GoPro Exits Drone Business, May Be Seeking a Buyer

It was a rough day for GoPro yesterday. The company officially announced that it was laying off more than 250 people and is killing its drone business in the wake of plunging revenues and continued losses. Worse yet, according to some reports, the company that created the action camera market may be searching for a buyer to acquire the business completely.

According to preliminary reports, GoPro lost somewhere in the neighborhood of 40 percent of its revenue in the all-important holiday quarter as compared to the same period in 2016. Part of that is due to decreasing demand for its high quality – but pricey – line of Hero cameras, as well as sluggish sales of its Karma drone, which was introduced to much hype back in 2016, but ran into problems when early production models began losing power while in flight, causing them to plummet from the sky. 

It has been a very difficult couple of years for the action cam company. Revenues and profits have been a rare thing in recent memory, forcing GoPro to reorganize, simply its product line, and search for new ways to generate income. The Karma was suppose to be an important step in that process, but it entered the market late, was beaten in nearly every way by competing products from DJI, and received lots of negative press for its inflight power failures. That design flaw was ultimately fixed by a piece of tape that held the battery in place more securely, but the damage was done and Karma never really got of the ground, despite very positive reviews. 

At one point it looked like the company was getting back on track as it reduced costs and saw growing interest in several of its products again. But, during the run up to Christmas, sales were sluggish at best, prompting this latest move. 

It should be noted that GoPro founder and CEO Nick Woodman denies that the company is for sale, but there are plenty of reports that indicate otherwise. For now, the future of this iconic brand remains murky. Hopefully we'll still have it around in the future. 

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Start Ups: How is Your Financing Going (or Not)?

Every day, our company receives calls and emails from companies seeking investment.

The large ones we route to our investment banking practice and the small ones to our investment conferences in New York, where they can represent themselves to investors without an intermediary.  (Others call about our narrow angel investment criteria in telecom or board positions).

But the great majority of callers do none of the above.  Some want something for nothing.  Others are dreamers whose aspirational companies are unlikely to get off the ground, but remain the subject of loving and lengthy monologues.

It is pretty easy to separate the wheat from the chaff –
(a) those callers who understand the endurance race aspect to raising capital vs.
(b) those who think  they just have to talk someone's ear off to collect no-questions-asked checks.

The following paragraphs include snippets of  seven, initial conversations with members of the latter group (the naive idealists or what?) followed by my behind-the-scenes interpretation.  What is your first impression?  Do you think the caller will be taken seriously by a finance professional?  If not, do not be like them!

Entrepreneur 1: “I don't need to hire your investment bank or present at your conference.  I will be funded by then.”
Us:   “Then how can we help you (I'm wondering,  uh, why did you call us)?” and “Wonderful news!  Are you currently negotiating a letter of intent?  (No)  Do you have a closing date on the calender (No)."
Entrepreneur 1:  “But we have several initial meetings scheduled and they'll love us.”
Interpretation: This caller does not know that investment is often a needle – in-a-haystack search, followed by a lengthy period of due diligence, a letter of intent, negotiated terms, legal advisors, finally culminating in a well defined closing date.  In other words, it entails a protracted and wholly predictable schedule of milestones.  Therefore, this blithe comment reveals that s/he has never worked with investors before.  Some service providers may take advantage of that.  In any case, s/he has lost credibility with professionals who know what s/he does not.


Entrepreneur 2:  “I cannot pay to attend your conference or hire your investment bank.  I thought you could just give me a few names of investors who would be interested.”
Us: “Well, why don't you leave me a short, two page summary, and if we run into someone interested,  we would be happy to pass it along.”
Interpretation: Really?  If a stranger gave you a box and asked you to send it to other people without opening it, would you ever do so? Of course not.  As licensed securities brokers, we have a fiduciary duty to both clients and investors to do due diligence on any business and management team BEFORE introducing a company to an investor.

Asking us to do so without due diligence reveals a caller unfamiliar with U.S. regulations about raising capital from investors.  It paints the caller as naive.  Asking us to do so for free, takes time and effort away from our clients who are paying us to do just that.  So suffice it say that no licensed securities professionals, including us, will just “send around” a business summary from a company we do not know to investors who respect us and whom we respect in return. It would undermine our professional credibility.  These entrepreneurs should regard a phrase like, “if I run into somebody” as a polite brush off to someone who has asked for a freebie.   Furthermore, why would any professional give away valued contacts to a stranger who has said up front he/she will not pay?  Does this guy walk into a restaurant and say, “I'd like a steak dinner with all the trimmings but I don't plan to pay for it.”

Entrepreneurs have to prove themselves to investors, financiers, or bankers.  Those who hope others will just "send it around" probably also hope that posting it on various websites will attract bonafide investors who field better prepared entrepreneurial inquiries every day.

Entrepreneur 3: “I would like to schedule a one hour conference call with you and our management team.”
Us: “I'm sorry, but we do not invest in this business sector/stage of company development.”
Entrepreneur 3:  “Well, then let me just tell you about it now (ad nauseum).”
Interpretation:  This person is not listening and does not value his/her own time, much less ours.  Any entrepreneur should ascertain the investment criteria of a potential investor and be respectful of it.  Most investors can be very clear about their investment criteria.  Ask before launching into a monologue.  If you run hair salons and they invest in telecom, not a good fit.  Simply ask, politely, Sorry to bother you.  Can you recommend anyone/ any group I might contact?"
                         
Entrepreneur 4:  “I seek investment for an idea/invention I have” or “for a non-profit.”
Us: “Gee, it sounds like a terrific idea.  But, unfortunately, investors invest in corporations, not ideas, because corporate law protects their interests.  Why don't you establish a company first and then call us back.”

Or “Donors donate to non-profits in exchange for tax deductions. Have you established your charity as a 501C3 with the IRS to protect the donor's contribution? Have you researched grants and contacted foundations that fund your area of interest? We don't work with non-profits professionally, so how can we help?”  
Interpretation:  These bright and well meaning people need to do some homework on setting up business or charity structures before trolling for investors and donations. A knowledgeable mentor is in order, too.  In most cases, I think such inquirers would do well to work for a larger organization that knows what they need to learn.

