All over the world, entrepreneurs have to resort to al-ternative forms of funding as traditional banks are not usually keen on early risks. Private investors under-stand the potential of innovative business opportuni-ties and are willing to take the risk, but entrepreneurs are overly optimistic in believing they have a winning business idea. Entrepreneurs know that business an-gels and venture capital firms have played a key role in the success of early stage ventures for decades, so they will say anything to convince an investor to inject money into their ideas.
Investors have to filter very biased information coming from every entrepreneur pitch to find that one venture that offers an excellent business opportunity, ideally with huge market potential. There must be a concept that can be implemented in a reasonable time with a reasonable amount of capital, but also, that venture has to be driven by an excellent entrepreneur and manage-ment team, a team that is honest, trustworthy, moti-vated, and that can execute on the business plan.
Investors must be very good at filtering information and understanding the deceptions and tricks used by many entrepreneurs, most times without even realising it, to attract investment. As Guy Kawasaki, Silicon Val-ley venture capitalist mentions, “when entrepreneurs tell you their projections are conservative, multiply their forecast by 0.1 and add five years”. We have all heard entrepreneurs forecast their market to be hundreds of millions or even billions in the near future or they are often “about to sign an important deal with a major cor-poration or government”. As an investor, reading be-tween the lines is key- be very wary of any potential deal before the relevant signature is on paper and be able to come up with your own projections on the size of the market, the competition and any other variables by analysing the facts available.
At the end of the day however, even with the perfect deal in front of you, for the investor to be able to add value to the business, the most important question is whether the entrepreneur and investor have aligned strategies and objectives. Early stage investors finance high-risk businesses and they do so in exchange for po-tential high returns when selling the company or their share in the future. On the other hand, the entrepreneur has to accept that the investor is investing with the ob-jective of exiting in the future and that a small part of a larger pie is better than no pie at all or a much smaller pie that is not getting bigger.
With many entrepreneurs I have spoken to, I find myself explaining to them that most investors do not want to tell them how to make day-to-day decisions nor have them report on a daily basis. Investors basically need the entrepreneur to run the venture profitably and to merely be consulted on any major decision. For this to happen, the relationship between the parties will only work if it is built on trust.