Before Asking Others to Invest in Your Project Prepare to Answer the Question That Always Comes

by: Geoff Ficke

Before Asking Others to Invest in Your Project Prepare to Answer the Question That Always Comes

Recently I reviewed a Business Plan that was submitted with a goal of raising a $2 million angel funding round. The product was a Hair Care Accessory that had real commercial potential. If I were grading the plan in one of my classes I would have given it a solid B. I was smitten with most of the assumptions that the document detailed to support the projects viability, except one.

There was only one very major red flag that any Venture Capital investor would seize upon and consider a disqualifier; the $2 million angel funding round. The question that is always asked when a prospective Entrepreneur presents to Venture Capitalists (VC) is this: “How much have you invested of your personal capital into this project”. In some way, shape or form this question always pops up. It is usually not well answered.

In this case the Inventor wanted the $2 million for salaries, a manufacturing facility, travel, staff and offices as well as for inventory build and Marketing. My job is to prepare Entrepreneurs for the rigid cross-examination they will surely receive from the VC panel that examines investment opportunity. I quickly had to refocus my prospective client that funding sources want to know what you are going to do with their money, as well as what you are not going to do with it. Building fixed overhead falls into the category of what you are not going to do with investment monies.

Ask yourself, “Would you invest in you”? If you will not invest monies and assets that you own in your project why would anyone else. For decades banks required a significant down payment before loaning money to buy a house. Housing was considered a great investment for those who had equity in the property. About 20 years ago underwriting standards were loosened and today we see what having no skin in the game has done to housing and the economy.

We approach VC to get projects off the ground. They are in business to discover exciting ideas and products that may potentially become great Companies. They have capital to invest precisely because they are smart people. The pool of hopefuls seeking funding is much greater than the available funding sources. VC is highly selective because they can afford to be.
When an Entrepreneur approaches investment sources they must anticipate and have answers for an array of questions they will surely be confronted with. If you live in a fine home, drive a new car, wear a designer watch and belong to a nice country club the VC’s I know will ask, “Why are you asking us for money”?

In the instance of my Hair Care Accessory inventor he could not answer this question. I repeated, “Would you invest in you”? He said, “of course I would”. My response was why haven’t you?

It is not necessary to be living in penury when asking for an investment. It is important that you can demonstrate that you have fully committed yourself to the project in question. You must be able to demonstrate that “You have invested in you”, to the best of your financial ability. Sweat equity is important. Do not take shortcuts. Due diligence must be thorough. How will you Market the project? Only when you can convince others that you are worth their investment will funding sources begin to open to your project.