Entrepreneur 5:  “Why should I pay to attend your conference?  I am invited all the time to present my fantastic business model for free.” 

Us: “So how is that working for you?  Any letters of interest or finalized investment? (No) Have you evaluated whether those free conferences have a financial model that benefits the organizers (like being paid by sponsors and service providers to entrepreneurs) that is unrelated to your search for capital?” (Uh, wow, no)

Interpretation:  Many people confuse being busy with doing business. Time absolutely is money – it is finite and valuable. Entrepreneurs who rush around to meetings, calling everyone in their contact database, feeling busy, should assess their  productivity, especially as it takes time away from actually running their business. How many actual investors have given them realistic comments on their business plan? Have they adjusted their concept to reflect that market feedback? If they are talking only to service providers, what is the point?

Entrepreneur 6: “I'll pay you a success fee (also called a back-end fee), but not a retainer. We don't have to go through your broker-dealer.  This could be just between us.”

Us:  “That's very generous of you.  But, as FINRA licensed securities brokers, we are required to run any compensation offer through our firm. Why don't you contact our managing director with your business summary and discuss a possible contract?

Interpretation:  A "success" or "back end" fee means that we do not get paid unless an investor funds the company, at which point we are paid an agreed-upon percentage of funds raised.  That is a gamble, of course, embarked on only after we feel confident that we understand the company and know potentially interested investors - in the words of our industry, "our sweet spot." 

Furthermore, this person is suggesting an end-run around a U.S. securities regulation!  If so, why would we want to work with someone who starts out proposing something unethical?  Alternatively, he/she is naive enough to not understand securities regulations in the US, and who, therefore, will require lots of hand holding to meet legal requirements for due diligence, document preparation, audits, legal review, and investor suitability.  In general, these are going to be expensive and time consuming clients. All for no money unless we land a suitable investor.  How likely is that?

Entrepreneur 7:  “Why should I pay you?  I'll just go to one of those crowd-funding sites and get funded there.”

Us: “Great idea. Do that first, and if that doesn't work, or if you succeed and later wish to pursue a second round of funding, you can always call us back.   We wish you all the best."

Interpretation:  Entrepreneurs are wise to explore all options, starting with those that cost the least and offer the best bang for the buck.   For example, a credit card interest rate may be 18-21%.  A promissory note may cost 14%.  A Kickstarter campaign costs about 4% but the entrepreneur gets access to the funds only when the whole campaign amount is reached, largely through the entrepreneur's own outreach to friends, family, and others (strangers?  not so much).  

An investment bank charges 4-10% depending on amount to be raised, plus, usually, a monthly fee to cover the due diligence, financial modeling and sales materials.  Then, they  target a short or long list of likely investors that the client does not already know.  I encourage all  entrepreneurs to research the percentage of companies in their category funded on various crowdfunding sites and angel networks and assess the size of his/her own database of potential funders.  Then develop a campaign based on this research.     

Conclusion:

Running a business is hard work.  Raising funds for it is, too.  Both require different sets of skills and knowledge and sometimes, alternate personality types. 

My recommendations for start up entrepreneurs are these:

1) You only have one chance to make a first impression.  Don't come across as an idiot in your first phone call (!!!!).  Do some homework.  You are asking for money.  Sound knowledgeable and deserving, not needy and ignorant (and verbose).

           a)  For the person you are about to call:  

           Check the website first, regarding services and investment criteria. Practice a            BRIEF (20- 30 second) soundbite explaining the reason for your call and                          ascertain whether you are talking to the right person. For example, “I see on                  your website that you are an angel investor.  Do you have a moment to                            elaborate on your investment criteria?”       

          b) For your business goals:  

  Is anyone investing in your type of deal?  Find some evidence.  Only Mom will               trust your "gut feeling." If you don't know and can't find out, seek out a                           knowledgeable mentor BEFORE dialing for  dollars. Be able to answer logical                 questions financiers will ask about your business, financing needs, use of                       funds, financial prospects.   Small Business Administration courses in your city             can be very helpful, and very inexpensive.  (I have taught several to classes of very attentive entrepreneurs).  Have short documents already prepared when someone asks for a summary.  If you don't have a well written business summary, with all its components, you have demonstrated an inability to review the lengthy legal documents you may get in the future... when investors are interested. Every entrepreneur seeking money is competing against entrepreneurs who are MUCH BETTER PREPARED.  I repeat, both for my phone bill and your success:  DON'T SOUND LIKE A LONG WINDED IDIOT ON YOUR FIRST CALL. 

Obviously, in writing this article, I wish that most of our callers would read this before dialing.  We may be able to help those who do.  

On the other hand, the callers I describe above are the LEAST LIKELY to do so.  

All I can say is, "We recognize you when you call."   

To those of you who read to this conclusion:  you are now armed with information to distinguish yourselves from those other guys.  Thank goodness.

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Entrepreneurial Liars and Cheats

Many entrepreneurs are dismayed by the slow pace of due diligence checks by potential investors. How many interviews, how many financial documents and resumes and business plans must they submit before getting a thumbs up or down?

This process might be more understandable if entrepreneurs realize that THERE ARE SO MANY LIARS OUT THERE.

Liars will be outed

1. Consider the process of home sales. Just as in real estate, investing in a company is proceeded by a period of judicious inquiry and inspection, recognized by both parties, ending in a legally binding closing, scheduled weeks in advance. (This is why I never believe an entrepreneur who blithely reports, “I'll be funded by then” without even having a letter of interest (LOI) in hand.
2. The reason for protracted due diligence is because, sadly PEOPLE LIE. As Catholics understand, there are lies of omission and lies of commission. The former is when a home seller neglects to mention a material fact, like a rotted roof. A lie of commission is actually writing or verbalizing a falsehood, like checking the word “no” on a form that lists “do you know about this or that.” Just as a home seller may obfuscate termite or water damage, companies seeking investment may similarly “put lipstick on a pig.” Repeat investors know this, so they endeavor to separate the wheat from the chaff through careful scrutiny. As any on-line dater knows, anyone can sound good, but how do they appear up close?

A sincere and honest entrepreneur may be aided by the following short list of several entrepreneurs who have approached us recently, each with constructed stories which omitted or fabricated information. If you can appreciate how many such people approach investors (and service providers) you can understand the logic behind due diligence of your company.

