANCH right at the corner. I do not want to finance. I want to invest. I am willing to share the risks but my return expectations are high.
Entrepreneur: I want more than cash, I want someone that offers work capacity, that is hands on.
Investor: Dear sir, if my goal in life was to manage a company I would start my own and surely would not invest on other companies.
Entrepreneur: My product has no competition!
Investor: Dear sir, I was wondering if JOBS would happen to be your last name…As I see it, either you have not done your research and are totally unaware of what is happening on the market, or even worse, you have no competition because there is no market.
Entrepreneur: Our forecasts are very conservative and cautious.
Investor: Dear sir, as I see it I’ll consider cutting only 30% to your figures instead of 50%.
Entrepreneur: This is a guaranteed risk free investment!
Investor: Dear sir, either you are lying or, if there is no risk, there isn’t a guarantee of value creation or return potential that I’m looking for.
Entrepreneur: Profits are not our major concern for now.
Investor: Dear sir, for now I think I will keep my money. If you are not aware or do not forecast the profits, how do you intend to maximize my investment?
This is obviously a fictitious conversation to just emphasize a fact, that in my perspective, is extremely real: most of the times the entrepreneur does not adjust his message to the person he wants to conquer
- the investor!
Someone that invests at the initial stage of a project – notice that I say “invests” and not “finances” -accepts the risks but expects high returns. The train of thought is “if I choose to invest in a given project I am incurring on an opportunity cost.”
Someone experienced and having know-how, networking and new contact creation skills that will not manage or work in the company. All features that apply to promoters and the management team. The project drivers are always the promoters. Otherwise, where am I investing and who will maximize my return chance?
In 99.99 % of the cases (or even 100%), products, services, ideas and others have to compete with other brands. Even when there isn’t a product in the same segment, a different segment will surely come forward as competition. In the vast majority of cases, if not in all of them, Business Plans and analytics forecasts are never conservative or cautious. Reasons span from underevaluating investment requirements to overevaluating traction forecast. Whatever the reason, chances of deviating from the original plan are always tremendous.
As I always say… Excel takes it all!
Finally, if the investment is risk free, then market, competition, etc. have not been properly analyzed, or the investment is of no interest whatsoever since it does not cater for the type of return envisioned.
Risk means uncertainty. The investor (in particular, risk investors like the Business Angels) expects returns and multiples of 5 and higher over 3 to 5 years. This only happens when investing on the project initial stage, a timeframe where there is risk but also the potential for attaining the desired return.