Dr. Earl R. Smith II

Turnaround Management, Senior Adviser, Board Member, Executive Coach, Author, Speaker, Radio & TV Guest & Panel Member

Jan 24 2010

The Money Chase: What Does Investment Grade Mean? Part 1

Posted by Dr. Earl R. Smith II in Venture Capital, tags: adviser, advisory board, angel investor, board of directors, CEO, chairman, coaching, consulting, director, dr earl r smith, dr earl r smith ii, earl r smith ii, earl smith, Executive Coaching, federal circle, federal contracting, funding, Governance, government contractor, investing, investment, investor, Leadership, leadership assessment, leadership coaching, leadership development, leadership styles, management assessment, managing partner, Personal Growth, the federal circle, turnaround, Turnaround Management, Venture Capital

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

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Entrepreneurs frequently enter the money chase much too early in the game. They often start as soon as they have a business plan finished; if not before. Most presentations that investors see fall into this category. The results are beneficial to the investors because they get regular insights into developments within a space they find interesting. But the story is far different for founders. They end up making presentation after presentation without any progress towards funding. For many start-ups, this series becomes a death spiral. Founders end up spending more and more of their time chasing then having meetings which result in little but a polite “don’t call us, we’ll call you”. They get increasingly desperate as reserves dwindle and finally disappear. Finally run out of money, options and energy. Exhausted emotionally and financially, they frequently decide that it is time to ‘get a real job’.

The hard truth is that this is an appropriate fate for most start-ups. Somewhere around one in ten makes it to their fifth anniversary. Many never generate significant revenues; some none at all. Angel investors are keenly aware of these statistics. Most have developed screens to keep from investing in losers. They want to identify that very small percentage of early-stage companies that have the value proposition, team and business plan which will put them in the top ten percent. The best investors identify likely losers very early in the process. This keeps them from spending time listening to presentations that will not result in an investment.

I have frequently used the term ‘investment grade’ to describe the type of investments that attract the attention of investors. I want to outline some of the characteristics that can put a company in this category. But before I start, a cautionary note is prudent. Investors come in all sizes and shapes. Their individual characteristics and objectives drive them in directions that are impossible to sum up within the span of a short chapter. The following list is not a panacea as, indeed, no such a thing exists. But, it may help entrepreneurs focus their efforts in ways that make it more likely that their money chase will end with funding.

Implementation

Investment grade describes a proposal that merits careful consideration because the entrepreneurs seem to have a very good chance of turning their company into a profitable and scalable business. It is important to realize that simply saying that that is your intent is insufficient. Too many ‘entrepreneurs’ do that. Most investors are averse to these kinds of ‘after you give us the money, we will do as we say’ proposals. True entrepreneurs are masters of implementation and of the creativity that is required to do great things with very limited resources. Investors look for signs that the entrepreneur and team are reflexive implementers. Here are a few signs they value:

Customers: Investors expect that they will be providing funds for a business focused primarily on generating revenues. The first thing that they look for is evidence that the value proposition is being monetized in ways that will generate revenues. Here, the old saw applies, “amateurs have markets: professionals have customers”. If you make a presentation to investors without any indication that you have successfully market-tested that value proposition in the ‘real world’, your position will be significantly weakened.

Movement Forward: The team is on trial from the very beginning. That trial gets more exacting the moment the business plan is finalized. Investors expect to see progress on implementing the plan. They see too many proposals that seem to have been still born; where the team has worked the business plan and then come to a full stop until funding has been arranged.

Agility and Adaptability: No plan gets implemented as originally written. The mark of a good entrepreneur is the ability to change focus and approach on the run; as circumstances merit. However, this coin has two sides. Investors are leery of founders who either change their plan at a whim or refuse to change until it is too late. Agility and adaptability are seasonings in the recipe. Too much means that the entrepreneur is not sufficiently dedicated to the core value proposition. Too little means that necessary adaptations will not occur.

Perseverance and Determination: Good entrepreneurs are truly a force of nature. They move through obstacles or move them out of the way. A well balanced and focused entrepreneurial team has the same characteristic. The best are determined to win the battle with the weapons and resources at hand. This characteristic is hard wired. By that I mean that truly entrepreneurial teams will start implementing from the very beginning. They will constantly amaze investors with what they can accomplish with limited resources. Remember, investors are trying to decide if this particular company is ‘investment grade’. They are much more likely to come to that conclusion if the team has wrought miracles with limited resources. Plants that flourish in resource-poor soils are likely to thrive when fertilizer is added.

Initiative: Investors are always avoiding entrepreneurs who cede the initiative to events beyond their control. They avoid teams what come to a dead stop because a funding decision has not been made, a key piece of technology has not been developed or the business plan has not been finalized. One investor had a particularly interesting way of focusing this issue. He added up the total number of hours that a team had at its disposal during a given week and then compared it with what they had accomplished. The results were sometimes startling. In one particular case, he came to the conclusion that the founders had to be spending most of their time playing video games as they got so very little out of the hours at their disposal. Another entrepreneur made a presentation with a business plan that had a two year old date stamp on it. He was asked, “in the two years since this plan was completed, what have you accomplished”? The silence that followed brought the meeting to a rapid conclusion. Every presenter needs to be aware that they are being graded primarily on the results they have already achieved. Having a business plan and an untested value proposition is not nearly enough. Being an entrepreneur is about implementing. Without that, you are just an author of third-rate fiction.

Next: The Money Chase: What Does Investment Grade Mean? Part 2 – Value Proposition

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Dr. Earl R. Smith II

Turnaround Management, Senior Adviser, Board Member, Executive Coach, Author, Speaker, Radio & TV Guest & Panel Member

The Money Chase: What Does Investment Grade Mean? Part 1

How investors help start-ups to fail – the Responses

The Money Chase: Breaking the Truce

The Money Chase: Oil and Water

The Money Chase: Should You

The Money Chase: One Way to Avoid Being ‘Avoided’

The Money Chase: Who They Do Not Invest In

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