Following the list are recommendations to help honest entrepreneurs make a strong, initial impression. For additional anecdotes about other bad guys (both entrepreneurs and service providers), see prior articles on this website.

1. A Torontoan advertised on E-Lance for business writers with a finance background, including introductions to investors for his new cosmetic company. His website looks great, and describes a very impressive business/finance/investment background for him. Hmm. Why is he trolling the modest halls of E-Lance for help in a highly specialized securities offering? Well, due to his unusual name, 5 minutes on the web revealed that his securities license has been revoked in Canada, he has been fined a 6 figure amount (which he has not paid, three years later), and that his prior financial firm was expelled from the securities industry, all for breach of fiduciary duty to investors. Entire legal documents outlining his shenanigans are available for a free read. Today, he runs an unlicensed financial consulting firm and is endeavoring to raise investment in the U.S. Does he really think nobody will look him up before investing? I sent him a paragraph describing his banishment from the industry to which he responded, “You just don't get it.”
2. A Chicagoan sought investment for his real estate fund. His company is rather opaque but his copious litigation record isn't. After a protracted court case, including several changes of attorneys and legal mumbo jumbo, an Illinois state court ordered him to pay an ex-partner nearly $800,000 for breach of contract and snarky efforts to rack up legal fees he apparently endeavored to foist onto the other party. When he did not pay up, he was sued again. This time, public documents (also on-line) reveal that he has moved more than $1 mm in assets among companies and relatives, emptied bank accounts to avoid paying the prior fine and has taken out additional loans on which he has defaulted and owes penalties. Surely this guy will end up in jail.
3. A Hawaiian sought funding to buy land on Maui and build a mansion he would sell, perhaps as the beginning of a real estate empire. After that, he planned to run for mayor. However, a bit of digging uncovered his prison record. In addition, notes from an open meeting at which he appealed the denial of a real estate license, indicate that he has not been seeing his psychiatrist and taking his medication as often as he is supposed to, and that various court documents sent to him care of the YMCA in lieu of a home address did not find him.
4. Sometimes people aren't liars and cheats, they are just naïve and pushy time wasters. A young New Yorker wanted to attract investors so he could develop a high-end resort on Antigua. He touted his relationship with political leaders on the island, but his only “proof” was a form letter from the Tourism director thanking him for exploring real estate there. Furthermore, he has no business experience in real estate or finance, and no track record with investors either! Yet, he called us often, apparently “into his cups” demanding that we invite the island's political leaders to the U.S. And that we line up investors for him. We reported his obnoxious behavior to the service provider through whom he had gotten our name and, have enjoy a blissful silence ever since.
5. Another liar was actually a client in London. I still don't understand his game. He promised to pay us up front, and more than we sought, which is obviously so rare that we were alert to something being awry, so we slow boated our services, awaiting that fee. For the next month, he called or wrote every day, sometimes three times a day, with a litany of excuses for why the wire, the credit card, the bank draft, PayPal wasn't transferring our fee, why the contact information he provided for his banker and accountant never reached a real person, and why the confirmation forms we requested never looked like real transaction reports we receive all year long. I was actually so entertained by the number and variety of his excuses that I started taking notes for a future article about types of business lies. However entertaining his calls might have been, they wasted time we could spend on real clients or nail clipping or anything else, so we finally conveyed a “don't call us; we'll call you” sort of message. I still wonder. Was he just lonely? Did he like creating a fictional personality? I guess I'll never know.

   

   Honesty is the best policy

What can an honest entrepreneur deduce from these anecdotes?

• From an investor's point of view, evaluating entrepreneurs is a process of weeding out those companies that are not suitable for one reason or another. The easy first research is to look for red flags like lies, litigation, and customer complaints. Those people get a quick and decisive “no.”  Other legitimate and well meaning companies are just an unsuitable fit. Maybe the investor specializes in a particular business niche or geography or stage of company development. Perhaps he/she is not liquid until an exit event in a prior investment.
• Action steps for entrepreneurs: Before you EVER approach a funding source, spend time on the Internet researching everyone on your management team, their prior company affiliations, and any companies with names similar to yours. I promise, prudent investors will do so. If anyone on your management team has public disclosures of liens, bankruptcies, criminal convictions, litigiousness, investor complaints, securities violations – you are sunk. If another company with a similar name has a bad reputation with investors, you will have an uphill battle on initial calls and may want to change your appellation. If none of you has relevant positive experience... please wait until you do. This is professionals' money you are seeking, not Mom's. Also, investigate the criteria of an investor before launching into a long monologue selling your deal. If the investor specializes in oil and gas equipment and you make marinara sauce, it is not a good fit. Be respectful of their time. Find out early. Maybe ask if he/she knows who does invest in food companies. 
• 
  
• From an investor's point of view, it is sometimes difficult to discern whether an entrepreneur's behavior is naïve or obfuscatory. Either one requires additional time. A naïve entrepreneur does not understand the process of financing, may not have appropriate documents organized well, and may have ridiculous notions of value. An honest investor may not want to be a tutor to a neophyte. By contrast, a dishonest (vulture) investor may take advantage. Meanwhile, a purposeful obfuscator is hiding information relevant to a well informed investment decision, which can cause litigation down the road when the investment is rescinded, even after the fact. As you can imagine, there are lots of strong ventures and well prepared managers asking for money, too. So it is easy to pass on questionable entrepreneurs.
• Action step for entrepreneurs: The more you know about how business transactions (including financing) work, the faster you can assess whether you are likely or unlikely to secure investment and whether a purported investor is real or really interested, or a time waster for you. Ignorance is expensive. One woman was ready to pack up her NY state business and move to FL at the behest of an alleged investor. Thank goodness she called us. “Do you have anything in writing from him? Have you called prior companies he says he has invested in?” “Uh... no.” Many a naïve entrepreneur has wasted time shopping for dollars they will never get or has been deluded by complimentary intermediaries who promised a rosy future (in exchange for monthly fees) who knew that the entrepreneurial venture was unfundable. So do some research on bank loans, valuations, investment banking fees, success rates on crowd funding or web posting sites, and get to know SEC and FINRA rules regarding the solicitation of private investment.  Enlist trusted mentors or advisers before approaching investors and intermediaries. This education will save you time and money. By all means, check references or anyone you work with. Don't just read resumes. Make calls. Familiarize yourself with the sorts of logical questions any investor is likely to ask (see other articles on this site). If you fumble a key question, the investor may not know whether you are just ignorant or hiding something. Organize your corporate documents in a professional manner (see other articles on this site or our business site: www.starlightcapital.com where we also offer a $50 workbook which lists every single document of value and explains why). If you do encounter an interested investor, you will be able to respond promptly with relevant documents and then able to ask, a week later, about any questions regarding specific, itemized sections.
• 
  
