Why the Wrong Investor Will Kill Your Business Plan

Business Plan is finished. Business Case is rock solid. Marketing Plan ready to go. What next? You need cash, right otherwise you can’t move from business plans to business planning.

Business Plan is finished. Business Case is rock solid. Marketing Plan ready to go. What next? You need cash, right otherwise you can’t move from business plans to business planning.

So, where do you go to get the investment? Or, to be more accurate, who has the cash you need? The biggest mistake startups make is choosing the first person who offers them money and not waiting for a more influential investor, someone who benefits their business other areas besides generating cashflow.

The Difference Between Money and Investment

The mistake is thinking that all money is equal. And it is. Up to a point.
Think about it. The dollar bills in your wallet are all the same when you go to buy gas. And no shop owner will turn you down when you peel out a hundred dollar bill.
From a transactional level, it’s all the same.
But from an investment level, it’s very different.
How come?
The difference is confusing cash with investment.
Cash is what you get from the ATM.
When you started out the focus was on

All this makes sense. But none of it will happen without funding.
Investment is what you get to move from a business plan into business planning.
And building a business takes more than cash as we’re going to see next.
FYI – sometimes investment is not cash or capital outlay, but that’s for another post.

Where to Find Money For Your Business Plan

The three classic avenues for getting funding as family, friends, and investors:

  • Family – This is fine for small investments. Your family may give you money as a gift and don’t really expect returns, at least not immediately.
  • Friends – May have more business experience, especially if you work on a project that relates to your business but things can become problematic when the boundary of friendship and investor gets blurred. Wearing two hats can be uncomfortable.
  • Investors – This is where we go when we’ve exhausted other possibilities and, if the project is significant, where you should go as you need more funding that your friends and family are likely to offer.

You can see what’s coming next, can’t you?
In the movie The Social Network, one of the pivotal moments is when the founders of Facebook realize that their cashflow is running out and they need to find investors who can continue to keep the business afloat AND also open doors to larger opportunities.
This leads us examining the type of investor you choose.

5 Different Types of Investors

Let’s stop a moment and look at recruitment. Imagine you’re hiring someone for your new business. Do you want someone who:

  1. Wants the job simply to pay the bills
  2. Has a great track record in your industry but is really a 9-5er or someone
  3. Is passionate about your line of business, matches your core values, and has serious contacts

You’re probably going to choose the third.
Why?
Because they’re more than an employee. They will help you through the hard times, come up with creative solutions, and contribute to the business on different levels.
And this also relates to your choice of investor.
When you choose an investor, you’re looking at:

  1. Connections – Can this investor open doors for me? How can this person help the business expand? Do they have connections overseas, in Asia, in the government?
  2. Endorsements – If this person invests in my business, others are more likely to invest as they trust his/her judgment.
  3. Status – Some investors create publicity and buzz on account of their public profile. Giving a small percentage to a high-profile figure in return for the publicity may be worth it, especially if you plan to dilute the shares at a later date.
  4. Patience – You don’t want a nag calling you at all hours looking for status updates. An investor committed to the long haul will let you get on with the work and stay out of your hair.
  5. Strategic – If your investor is well connected, they can accelerate your business development by recommending your product to other parties. Connections in government agencies can be very effective in this respect.

When you see it from this angle, the cash injection is one part of the equation for startups. It’s the other factors that investors bring that you need to gauge.

How Strategic Investors Accelerate Business

Now that we understand that there are different types of money, what’s the smartest way to use their connections, status and influence?
For example, investors with ‘reputation capital’.
Investors with ‘reputation capital’ help you in the following ways:

  1. Direction – Seasoned business-people know when to step back (and let you work) and when to intervene when you’re losing direction. For example, Facebook brought Bill Gates and Warren Buffet onboard. Their experience in business negotiations, mergers, and leadership will all contribute to Facebook’s strategic direction.
  2. Credibility – When you’re starting out, you’re nobody. But a partner with ‘reputation capital’ has the status you need. Their credibility gives you credibility by association. The fact that you’re formal business partners will open more doors for you.
  3. Connections – This investor can make strategic introductions for you. From this angle, you’re buying into their network in exchange for a part of your business. Likewise you get access to their Address Book, something you’re unlikely to get before you meet them.
  4. Global Scope – In additional to local connections, seasoned business people will have overseas experience. This accelerates the process of opening offices in different countries and may also smooth red tape or at least show you the mistakes to avoid when partnering in foreign countries.
  5. Leadership – No one knows it all. And while you may a great business plan, your investment partners will shape the future of your business in ways you hadn’t thought of.

Conclusion

If you’ve developed a product from scratch, your focus is on the product development, writing the business plan, and writing the marketing plan. And that’s more than enough for one human being.
So, when you go looking for investment, especially when you’re short of cash, it’s tempting to accept the first investment offer without thinking it through.
After all, cash is cash, right? But, it’s not.
Look at your investors and determine who bring the most to your company… in terms of influence, experience, and connections.
Another point: the ideal business partner will help you develop your product AFTER you’ve launched it as they’ve been through this process before and know what comes next.
Which is what we’ll talk about next week.
So, what do you think? What’s your best or worst story you’ve hear about investors. Please share below.
Flickr: http://www.flickr.com/photos/thetruthabout/2957128619/

6 thoughts on “Why the Wrong Investor Will Kill Your Business Plan”

  1. Danger lurks in getting involved with the wrong person or people. This post is an excellent start for choosing wisely. Beyond this, make sure you understand the motivations of an investor because often they will not align with your goals. There are many investors who have much influence but will want far more control of your business or want an exit strategy that won’t work for you.
    If Ivan doesn’t already have a post about the difference between JV and angel investors he can share here I hope he’ll write one.

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