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Mistakes To Avoid While Approaching An Investor

By SiliconIndia  |   Thursday, 02 February 2012, 23:25 Hrs
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mistake, approaching investor, probable investor, portfolio company


Bangalore: So you think you have a splendid idea which would be an answer to many unsolved problems and make you rich in the process. You convince a few people who share the same excitement about the idea and you get down on how to make it a feasible solution. The next and an important constraint is finance. You decide to approach few investors who would be flabbergasted by the idea, but one wrong step and they might choose not to invest in your idea. Approaching a prospective investor is like walking on a sword’s tip; so what caution should you take to ensure that you win the investor’s money?



“First of all entrepreneurs should avoid investors with whom they don’t find the right chemistry. It is not just about the money, it is about working together on a venture. Even if the money comes, the journey can be painful, if there is a chemistry issue,” says Sanjay Mehta, Joint CEO, Social Wavelength. Investors generally take a particular stake in a company in return for their investment and have a certain lock in period. They tend to mentor the entrepreneurs on what best they can do to take the company forward. But, in case you don’t gel well with the investor, the journey might seem endless and end up in a bumpy ride, hurting both the parties.



Before approaching an investor, you should do a background check on his portfolio investments, his choice of industry to get an idea whether he can be the right person. And after you start discussing your idea with him, you can make a choice depending on whether you share the same wavelength, whether the thought process is the same, and most importantly if you share the same vibes. An entrepreneur is generally under a lot of pressure and after making an investment, there is pressure from the investor’s side also. You need a person who can guide you, connect you with the right people, for which the chemistry should match. Thus, like you choose a partner, be it in professional or personal life, you should choose the investor with whom you have a right chemistry.



Desperation is good, but while approaching a VC, the entrepreneur should make sure not to make it look obvious. Entrepreneurs must avoid seeming desperate for money, even if they actually are. The VCs would try to negotiate the best deal for themselves, and it is upto the entrepreneur to negotiate well too. But the moment the investor sniffs the despair, he might try to put in more demands. “The mistake entrepreneurs make is focusing too much on the valuation and not in the terms that dictate control. VCs have to take preference to be able to protect their minority investment in a company. It is upto the entrepreneur to find the right balance of control and funding”, says Avichal Garg, Co-Founder & CEO, Spool. Getting a higher valuation is good, but if the entrepreneurs cling to it, they might lose out on the whole essence of raising money from investors. They might be misled by specific clauses, which might bite them later.



“One of the most important in raising capital is underestimating the timeline. Fund raising itself is like a six to nine month project, especially for first time entrepreneurs. Unless convinced that it is a scalable business, please don’t waste time in trying to raise capital,” says Sanjay Rao, Director, SportsNest. Before approaching a prospective investor, make a roadmap on how you would scale the business, in terms of product offerings, market size, number of employees, and so on.



Now that you have passed the initial phase and are on a growing spree. A financial opportunity knocks on your door, but before grabbing it, you should ask yourself “Do I really need this money now?” Some startups raise money whenever they find an opportunity, but this should be avoided. “In most industries, taking too much of money before product market fit is found is a big mistake. It negatively impacts the culture and releases a critical constraint of having to innovate to find the product market fit. The ‘right’ amount to raise before product market fit varies between industries and sectors,” says Garg.



The apt time to raise funds, differ for different firms. If an entrepreneur feels that capital is the constraint for his company’s growth, they should approach the investors. For many companies, their products are such that they would have to get a lot of users in order to upgrade their offering. The time taken to scale in terms of customers might be more, but the company might not be able to do more on R&D due to monetary constraints. Thus, this might be the right time for the startup to raise funds. If the size of the opportunity is huge and waiting for the market share is more important, the company should wait for some more time before approaching the investors. “Ideally a startup should raise money when it needs it. However, often, the startup's need and the market conduciveness to fund raising may not align. Due to which reason, one might go out and raise money, perhaps when the market is good, even if the need is not immediate,” adds Mehta.



Mistakes made while approaching investors have hit many a entrepreneurs but it is not just the idea, but the scalability of the idea, the timing of the fund, the chemistry between the entrepreneur and the investor, all matter. These are things which might seem less important at first, but might bite back in the long run.



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