• From an investor's perspective: People who say, “You just don't get it” often have secrets they don't want you to get. This was Enron's response to investigative business journalists, Bethany McLean and Joe Nocera. Guess what, they did get it and exposed it as fraud.
• Action item for entrepreneurs: If you can't explain what your company does, how it makes money or what you will do with investors' funds, no one will trust you. Practice your answers to logical questions that any investor will want to know. (See other articles on this site for details).

I happen to enjoy sniffing out liars and frauds, self-promoters, and bizarrely fictitious self-creations who may be endeavoring to secure money or jobs under false pretenses. 

Often, honest people do not realize how many bad guys are out there. I hope this article outlines how they hinder your business goals even if you don't meet them. I assure you, investors do, all the time.

P.S.:  "If you like your article then you can keep your article" but please also share it with others on your favorite social media site.

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High Conflict People and the Toxic Damage They Cause

Do the following statements sound like anyone who makes you cringe, at work, in your neighborhood, in your extended family?  If so, you are by no means alone.  Fortunately, there are resources available to address the damage such people do to those around them.  

• "This is all your fault. None of it was my fault.”
• "I disown you (again). You have been a terrible spouse/son/daughter/etc. How dare you contradict me.”
• "Don't talk to those neighbors; they'll screw you like they screwed me."
• "You never loaned me that money. It was a gift. Prove it.”
• "Of course, my way is right.  You can't possibly succeed doing that. How stupid.” (No, I never thought of it ).

A recognized category of extremely difficult personalities, identified as "High Conflict People," is easily recognized by a combination of unattractive traits that include:

• “My way or the highway” thinking

• Emotional over-reactions (that can include yelling, throwing things, hitting, or over-the-top messages on emails, letters, answering machines, back stabbing, starting rumors)

• Blaming others, particularly for their own problems, either defensively (“he's out to get me”) or offensively (“it is your fault now and always”)

If your business or home life has been ripped asunder by unpleasant people with such personality traits, you will be glad to learn that a number of books and articles outline how to deal with them, and in various contexts, such as business negotiations, employees/supervisors, divorce, and parenting. There is even a HighConflict Institute! The founder of that organization, Bill Eddy, was previously a therapist at a psychiatric hospital, and later a lawyer and mediator. What a great background for the topic! He has written books with such provocative titles as Its All Your Fault!: 12 Tips for Managing People Who Blame Others for Everything  and High Conflict People in Legal Disputes.

Another excellent resource is The No Asshole Rule:Building a Civilized Workplace and Surviving One That Isn'tby Stanford professor Robert I. Sutton. It is a very short book, which brilliantly quantifies all the costs to businesses that hire and retain such awful people.

These and other resources made several points which I found very useful.  I summarize several below, primarily from Mr. Eddy's writings, because everyone I have spoken to is able to identify several people like this who have been destructive at worst or exhausting and high maintenance, at best.

High conflict people are TOXIC, and their destructive behavior sooner or later results in the erosion of friendships, partnerships, employment, business deals, marriages, and parent/child relationships. In the meantime, they can destroy other people's reputations and livelihoods, undermine business productivity, morale, and profits, and, as one title above suggests, generate or extend frivolous law suits.

High-conflict people are difficult to interact with for the following reasons:  
1) They have difficulty feeling empathy for others, so they can't conceive of compromise. 
2) They have difficulty reflecting on their own behavior, especially as it contributes to their own problems, so they don't handle criticisms or alternative points of view well, nor are they likely to change, despite repeated negative feedback from others. 
3) They tend toward negative perceptions of the world and other people so they assume a defensive or offensive stance even when one isn't warranted or recognized by anyone else. 
4)  They tend to blame others, and harbor and manufacture grudges which reinforce their modus operandi. 
5)  They may try to enlist others (in a junior high school girls sort of way) to join their vendetta against someone else, for example, to get someone fired or socially marginalized, through rumor, innuendo, lies, or even actions they do themselves and then blame on the other party (the recent best selling novel, Gone Girl, by Gillian Flynn).

The reason that they over-react as they do, according to some authors, is based on fears (such as being ignored, criticized, or hurt), that others do not feel so acutely in reaction to similar triggers. Carolyn Baker deals with this in her blog and gives examples, such as preparing for death. 

Most of the sources I read indicate that if these people are adults, you probably cannot change their personalities, but you can and should protect yourself and others, one way or another, such as by leaving them, firing them, or setting boundaries of appropriate interaction (see below). My father wrote a business book years ago (The New Partnership, by Thomas Melohn) in which a whole chapter was devoted to “Firing the Sharks” - those people who continually undermine a company's morale, productivity, and reputation, even after being called on it by peers and supervisors. Think "toxic."


Certainly such people are easy to recognize in the act, but how do you avoid hiring, dating, or marrying them?  

Anyone can demonstrate good behavior for an interview or a few dates. So for goodness sakes, look for red flags.  Among these are: (a) a series of short stints at prior employers and people who seem to cycle through friends, spouses, or dates who never last very long – and guess whose fault that is. (b) anyone who specifically asks you to not talk to prior employers, clients, neighbors, or family members at all is worth closer scrutiny. Is he/she presenting a false front that will be decisively countered by such a background check? What is he or she hiding? Road rage may be another indicator.

Once you are stuck with such people, perhaps relatives, neighbors, or bosses/employees, how can you deal with them? How can you protect your own sanity and sense of purpose?

Bill Eddy suggests seven methods, with easy-to-remember acronyms of BIFF and EAR to guide your responsiveness. In general, EAR governs active listening and BIFF governs your focused responses.

