When looking for investors, entrepreneurs used to have a tendency to sign with the first VC who came through the door with money. Today, that's seldom the case. Instead, startups and entrepreneurs weigh a number of options when choosing an investor, namely operational expertise, the extent of their network, access to customers, financial partners and industry expertise. Consequently, private equity and venture capitalists have to build capabilities to complement their financial resources in order to stand out from the crowd and attract the best companies to their portfolio.
In Silicon Valley, the relative maturity of that market and its reputation for technology specialization has created an environment where both entrepreneurs and investors alike are aware of the strengths and weaknesses of the respective companies and funding sources. The effective "prequalification" that accompanies this familiarity means entrepreneurs and financiers can avoid the ritualistic mating dance and tire kicking that is preliminary due diligence, and more directly engage in the productive dialogue that occurs when there is an obvious fit between the firms. Consequently, deals tend to close at a much quicker pace than they do elsewhere.
At the other end of the spectrum, emerging growth companies that nonchalantly foray into the deal process without thoroughly understanding what they want from a financial partner―or what an investor expects from them―stagnate the actual funding process. Of equal importance, investors similarly need to have a clearly articulated investment strategy, a well-defined set of qualifications they can bring to the table, and a commitment to share their attributes with the market.
When everyone's on the same page, investors can better identify companies in which they have interest, and entrepreneurs can more quickly raise the capital they need to grow their business. With that in mind, here are three ways that entrepreneurs can best position themselves to ensure their deal closes quickly:
1. Create a well-articulated plan. Prospective investors want to know how a business is going to scale. Outline and present a plan that clearly and systematically describes the breadth of the market you serve; how your company will develop, produce, market, and sell your product or service; and how you plan to penetrate the market, gain traction, as well as build the management team that will be needed to execute your plan.
2. Approach valuation with rationale and reasonable expectations. The value of your company plays a major role in the investment process. Entrepreneurs who have poured their life and soul into their business often believe they know best what his/her company is worth, and frequently rethink valuation at the 11th hour. Instead, you can speed the close by coming to the table with reasonable expectations and a rational perspective on the valuation. Keep in mind that the value of your company today is just the starting point for the rapid growth that will help that value blossom over time. Also remember that equity raised in the early stages of growth tends to be the most expensive. Rationally determine the amount of capital needed. Less is more.
3. Properly evaluate and assess management capability. During the due diligence process, investors might determine that a startup or emerging growth company could ultimately be stronger with new leadership. However, deals can stall when entrepreneurs don't take such conversations seriously or refuse to accept that they might be better suited to have a new CEO step in and run the business. A change in leadership can understandably be difficult. However, professional investors, who don't have the same emotional attachment as entrepreneurs, are much better qualified to recognize the strengths and weaknesses of the management team.
These three steps will help entrepreneurs both speed up and improve the capital-raising process. Armed with an understanding of how the process works, entrepreneurs can properly position their companies to ensure a faster route to the capital that will help them further their goals and build a successful company.