Apr 182010

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Dr. Earl R. Smith II


I recently sat in on a gab fest of entrepreneurs and wannabee entrepreneurs. The subject of investors and how best to approach them came up and I was taken aback by what I heard. If you listened to these guys investors were stupid, arrogant, greedy, short-sighted, overbearing, intrusive, difficult to deal with and distinctly neither a recognized nor welcomed part of the human race. Investors were the scourge of the business world and responsible for most of the failures in it.

What set me back were the obvious questions:

  • “OK, if these people are this way, why would you have anything to do with them?”
  • “If these people knew how little you thought of them, why would they ever consider investing with you?”

Uncharacteristically, I held my questions and decided to ask the ‘other side’ what they thought about the conversation. So I organized an informal session of investors and put the question to them. After I had described the ‘bitching gaggle’ and named the most prominent participants, here is a bit of what they offered:

  • “Yeah, we know about these types. The grapevine beings us their names and we don’t take them or their proposals seriously.”
  • “These guys are so busy ratifying their own provincial perspective that they never see the process from ours. Most of them think they can simply present a good business plan to strangers and get a commitment on the spot. They treat us like an ATM”
  • “They are only one kind that I see … the majority, to be sure, but not the only kind. Some – the very best of them – learn that they need to get to know us and let us get to know them. They approach us as serious people and work establish a relationship based on trust and mutual respect.”

The last comment echoed something that I have been telling founders for years. “You need to start a year or more in advance to establish relationships with potential investors before attempting to raise capital from them.” Most investors respond professionally to this possibility; that is to say, they either pursue or turn away from such approaches depending on how well the founders and their value proposition resonates with the investor’s interest. This process takes intelligence, sound judgment, planning and perseverance. The founders who misses the boat tend to have the ATM perspective. They wait until it is far too late to begin the process of building relationships with investors. By that time, their company can’t wait for a year to raise the capital it needs.

The unavoidable fact is that investors are humans focused on a human purpose. And, as such, they are not, by definition, stupid, arrogant, greedy, short-sighted, overbearing, intrusive or difficult to deal with. They typically won’t invest unless they have direct or indirect relationships with founders and companies. Every investor has many investment opportunities. The ones they invest in are companies they know more about than they learn from an elevator pitch or a business plan.

Through all the companies I founded and companies I have worked with, I have never known one to successfully raise capital from total strangers. Typically, the investor had a relationship over a significant period of time with a member of the founding team. The relationship was based on trust and experience. In other words, those founders who were successful in raising capital most often saw investors in positive, rather than negative, lights.

To summarize, according to my informal focus group, the key to successfully raising capital from investors is to establish a relationship with them so that the investors can get to know the founders, their business ideas and the kinds of business people they really are. If the relationship develops into a good fit, these investors become a champion to other investors.

Now let’s return to the group. I wanted to see if the investors that I had gathered had any opinions as to why certain founders saw them is such negative lights and held them in such low esteem. “OK guys, what drives these types to think so poorly of the very people they need to help their business grow?” Here is some of what they offered:

  • “I see it as a form of immaturity. These are essentially angry children. Many of them puff up their chest, proclaim a long and successful career (such pretensions seldom survive even a cursory diligence) and pontificate on things they know little or nothing about.”
  • “It is the uninformed showing the unwilling how to do the unnecessary. These people are really nobodies parading as somebody. They do a lot of damage to the chances of other founders. By the time they begin to think this way, they are not founders anymore; just proselytizers.”
  • “It’s just background noise mostly. But there is some benefit. We tend to keep close track of those who pontificate in such a manner and politely decline to engage with them in any way. The internet is such a great source of information. I once was approached by a founder who pitched me an interesting idea. I Goggled him and found lots of derogatory comments he had made about how stupid and destructive investors were. Needless to say, I did not pursue discussions with him.”
  • “Who in their right mind would do business with somebody who thinks you are an idiot?”
  • I keep a cartoon on my desk. It is from the Simpsons TV show. It is called “old man yells at cloud”. I am amazed at how young some of these old men are.”

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