Entrepreneur Delusions During a Capital Raise

After having been in the investment banking business for over 10 years, I suppose I have gained some knowledge in this area. First of all, there is investment money out there (lots of it), primarily in the form of equity (I mean venture capital and private equity). Unfortunately, given the current state of the banking industry, that’s all we entrepreneurs have going for us for the time being.  And the banks are posting record profits? Go figure…

Entrepreneurs are a funny breed (myself included). I don’t think that I have ever run into a true entrepreneur who didn’t believe that their product or service was the “best thing since sliced bread.” However, to be brutally honest, not all ideas deserve to get funded. The problem is that entrepreneurs gets so wrapped up in own hype that they forget to take off the “rose colored glasses.” In order to combat the “rose colored glass syndrome,” here are some things to consider:

(1) My product (or service) is going to revolutionize the world.
KC Comment – Really? How many fantastic products or services have been invented failed to gain any traction? Do you really think that there aren’t alternative or competitive products in the market? Look again before you approach any professional money source and risk embarrassing yourself (or your valuable referral source).

(2) I have the greatest Board of Directors (or Advisors).
KC Comment –  Just because you have people on your board that have big titles or PhD’s does not translate into credibility. The best Board is comprised of people that are willing to roll up their sleeves and use their connections to help you grow your business. Don’t just stack your Board with people with seemingly impressive titles and delude yourself into thinking that professionals won’t be able to see through this in 30 seconds. If your business model is so great, you shouldn’t have too much difficulties getting industry leaders to sit on your Board. Let that be a litmus test.

(3) We are going to achieve $50M in sales with $25M in operating profits within twelve months.
KC Comment – If you really believe this is true then you should do everything in your power to avoid giving up any equity in the business. The best performing companies have to strive to generate operating margins in the high 20′s. Doesn’t starting off with the premise that you can do better than industry giants seem a little wacky? However, know that you’re in good company as over 80% of the business plans I see have financial models that predict these kinds of numbers.

(4) We plan to exit in 3 years with a 10X multiple.
Hmmmm. Given that venture capital companies are currently stuck with several portfolio companies (with no exit in sight) and these people are generally thought to be the “best of the best,”  there does appear to be a little disconnect between an entrepreneur’s wishful thinking and reality.

(5) Every money source is valuable.
This is probably the most common mistake that I see entrepreneurs make. They usually get themselves in such a financial bind that they blindly chase money, without any regard to whether the investor has any appetite in the deal. They private equity market is categorized by (a) stage of investment and (b) industry/sector focus. If there isn’t a good fit on both investment stage and industry focus, all you are doing is wasting your valuable time in meetings that won’t generate the outcome that you are hoping for.

Ok. Now that I have spent a fair amount of time bashing entrepreneurs, I promise to provide a counter balance on my next post.

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