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Entrepreneurs Raising Early Stage Venture Capital are in a Beauty Contest

Written by: Karen Rands

Article Overview: Startup and Early Stage entrepreneurs must compete for the attention and limited capital available from angel investors and early stage venture capitalists. In many ways it can be compared to a Beauty Contest. The business fundamentals of a successful business are in place, but to be "picked" from the other companies also pitching those investors, that company must be the most attractive to that investor, that judge who will decide if the company qualifies to go to the next stage in the process.

Entrepreneurs Raising Early Stage Venture Capital are in a Beauty Contest

Start up and Early Stage companies often seek between $300,000 and $3 Million to get their business started and flowing with cash so they can grow profitably. They can't go to banks to get that money. If they are lucky, the entrepreneurs will know enough wealthy men or women who will share their vision and will take a risk to provide seed capital to get their business going and growing. Or, the entrepreneur will have a friend or adviser who knows a few angel investors to meet with and, based on the credibility of the introducer, will seriously consider the entrepreneur's endeavor for the riskiest investment seed capital. When the initial sphere of influence is exhausted, the entrepreneur enters into the subjective and seemingly arbitrary world of raising capital from "business angels"-very sophisticated and jaded investors who are in the business of investing. They have seen many variations of the same business idea, lost money along the way, heard every promise of gold at the end of the rainbow and have many options when considering an investment. Assuming the fundamentals of the business are strong, then it becomes like a beauty contest getting the investor to judge the entrepreneur's deal with just enough favor to get to the next stage....the second meeting to begin the due diligence and true discovery about the opportunity.

Most entrepreneurs simply do not have access to people with enough wealth that qualify as accredited investors or have sufficient liquidity in their accumulated investments to invest in their deal even if they believe it will succeed. Entrepreneurs should be able to raise at least $100,000 from within their extended network to lay the foundation for the launch of their business. But, if a company needs millions of dollars to get to profitable operation, that is an entirely different story and a different game that the entrepreneur needs to gear up for in order to succeed. Entrepreneurs inherently know to think of their competition at the product or service level, but rarely think about their competition when competing for capital from early stage business investors.

Inevitably, during an extended capital raise, the entrepreneur will be required to "pitch" either at a fast pitch or full presentation event to a crowd of people in the hopes of gaining favor with any number of anonymous investors in that audience. Millions of dollars are invested in early stage companies every year by investors who attend investor forums and investor membership meetings with the singular purpose to identify potential deals that can produce a return on investment for that portion of their investment portfolio. More money is invested every year by individual investors as "angel investors" in total, than all of the venture capitalists' cumulative investments made annually. Angel investors are the Holy Grail for entrepreneurs trying to bridge the capital divide to get their business really going. Momentum with investors to raise sizable amounts of money comes when a company can move beyond the "relationship sell" to the validated business opportunity that can attract capital from investors in the business of investing. Inevitably, this comes from pitching a large number of investors over time, telling a compelling story of potential success in such away that the investors "get it" and get excited enough to tell others about the opportunity---to create a buzz within each investor's sphere of influence. In effect the company begins to win the "beauty contest" to attract the investors, get them to "vote" for them so they can move to the next level, the next meeting-the prize being awarded when that investor strokes the check to buy the company's equity.

Make no mistake; it is a contest -- A contest to get the investor to choose that entrepreneur's opportunity over another investment opportunity. Accredited Investors, Angel Investors, Private Investors have one thing in common - Choices. Their money is working for them now and they have to decide to invest in an opportunity they think will make them more money with only a moderate increase in risk, compared with where they have their money currently invested. Pitching investors happens one on one and in group settings. Raising large amounts of capital equates to pitching to a large amount of investors. Standing in front of potential investors, displaying all the promise and potential of your dream is like a beauty contest---every deal is appealing in different ways to different investors. It is a contest of wits because you have to anticipate the investors' objections and concerns and address them in your pitch. If not, many objections will go unspoken and the entrepreneur won't get the benefit of a second meeting.

Reality based contests on TV are gaining popularity in all areas of life.... "The Big Idea", "The Next Tycoon" and "Everyday Edisons" are examples of contests that have attempted to create entertainment out of the trials and tribulations of aspiring entrepreneurs' desire to get their company launched and their desperate need for capital to do so. "Shark Tank" is one reality based contest that has stood the test of time....mostly because it focuses on the art of the deal from folks with real cash, and their own cash, to invest. It provides a very visible lesson in what investors are really looking for when they decide to invest in a company and the myriad of reasons why they won't invest. Early stage venture capital investors are not "sugar daddies" that just willy-nilly throw their money into deals without regard or at least a slimmer of hope to get a BIG FAT return on investment.

Raising capital for an early stage company with private investors is not much different than selling a product.... To be successful, an entrepreneur must understand the message needed to compel that investor to buy and they must talk to enough potential buyers (investors) in order to increase their odds of selling enough product (equity) to meet their objectives. Just like in sales, if they are not meeting their revenue targets or in this case capital raise targets, something in their sales formula is wrong... product is no good, message is missing its target, not enough prospects to fill the funnel, or follow through to close is ineffective. If an entrepreneur is ineffective at raising needed capital, they have two choices....deny they have a problem, struggle and incur massive amounts of debt and finally go out of business OR get professional help to assess their problems and put a plan in place to get them on target to reach their objectives. Sometimes they need a "make-over". Sometimes they just need to learn how to walk the walk and talk the talk. One thing is certain, to be successful in raising capital at the early stage, the company needs to understand what is needed to compete and win the contest for that investor's capital investment.

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