Prospective Investees should read and understand the following:
1. I have a good idea. I have a good chance of being funded.
- Wrong. A good idea is a necessary start but fund-raising is a multi-phase effort. Any 'red flag' can throw the investment off course. The fact is <5% of ideas get funded.
2. I have a great idea but no revenue yet. I will generate revenue once the investment is in.
- Wrong. Barring exceptional cases, no revenue means no investment. A savvy investor will not allow the investment to become your tuition.
3. The investment is confirmed once the investor says 'yes'.
- Wrong. Far from it. The deal can change anytime during the negotiation phase.
4. The investor and I have great chemistry. There is no need for paperwork or Due Diligence(DD).
- Wrong. A seasoned investor will not disregard DD. He is accountable to his own investors and partners. A lack of paperwork will cause misunderstandings and rifts down the road.
5. Once the money is in, the investment is confirmed.
- Wrong. The investor can demand to rescind the deal and have the money returned if he feels he has been misrepresented.
6. I have money of my own but I will use OPM.
- Wrong. Why use OPM if that means giving away equity? An investee who does not put himself/herself on the line shows no sign of sincerity or readiness for an investment.
7. I don't mind giving up equity in exchange for OPM.
- Start-ups should always maintain as much equity as possible when they are young. Giving up equity too early indicates a lack of prudence.
8. DD serves the investor and is a chore to the investee.
- Wrong. DD serves both parties. The investee can exploit it to find out more about the investor as well. The DD is also a form of insurance for the investee, to add defence to his position in the event of claims of misrepresentation by the investor.
9. The investment is in one lump sum.
- Wrong. There is always a schedule that plans out when the next tranches of cash are released.
10. If I get funded, I will pay myself for the many months I went unpaid to build up the company to where it is today.
- Wrong. Investors want their money to go into assets to build the next chapter, not to settle outstanding liabilities.
11. The investment is in the form of equity, not a loan. The money need not be returned.
- Wrong. The investment may be in the form of a loan, a convertible instrument, straight-equity or services.
12. If the company needs further funding, the investor is there to help.
- Maybe. Not a given.
13. Similar ideas are valued in the millions in Silicon Valley. Therefore, a similar valuation for my company too.
- W.R.O.N.G answer. You should pitch in the Valley then.
14. My advisor who is an investment-banker/lawyer/accountant/entrepreneur values us at $x-millions. This valuation is fair.
- Wrong. He or she should put his own money in.
15. I do not know how to value my company. What do you, as the prospective investor, think my company is worth?
- It does not work that way. You pitch, we catch. If you do not know your company's valuation, the conversation cannot proceed.
16. I can value my company in a 'bespoke' (as opposed to a systematic and financial) manner.
- Wrong. Business performance is always measured by numbers. If the company does not have sales or distribution, it is not investable.
17. The investor is 'one of us' and will always back me up.
- Depends. An investor is closer to being a boss than a friend. He or she will eventually want his/her money back.
18. The investor is going to handhold, assist and mentor me.
- Maybe, but only to a certain extent. He or she has a full time job already and is not going to do your work. You are expected to make the business work.
19. The investment will arrive within weeks.
- Wrong. It can take 3 - 9 months. Or not at all if something throws it off-course.