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This Ain't the Internet Bubble - Start-Up Financing Takes More Than Potential

Chris Lynch

These days, it takes a lot more than a start-up's potential to attract investors.  Many of them learned that lesson with the Internet bubble.

Now nothing is onsidered a sure thing.  If a start-up isn’t on the right track, or if the entrepreneur owner hasn't done his or her homework, raising capital will be difficult.

Someone who has coached successful businesses for years, Chris Lynch, vice president of economic development at the Irvine Chamber, has some assignments for that essential homework.  Here are his 10 tips to help start-up owners secure the financial support and funding their business may need to succeed:

Tip No. 1: Know the investor. Investors are typically intrigued by companies that fall within current trends, but that isn't always the case. A large pharmaceutical company, for example, may be more interested in a small biotech start-up that shows potential to produce a new drug that the big company can’t produce itself. Different angel and venture capitalists are looking for different things, and most have a track record of the type of company, and even rate of return, they are looking for. So do some homework and know who the company is pitching to.

Tip No. 2: Know what they like. Investors want to see that the product/service not only fits a market, but also stands out amid the competition. Without seeing proper market research, a unique selling proposition and a solid marketing plan, people will be wary of investing in an idea. If the company hasn't put research and planning into the product, don’t expect someone else to fund it.

Tip No. 3: Focus on creating a first-rate management team. If the team isn't educated about the product and its market, that poses a great risk to the investors. A favorite venture-capital saying is “investors would rather have a second-rate product with a first-rate management team than a first-rate product with a second-rate management team” - because a first-rate management team will know how to turn the product around.
Tip No. 4: Have a great pitch. A pitch should be short and straightforward and should clearly articulate the value proposition of the company. Start with a quick elevator pitch which should include basic information on the product and its market.  Imagine being with Bill Gates or Warren Buffet and having 60 seconds to sell the idea – create that pitch.
Tip No. 5: Have a great presentation. After your pitch, include a visual presentation to go into further detail. Keep it simple and don’t use too much text. Investors are interested in how they will see a return on their investment. The better they can visualize this, the better the company's chances are for getting investments.

Tip No. 6: Stay focused.  Be approachable and on target with the key points. Remember, entrepreneurs are not just selling the company; they’re also selling themselves. If the investors don't leave with a clear understanding of what is being proposed, then the representative hasn't communicated with them very well. Highlight the strongest qualities (including the management team) and communicate in a clear and precise way that shows the company is open to their ideas and even coachable to learn new things.

Tip No. 7: Get some cash flow before raising capital. Show potential investors that the product or service has already produced a little capital. It will speak volumes of the likelihood for success if the company can show that it already has paying customers or a positive cash flow.
Tip No. 8: Think realistically. Different venture groups will have different rates of return based on the type of investor. Companies dealing with life sciences will have a longer development cycle for generating cash flow and will often require types of funding such as research grants. Know the market: How big is it? Who are the competitors? How is the company differentiated?  Know the customer base: Who are they? What pain point will the company solve? What will they pay for? Otherwise the business risks building a product for itself and not for the market. Know the business model and find an investor who is familiar with the industry.

Tip No. 9: Use your resources. The Internet is full of resources: business coaches, matching services, university classes, local angel groups, business incubators and entrepreneur forums with strong education programs and workshops that are open to the public. Also, try speaking or networking with other  entrepreneurs who have been successful; this will give you access to first-hand experience of what works and what doesn’t.

Tip No. 10: Learn from failures. The biggest mistake companies can make is to not learn from their mistakes. Don’t expect the first pitch to land some funding. Learn from every situation; continue to practice the pitch and strategy; and keep moving forward.

Adapted from an article by Lynch, who oversees the Irvine Chamber’s programs to promote tourism as well as to attract, retain and incubate businesses in Irvine. From 2004 to 2009, Lynch directed the economic-development and governmental-affairs programs of the Santa Rosa Chamber of Commerce, including an award-winning series of entrepreneur-investor conferences. Previously, Lynch served as a U.S. diplomat specializing in economic and business policy. He was stationed in Colombia, Chile, El Salvador, Spain and Germany, last as consul general in Hamburg, Germany. Lynch is also an adjunct professor of international business at Golden Gate University.

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