E: empathy (“You really feel strongly about this, don't you?” “You must have felt awful.”)

A: attention (“I'll listen and pay attention.” “When did that last happen?” “What did you do?”)

R: respect (Offer some personal compliment, like “You have a great memory.” or “You certainly made your feelings well known.”)

Bill Eddy's observation is that by their horrible behavior, high conflict people have alienated so many people that they rarely get anyone's empathy, attention, and respect. And they crave it. These three behaviors on your part can calm them down from their defensive/offensive position so that your messaging has a better chance of being heard. You can also disrupt the long harangues by empathetic insertions. This is because, many times, the high conflict person is “on a roll,” repeating a story of victimization or blame that they have told (to you or to others) many times before. In other words, they are on “auto-pilot.” Your pleasant comments can derail and abbreviate the narrative. You can also use EAR comments to bring the conversation to a close (because to a high conflict person, the issue is NEVER closed). (“Thank you for telling me so clearly how you feel about this. It bears some thought. Given the time, though, let's wrap this up for now.”)

BIFF

B: be brief (the longer you go on, the more fodder you give the other party for misuse or abuse).

I: be informative – (correct misinformation, focus on the issue: “We are talking about this one, specific topic. You volunteered on the 12^thfor the project; no one assigned you. You said on that date you'd have it ready today, and the client is scheduled to arrive at 3 pm to hear it.)

F: be friendly (not threatening, not defensive – don't ramp up the reaction).

F: be firm (Unless you want to continue the argument, bring it to a close) (“I have heard your views and have corrected some misunderstandings with facts and dates. Let's get back to work so we are ready for the meeting.”)

In conclusion, if you are beaten and bowed by someone extremely difficult, he or she may be a high conflict person.If so, that term and these resources may help you prepare for incoming shrapnel.

Remember:

(a) You are not alone. These people have, do, and will blame lots of other people all the time, too, with whom they over-react and express all or nothing thinking (you are with me or against me). Many professional resources are available on-line pertinent to numerous situations.

(b) The person's reaction (call it juvenile or "flight or fight") is not your fault.

(c) The person won't change a long term pattern of toxic behavior, so you do need to protect yourself and your loved ones or employees/customers, for example, by cutting them out of your life or company. If stuck with them, try practicing listening and reacting behaviors that demonstrate appropriate conflict resolution. Be firm about setting limits on their abuse of you. By doing so, you'll protect your self-esteem, your reputation, and perhaps, even resolve a task at hand.

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Angel Investments over the Past Decade

An excellent source of information about angel investments in the U.S. can be found at the website for University of New Hampshire's Peter T. Paul Center for Venture Research. https://paulcollege.unh.edu/research/center-venture-research
Scholars there have been tracking venture funding since the early 1980s, and the most recent ten years of annual and semi-annual reports are available for free, at the school's website. Below is a summary of highs and lows over the past decade. What questions do these statistics raise for your business funding plans?


In 2012, 21% of entrepreneurial ventures presented to individuals and angel groups (beyond a “friends and family” round) found investors willing and able to invest in their businesses. This percentage, referred to as a “yield,” is nearly as high as the peak 23% attained in 2001 and 2007, and far higher than the historic average of 10 – 15%. Interpretations for this influx of investment dollars vary greatly and sometimes combine such reasons as investor optimism, fleeing the public equity markets, and a bubble in the making.


In addition to the increased percentage of ventures funded, both the number of entrepreneurial ventures AND the number of angel investors have peaked for the past decade, at 67,030 ventures funded by 268,160 angels in 2012, and 66,230 ventures funded by a whopping 318,480 angels in 2011. These numbers far outstrip the paltry 36,000 ventures funded by 200,000 angels during the “boom years,” such as (these numbers in) 2001.


However, these investment dollars have shifted away from seed stage companies to those with more of a track record. In 2012, only 35% of angel dollars funded seed stage companies, and 33% early stage, far lower than 2005's 55% of investment for seed stage companies and 2010's 67% to early stage companies. A corollary to this shift is the nearly steady, year by year decline over the decade in the percentage of angel investment as the first investor, from a high of 70% in 2005 to 52% in 2012. In other words, although more angels invested in more companies in 2011 and 2012 than earlier, they have become more conservative, by targeting more developed companies, and preferring to follow other investors rather than lead the charge.


What about exits?
The worst year for bankruptcies was 2009, when 40% of angel funded deals went belly up. More commonly, the percentage is in the 20-27% range, highlighting the risk that angels take when they invest in young companies – a point that entrepreneurs should bear in mind when asking for other people's money. In other words, just about the same percentage of companies being funded by angels (about 1 in 5) will, once funded, fail. So entrepreneurs should expect attentive due diligence by potential investors, which may well take longer than they wish.


The most frequent positive exit by angels was in the form of mergers and acquisitions. The highest percentage was 70 in 2008. Other years, mergers and acquisitions accounted for 50 to 65% of the exits. For this reason, entrepreneurs are wise to surround themselves with industry knowledgeable management and directors, whose connections may be crucial to ensuring a profitable merger or acquisition.


IPOs don't happen for small companies anymore, and none have been recorded for the past few years.



The industry sectors most popular with angel investors remain remarkably consistent. The most frequent two sectors for the past ten years have been software and healthcare. The following industries shift back and forth for the next few places in the list: industrial, energy, retail, bio/life science, IT, and media. Financial services and telecom have both fallen out of favor in the past five years. This does not mean that entrepreneurial ventures outside these industries don't get funded, but it may suggest that other management teams need to explain their value proposition carefully to an audience that doesn't encounter as many deals in that sector.


Like any set of statistics, these data leave plenty of room for interpretation, but a few points jump out to me.

1. Entrepreneurs have a lot of competition for angel ears, as well as angel dollars. So be prepared to stand out of the crowd by being thoroughly prepared for investor scrutiny.
   
   
2. The percentage of entrepreneurial ventures successfully securing funding is close to beating the decade's high. This could mean that it is easier to get funding now than before, or it could mean that a bubble is forming and the gravy train will derail shortly. Entrepreneurs should develop contingency plans if the funding climate shifts during a protracted period of due diligence and should never, ever spend money anticipated but not yet in hand.
   
