How not to attract Investors


The British writer and venture capitalist, Luke Johnson, authored the following article: “The Wrongs that Write a Business WomanNumbersPlan – What to avoid if you want to raise finance”, by Luke Johnson, FT, June 11, 2013, Management.  All I could say, how true!

First, complicated NDAs.  I believe that many startups believe that the lengthier the legal document, the more impressive it will be.  With regard to the lawyer who wrote it, he would be first to congratulate himself. However, NDAs tend to be turn-offs. More to the point, they are hardly ever enforced.  VCs have a hard enough work to plow through scores of business plans, and many VCs are reluctant to execute such documents anyway.  The key to any business plan is the execution, not the description of a plan.  NDAs suggest that the idea is so secretive and unique, it has value in itself.  None of that is true. As a lawyer, I question the merits of any NDA as an enforceable document.

Second, compensated advisors upon closing.  Once, I was introduced to a financial advisor expected to be paid $15k to introduce my company to a leading financier in Chicago. He wore a $50k gold watch, while I still owned my Timex. VCs do not want their dollar investment to compensate for any finder’s fees on a start-up situation.  Every dollar is dear and every dollar must be thrown at the operations quickly.  Some VCs will directly compensate the advisor directly and I have witnessed that scenario.  The reason being that the advisor might bring additional future deals and wants to maintain an excellent relationship.  However, the startup should never volunteer to do the same.

Third, founders without investing their own capital.  Sometimes people resort to OPM – others people money.  They believe that “sweat equity” is enough.  On the other hand, if the founder is not willing to risk his own capital, why should a third party take the sole risk.  I met the CEO of a pharmaceutical startup in D.C., and all five senior managers had impressive degrees, worked at some pharmaceutical company. Most importantly, they want 60% after a $10 million investment. They had no risk: they either were still employed and had never invested any personal funds for this startup. And, with the $10 million being sought, I thought they had no risk for the startup for a while.  As I told the CEO, no one could ever agree to fund her company under those circumstances.

Fourth, complex financial modelling.  I am guilty of that but my standard financial model applies to any startup and is highly flexible. I also agree with the author that one can predict the near term and anything beyond a year and a half would be speculative.  It should be accurate though.  Any variance over 10% demonstrates to me bad financial planning.  But any financial modelling should be clear and well documented. Complex modelling does not mean that the model reflects the operation.  Indeed, it might be a means to obfuscate the reader from understanding the costs stemming from the operations.

Fifth, the conundrum of vague CVs.  Recently, I reviewed an online background of a founder.  His website depicts brand name companies, but nowhere do the job experience depicts whether this individual had any senior managerial roles.  All one needs is to show the titles.  And then one begins to question whether this person as the capability and experience to lead a management team.  Another CV denoted a degree from a Tony Robbins program as his sole academic background.  Personally I would question whether I would insert that information.  Again, there is some question whether this person is capable of managing a business.

Sixth, business plans written by others. I know of a firm that provided me with two business plans, both written by law firms. I can easily spot the grammar and syntax, as if being written for the S.E.C.  Unfortunately, lawyers write to avoid perceptual risks and hardly understand the core business activities.  It is a strange and suicidal means to attempt to attract investors.  I am also irritated knowing well that capital is being used to pay lawyers to write such documents, and this ghost writing further undermines any investor interests.

Let me add the seventh, not having a business plan in the same train of thought of ghost written business plans. I recently met with an entrepreneur who had no business plan or business cards.  Why the meeting.  What was he thinking?  Investors only make money when they invest and liquidate that investment later on.  They pursue many deals in order to be able to collect enough investments to develop a portfolio.  Nothing is more irritating than wasting time on the same company not prepared with a pitch deck/business plan. This approach meeting with potential investors empty handed is fatalistic.

The eighth point related to business plans – they are marketing documents – similar to a sales brochure.  The entrepreneur must know his audience – the potential investor – the type of investments, size of investments, etc. The business plan should tell a story in such a persuasive manner that entices the reader to invest in the company.  It should show enthusiasm in the product and the markets. But then when someone employs ghost writers, nothing like that comes out.  That is why lawyers write the least persuasive documents.  They must be hortatory. And using too much technical terminology without some definitions attached can also turn off a reader. The most important aspect of a business plan is to attract investors, not to impress them or distract them. Also note that the potential investor is already jaded with some other business plans reviewed over the course of the year.  I doubt that he/she has not seen these ploys before.

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Needless to say, Mr. Johnson hit the many basic, educational points that for some strange reason are ignored by many startups.

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About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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