Investors are bombarded with business plans and small business investment opportunities all the time. Most of these investors are successful businesspeople involved in many projects. They have capital to invest, and a willingness to fund promising entrepreneurial ventures. But if you want a real chance to gain their support, you need to understand the harsh realities of their world.
- They have a limited amount of time they can devote to looking at new opportunities because they are very busy people.
- They often receive dozens of funding requests per month.
- Every entrepreneur has a business plan and a private placement memorandum, but the format and quality of these documents vary wildly. There is little consistency, and as a result, it takes longer to find and digest the key information they are looking for.
- Investment decisions are rarely made without first developing a personal level of trust with an entrepreneur. When starting from scratch, this takes valuable time.
- Business valuations and deal terms offered by entrepreneurs are often based more on enthusiasm than reality.
- After investing all the time to sort through and finally find an attractive deal and develop a level of trust with the entrepreneur, it may take another 40 hours to conduct proper due diligence on a deal.
- Due diligence also costs money for background and credit checks, legal review and document preparation, and much more.
- After funding a deal, the statistics for success are not encouraging. 5 out of 10 businesses invested in will fail. 4 out of 10 are likely to survive but provide little return on investment. Only 1 deal in 10 is likely to be a home run. That home run has to make up for all the other losses incurred, and still provide a reasonable overall return.
- A down economy adds a whole new layer of risk, as successful exits through acquisition or public offering become fewer in number.
Even with all of these challenges, accredited investors still invest in deals. Smart entrepreneurs recognize that the key to capitalization success is making it easy for investors to address all these challenges.