   
3. Seed funding is harder to come by. So entrepreneurs need to be able to self fund for a longer period than in the past or need to develop some revenue stream early, in order to (a) stay afloat and (b) attract investors who want to see a functioning business, not just a business plan. Besides, being able to generate some payments increases the range of potential funding sources, such as revenue based lenders (like factoring firms).
   

4. Because the majority of investor exits are through M&As, entrepreneurs need to know their competitors, suppliers, and customer base very well. Any of these could be your partners, buyers, or bosses in the future.
   
   
   To be routed to the website of the University of New Hampshire, click here.
   

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Spot Liars and Frauds Before You Hire (or Date) Them

For ten years, my favorite job as Compliance Officer of an Investment Bank was spotting liars. This meant figuring out which finance professionals NOT to hire because they embellished their qualifications, which potential clients NOT to accept because they had obfuscated weaknesses in their companies, and which alleged investors NOT to believe because they would never pony up a dime. On the theory of “garbage in, garbage out,” I figured that anyone who lied to me up front about something I easily discovered was likely to lie later on about something important I might not detect. With 7 billion people on the planet, I endeavored to avoid those mendacious people and work with honest ones.


What appalls me is the frequency with which I have encountered grown-ups who lie, easily, smoothly, and frequently to get something they want, based on merits they lack. Obviously, their blarney must work on some of the people some of the time. I'm also dismayed by the number of companies and individuals who don't do background checks before they hire or recommend people, or who part with their money or let someone into their homes or lives without asking a few logical questions first. So shame on both parties!


The following article shares easy, cheap or free research that anyone can do in less than an hour and examples of falsehoods I have uncovered in the areas of education, business experience, lawsuits, and crimes.  Protect yourself with a healthy dose of skepticism, a few minutes on the Internet, and some judicious questions.





Start with the person's resume. If your interaction is not professional, and doesn't warrant asking for one (such as your daughter's new boyfriend), look up the person on Linked In or similar self-posting websites. Scrutinize the document. Do you recognize the names of the schools and companies? Do the job descriptions and interests correspond to what you know of the person? Some lies are obvious, while others require more digging, by cross referencing this information with corroboration or contradictions available elsewhere. Examples below.


Education:
Examples of Findings:

One CEO of an OTC shell company lied in his SEC filings about his academic credentials. He claimed a PhD      from a university that does not even exist! Instead, he actually has an AA degree from a community college in Washington State. I told the SEC what I found.


A potential employee claimed a MBA. The school registrar revealed that he attended adult education classes, but never enrolled in a degree program.


One man claimed to be a bishop in a conservative branch of the Anglican Church(for which he created a Wikipedia page) and to have been ordained after attending a particular seminary. A bit of research revealed that he made up this alleged denomination AND the school! Neither is a legitimate, recognized institution.

A woman listed no college degree but put “post-grad” on Linked In, citing no school at all. She also indicated membership in The Yale Club and Harvard Club. These are rather obvious ploys to sound impressive.

Two people claimed to be members of a national honor society that sounds real but is actually a “pay to post” website.

How can you validate or discredit educational claims?

If you are unfamiliar with the name of the school,search for its website or Google “accredited universities.” If the only reference you find is in connection with this person's posting, such an institution does not really exist. Some other schools exist only as “degree mills” - website companies from which a person can buy a fake diploma. In the case of legitimate, small colleges and universities, you can call the registrar, who may answer your questions about someone's enrollment. In most cases, though, you need to pay a few dollars (usually less than $10) to the National Student Clearinghouse website:  www.nationalstudentclearinghouse.org.


Many employers ask applicants to sign an authorization for a background check, and on it to include relevant details such as address and social security number. Such a standard form is an easy to way to separate the wheat from the chaff early, as some people may fade away to evade such scrutiny. If your reason for checking somebody out doesn't provide an opportunity to solicit such authorization, you might ask a friend who is an alumnus of that school to look up the person's name in their alumni database. Alternatively, you can review the school's website to see if, for example, it offers the degree the person claims or to glean some details you might work into a subsequent conversation if you doubt the person's attendance there.


Prior employment:
Examples of findings:


One man claimed to have investment banking transaction experience. A short call to the employee check hotline revealed that he had one year's experience in a back office, administrative support function.


One woman's patchy resume indicated consulting services to the CEOs and boards of international banks. Her prior experience? A BA from a state university, followed by 3 years selling household products for a pyramid marketing company and 5 years as a telecom customer service representative (which her Linked In profile neglected to mention, but which are evident from other Internet sites).

One woman described herself as a real estate investment expert. The real estate broker confirmed that she had worked with them for several months as a brand new realtor but, as yet, had no clients.

Calls to two prior employers of a job applicant were the most interesting I've ever had. One man actually yelled that my applicant was crazy. His prior employer indicated that he was a severe alcoholic with rage management issues who sabotaged several client relationships. He was with each company for only a few months.

Several alleged investors were unable to give me the names of any companies in which they had previously invested. Another investment firm was cited in a public company's SEC filings as having failed to fulfill their contracted investment (the firm needed to explain a revision to their financial outlook).



How can you find out about prior employment?

Review the names of past companies, dates, and duties on the resume.  Be sure to look for other resumes on other sites, by googling the person's name and any of those companies. Often, people update one document but forget that the Internet stores prior versions, too, and that other companies and websites may mention them. Red flags of doubt include:


frequent job changes, with short stints at each, an illogical career trajectory, impressive titles or duties surprisingly early with little prior experience, long gaps, multiple resumes that don't match on dates, duties, titles, or firms, companies you can't find through Internet searches, claims of great success yet major swings in industries, cities, or employers.   Ask for references and be sure to call them.


