Would you loan money to this guy?  Neither would I.  Unfortunately this is how a lot of small business owners look when they go hunting for business capital.  The business may have an excellent product, wonderful sales projections and perfect pro forma’s and still not find a suitor.  CEO’s often scratch their head trying to figure out where they are going wrong.  The truth is they may be lacking credibility.

Investors are a skittish bunch by nature.  You would be too if you had been torched out of huge sums of money over the years.  For every home run an investor funds, they will likely tell you of 7-8 failures that have cost them a mint.

The commonality among winners and losers is how each started the process.  *cue Chariots of Fire music*  Both brought big hopes and ideas to the investors table.   With a burning desire deep within the soul, they knew without a doubt that they were going to be the next Microsoft.  All of them stood tall with hands on hips, overlooking their little fiefdom and dreamed BIG, sometimes pondering how they could run this juggernaut of an industry and still find time to fit the Oprah interview into the schedule.  Visions, yes actual REAL VISIONS of sugar plumbs danced in their heads!

The statistical reality is that only half of these companies will still be in business after five years.  So to counter this statistic, one of the elements that investors look for is your credibility.  If you are trying to start a business with your college roommate, forget it.  An investor isn’t interested in paying your “University of Hard Knocks” tuition… it’s VERY expensive  The simple fact is that there are too many established businesses available to investors, ones with historical performance, proven revenues and lots of traction.  So what can you and your roommate “Kegger” do to get some respect?  Form an advisory board.

A Board of Advisers offers a number of strategic advantages that include

*  Industry Experts who are serious about your success

*  Years of experience from Wiley veterans who have traversed your path before

*  An instant networking hub that can leverage and introduce strategic partners

*  A group of people to whom you must be accountable to

*  Instant credibility

Funding Universe suggests inviting the following qualified people into your inner circle.  An industry guru, accountant, lawyer, established businessman and a distribution/sales agent.  A diverse group of individuals such as these provide rich resources of knowledge, networking and growth opportunities. So if your business is struggling and you can’t seem to get the respect that you deserve, consider trading in your pocket protector and taped-horned-rim glasses for a board of advisers.  It just might get you funded!

Joel Nielsen is a Venture Consultant for Funding Universe and can be contacted at jnielsen@fundinguniverse.com

You should plan on doing well before doing good.

I know all of my recent posts have a “don’t to this” theme to them, but there are some common mistakes that I have seen that really make it difficult to get funded, besides, there are a lot of smarter people than me giving out all kinds of advice to entrepreneurs telling them what they should do. For now, I will continue to be the scold.

Would-be entrepreneurs tend to be shockingly optimistic. This is generally a good thing but it can lead to big mistakes if not tempered with a appreciation of reality. Case in point: Don’t put charitable giving into your business plan. A business plan needs to lead to the maximum possible return for the investor. This is already about the riskiest investment around and there really is no room for reducing returns even more. Elements that put any strain on returns that are not absolutely critical only increase risk. This necessitates that charity be separated from your start up plan. Do not tell your investors that you are going to spend their money to pay your janitors $20/hour or that your exit strategy is to give half of the company to a ministry serving unwed mothers or part of your plan is to do pro bono urban renewal with the start up capital. These are actual examples I have seen in my clients business plans just this summer.

The standard expectation will be that this type of work is done through the entrepreneurs as individuals and the investors as individuals. The company exists to maximize return for the shareholders who can do with it what they wish.

Any company’s customers should be better off because of its’ products. Many enterprises naturally benefit their communities in ways not directly related to their products. Business should by their very nature contribute to society (if you’re in a business and it doesn’t, get out now.) But early stage companies need to be focused on maximizing the return of their shareholders. The risks are too high to do anything else.

Also, here is the best “how to pitch” video I have yet seen and it’s from one of the members of the FundingUniverse investor network.

The business plan you should be using to raise capital is not the same as the one they usually teach in college.  I went over the topic several times in graduate school and each time the spiel was the same:  It should be a comprehensive guide to how to run your business.  Update it every month, or quarter.  Use it to keep everyone going in the same direction.  Include important operational plans and strategic studies in detail.  And of course, the longer the better because that shows that you put more work into it (unfortunately I’m only half joking).

If you are one of the few people who actually have and use such a plan, good for you but it probably won’t get you very far with an investor. You need to have a plan written just for the purpose of soliciting investment. There are multitudes of guides and examples on the web and in print on business plans, make sure that the ones you are looking at make are clearly designed for this purpose.

We at FundingUniverse see lots of funding seeking business plans and of course have lots of ideas on what works and what doesn’t. Here’s a simple idea: Approach the fund seeking business plan and related documents as a sales tool. You are trying to sell a product, an investment in your business, to a customer and investor. Like any piece of sales collateral it needs to reflect the characteristics of your target market that affect their buying habits.

As customers, accredited investors tend to be about as discriminating as you are going to find. Here is an analogy: You are a car salesman. Don’t look at it as if you are selling a car to someone who buys a new car every 4 years. “Look at the room in this baby…” Assume the fellow (and for some reason the overwhelming majority of them are fellows, women seem to be very thin on the ground in this sector) is a car buyer for another dealership. He looks at dozens of cars per week. He will try to make a decision on a well defined, specific set of criteria. Usually many of these criteria will be quantitative. He is not emotionally tied to your deal and it will be very hard to get him emotionally tied to your deal. Like a professional poker player he will look at his hand, the odds, the risk and return, the other player, etc. and make a dispassionate judgment. Even if he is emotionally wrapped up in what you are doing or acts impulsively, he will likely want to pretend that his is the other guy, the one I just described, the poker player. At the very least, he will want to be able to make the case that he was making an objective, well considered investment decision.

Most investors put these criteria on their web sites. Here are some examples from Garage.com, Keiretsu Forum, and the Sofia Angel Fund. With these types of criteria in mind you should write you plan as kind of combination between a sales proposal and a legal argument. Emphasize what the investors say is important to them. It probably isn’t a technical schematic of each of your products’ components or a process narrative on how a customer complaint is handled or a mission statement. And of course it should be specific, quantitative, clear, concise and compelling.

Today, I found an article written by Frank Peters (from the Frank Peters’ Show fame) that I thought was very well written.  I’m sure that I have written about this topic before, but it seems that the message has yet to penetrate to entrepreneurs across the US.  What is the message?  Here it is in Frank Peter’s words:

I don’t love Executive Summaries; it’s just me being smart-alecky. But I hate business plans even more; no one reads business plans. Why? Because there’s no time; I’m not that interested at that point of first contact, and I’m not alone. I don’t know anyone who wants to see your business plan.

Knowing that we (who’s the we? me and my angel peers) are too busy for a long business plan, the ES plays the critical role of sparking our interest.

Here are a few of my Do’s and Don’ts

1. It can only be 2 pages. This is a great discipline for you; tell your story succinctly and cover all the essentials in just a front ‘n back handout. Why only 2-pages? I already told you! We are constantly looking at applicants’ entreaties for funding. We want to see something that either fits our interests or doesn’t, and we can tell in just 2 pages.

Click here to read more…

Frank does a great job explaining in detail the importance of writing an effective executive summary — all I can add is a simple, “amen.”  :)