Ask if the person worked there, during the years and with the duties claimed and ask “is there anything else I should know?” Some large companies have “employee check hotlines” for such inquiries. If the person claims to have been self employed (as a reason why you can't find the firm) look it up in the corporations list of the state's secretary of state or commerce website. Although each website differs, many allow you to research whether a company name is “available” or associated with an existing or even past company, and many list the officers and directors, along with the address. For some types of businesses, the Better Business Bureau (www.bbb.org)  is a good source of information, not about individual employees but about the reputation of the company. I like the website, www.ripoffreport.com on which unhappy clients criticize companies.  For public companies, you can review SEC documents and EDGAR filings at www.sec.gov. Most professions that require licensing, such as accounting, law, medicine have websites where you can search for names, specialties, and whether the person remains in good standing with the profession. I like www.martindale.comfor searching attorneys and www.finra.org(look for Broker Check) for investment bankers. If you don't find the name of the person, he or she is not licensed. If you do not find the name of a person who purported to be a licensed doctor, attorney, investment banker, etc, call that organization.  Ask why you don't find the person.  They might be interested to learn that someone is masquerading as a member of that profession.  In fact, some groups have posted "wall of shame" websites naming names of imposters.  There is one for people who pretend to have been Navy Seals.  


Crimes and Lawsuits:
Examples:

A man proclaimed himself an expert in financing small companies, but his credibility was marred by revelations that he had filed personal and corporate bankruptcies in two different states after shareholders accused him of fraud.  Even more damaging were the words of the bankruptcy judge, who handed down the most sweeping denunciation of his business practices that I have ever read outside a criminal indictment.

A man sought investors in his new venture, based on claims of great experience in the past. He neglected to mention, understandably, that his past included SEC sanctions for fraudulent business practices so egregious that he is in a case study at a law school!


A man was imprisoned in New Jersey for fraud, and moved to Texas to look for new investors in the same type of business. I reported him to the white collar crime division of the local police but they said they couldn't do anything until he actually committed a crime in their jurisdiction.


A man was barred from licensing in the securities industry and from selling any security in the state of CA based on a law suit by several investors. He re-registered the exact same business in MD and got some attorney who obviously did no due diligence to draft a Private Placement Memorandum so he could solicit new investors! I called the state's attorney general and the lawyer.


One man is operating businesses, soliciting investment, under two different last names. Somebody actually set up a website to expose him as a fraud.


One woman is listed on the internet under several spellings of her name, several different email and physical addresses, and inconsistent resumes, titles, and job histories.

One man sought investment in a pet food company.  However, he is under indictment in CA for 48 counts of fraud and cruelty to animals when he ran a pet shop.  

How can you discover a person's crimes and lawsuits?

Google the person's name with a variety of search terms for your worst fears, such aslawsuit, bankrupt, and various crimes. Common names, like “John Doe” may be very difficult to search, so narrow the field with details like the city, state, job title, school:  "John Doe" + NY + invest + fraud.  Some states, such as TX, AK, and FL make it very easy to look up lawsuits, bankruptcies, and IRS liens. Others, like CA and NY have tighter privacy laws.  When you search, don't look just at the first page of results. Some clever people bury their past misdeeds with a pile of free press releases, self-published articles, and other more recent information. 

*      *      *      *      *
Over the years, I have uncovered more lies among professionals that I ever expected. Now I am pretty jaded, with a fine tuned “nose” for people who “don't pass the sniff test.” I'm not talking about women who lie about their age or men who lie about the size of the fish that got away. I'm warning you that there are plenty of charming people who have lied and will lie to get into your company, your home, or your bed. Protect yourself. Check them out.

***

If you enjoy or learn from this article, please link it to or post it on you favorite social medial sites.   Thanks,  Laura Emerson

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Five Questions Any Money Seeking Entrepreneur MUST Be Able to Answer Briefly and Compellingly

Every day, we talk with entrepreneurs who wish to grow or start a business, with the help of other people's money (whether the source is investors, banks, factoring firms, or grants). If you are among them, you HAVE to be able to answer the following five questions, briefly, clearly, and compellingly or you will not get past a first phone call with a legitimate source of funds and each subsequent call to someone else will be a waste of everyone's time. Too often, the entrepreneurs who call us are absolutely stymied by these questions. Don't be like them!




The Questions:

1. How do you (or how will you) make money?
   
2. How much do you wish to raise (or borrow)?
   
3. What will you do with the investment (or loan amount)?
   
4. How will you pay it back (by date) (or how and when will the investor earn a return on investment)?
   
5. What experience do you and your management team have in this industry and with prior investors' money (or loans)?
   

Why These Questions are Important:

Each question helps your potential lender or investor assess risk and potential reward. If you hem and haw on any of them, you are doomed, because it means that you don't appreciate the risk you are asking that person to take with money he/she has that you lack. A non-answer to any one of these is akin to asking someone to dive into a dark pool without being able to answer the obvious first question, “how deep is it?”




Components of Compelling Answers

1. The answer to question 1 (How do you make money?) is stronger with any of the following components:
   (a) Multiple revenue streams are better than “one trick ponies” because the variety allows the company to stay afloat even if some products or services fail or take longer to succeed or cost more to develop/deliver than anticipated;
   (b) The revenue projections are not dependent on unlikely scenarios (like huge market share grabs right away or fuel prices lower than they are today or a a shorter sales cycle than is normal for your industry);
   (c) Products and services that are correlated to a variety of economic assumptions are likely to weather the highs and lows of economic cycles better than those that depend only on a high or low. For example, a company might have some offerings attractive in periods of inflation AND recession or when client companies or target populations are growing AND maintaining, aging, and retracting.
   (d) Demonstrate profitability, even if in a small market or by another company.
   
   

2. Questions 2, 3, and 4 are related, even if they are asked separately, so construct your answers with each one in mind. This is because the amount you wish to raise should be directly related to how you plan to use it and that use should enable you to pay back your lender or investor on time and at a profit. For example, if your reason for raising money is “to rent larger office space and pay me a salary,” or “to research the market potential” such answers do not translate into repayment of the loan or investment and therefore do not encourage much confidence. These are faith based answers, like “just trust me.” Why? A compelling answer is one that directly leads to a believable profit. Good answers might sound like this: “We wish to raise $xx in order to increase our manufacturing speed to meet current demand that exceeds our capacity” or “We wish to raise $xx to buy a competitor we believe to be undervalued and that offers a complementary fit with our firm in terms of customer base, geography, and product lines.” Or “this business model has been profitably test marketed (where) and we are now ready to launch it on a larger scale, with $xx for experienced industry sales personnel in the most lucrative markets.”
   
   
3. Your answer to Question 5 indicates your ability to understand and respond to the the risks in the business you propose to run with someone else's money. Managers with a track record of relevant experience are obviously more attractive than those without. Managers who have borrowed money or taken investors' money and returned it, on time, at a profit to the lender or investor are equally appealing. If you have not done the exact thing before to great financial gain (because otherwise you wouldn't need to borrow money, would you?) you can still construct a compelling answer. For example, have a board of advisers experienced in this industry, an excellent credit rating, or prior lines of credit that were paid back on time after being used well. Have a list of pertinent referrals from professionals in your current and prior industries. If you are an expert in the pertinent field, who knows it? Have you published papers, delivered speeches? If not, write some and put them on your website or send out press releases. Neither costs much. Become an expert in your field. Research other public and private companies in this sector, join relevant professional associations, subscribe to pertinent journals.
   
   There is nothing more embarrassing than talking to an entrepreneur who knows less about his/her industry than we do, especially when we don't consider ourselves expert, but just educated business people. Compelling answers could include variants of: “I have x years of experience in this aspect of the industry, and have assembled a management team and advisory board that excels in the other areas we need to anticipate and respond to the market potential.” Or “I am a serial entrepreneur who has run xxx number of companies in other industries and sold them at a profit (or returned investors' money) in most cases and learned hard and lasting lessons when I didn't. I have succeeded by a set of priorities that has guided me in each of the prior companies and will do so in this one, too. Those priorities are xyz.” Or “I have several patented game changing innovations that will enable our targeted client companies to deliver results faster, cheaper and better than their competitors.”
   

Conclusion

If you can't answer these questions well, don't pick up the phone to ask for money. Put your time, instead, into learning more about your industry or surrounding yourself with others who know it better than you do. They can help you not only answer these questions, but build a profitable company. Who knows. You may never need to borrow a dime to make a dollar.

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Why No Term Sheets... at all? or "They Just Aren't Into You"

Laura Emerson

laura@starlightcapital.com

March 24, 2013

Raising capital is hard, time consuming, expensive, and sometimes humbling. There are as many reasons that investors do not invest in companies as there are reasons why people who meet choose not to date. Sometimes “they just aren't into you.” On the other hand, if you have done your research and have found that indeed there are investors financing companies in your niche, just not you, it is WAY past time to assess whether you might be doing anything to sabotage your own game plan.

Below are five commonalities among companies that never get any term sheets at all. Do any pertain to you? Also, review the descriptions of unfunded (unfundable?) companies at the end of the article. Do any aspects sound uncomfortably familiar? If so, the most common problems are not difficult to address.

The five categories are: talking too much, talking to the wrong people, talking about the wrong things, a business plan with holes that indicate naivete or obfuscation, and inflated pre-money valuations. Do any of these sound familiar?

1. DO YOU WASTE TIME BY TALKING TOO MUCH?

Every entrepreneur I have ever met is as proud of his/her company as a new parent is of that wrinkly little baby. Both groups often make the mistake of being long winded, without first ascertaining the audience's degree of interest. Someone's polite inquiry at a networking event of “What do you do?” or “Tell me about your company” may welcome a 2 minute soundbite between drinks, not an uninterrupted oration.

If your monologue gets interrupted with some version of “I've gotta go,” you've talked too long. Besides, it is in YOUR interest as a social being as well as a finance hunting entrepreneur to be brief in order to ascertain something about the other person. (See reasons below). Don't be a blow hard who confuses stunned silence with abject interest.

2) DO YOU WASTE TIME BY TALKING TO THE WRONG PEOPLE?


Time is indeed worth money. For most entrepreneurs, their burn rate projects a go/no go date by which they need to grow the company out of current financing constraints. This date should be etched on an entrepreneur's wallet, if not his heart and mind. Therefore, value your time (as well as other people's) by being selective about who warrants your time.

In a spontaneous conversation with someone you don't know well, you can be brief and then ask a few pertinent questions such as “That's my soundbite. How about you? What does your company do?” Their answer will help you decide how to proceed. Before a scheduled telephone or personal meeting, you should review a company's website, do Internet searches about the company and management, or ask people who know the company. By whatever process, your goal is to determine whether this person or that meeting is worth your time for whatever your goals may be. Is it direct funding? Indirect referrals? Board members? Employees? Paid services? Customers? You may be juggling several interests. If you know something about the other person's potential for you, you can play toss and catch with the right ball. If you don't bother to find out, you are likely to (a) waste time, (b) blow an opportunity, or (c) worse. Maybe the stranger listening to your loving description of your company is actually invested in a competitor. Maybe she is a service provider masquerading as an investor. Check people out early in order to allocate your precious time appropriately.

• Once you determine that a particular person or company is a possible source of direct investment, what questions might you ask early on? Logical questions expected and appreciated by investors include:
• “What are the parameters of your investment interest (stage of company development, geography, industry niche)?”
• “What is the status of your recent investments? (within the last 3-4 years. Any follow on rounds? Failures? Liquidity events?).”
• “Do you prefer debt or equity? How much? Generally, what sorts of terms (they will hedge, but you can learn what percentage of a company they like to buy for equity, or the sort of interest rate they seek for debt)? A board seat or management role? Is the money doled out in tranches (for example, as certain milestones are achieved) or annually (after audited financials?

Many investor websites address such points very clearly in order to encourage appropriate inquiries and discourage time wasters. Read a few (any at all) to see what they consider important so you can ask the right questions next time. Research those that have invested in your industry or company size or geographic range. If you don't know them, it may be worth paying something to find them, whether buying a list or a hiring a service provider who knows your industry and the financiers in it.


If you conclude that the person or company is knowledgeable but that there is no fit between you, ask if they know anyone who does invest in a company of your stage/size/location. Many people are happy to provide referrals. With a cordial attitude, you may develop a valuable resource person in the future if you don't burn bridges with someone “just not into you” at this point in your company's history.


3) DO YOU TALK ONLY ABOUT YOUR OWN INTERESTS WHEN YOU SHOULD FOCUS ON THE INVESTOR'S ENLIGHTENED SELF-INTEREST?

In a meeting with investors, don't be like someone who walks into a mortgage broker talking about the great tuck pointing on the house he wants. That's NOT important to the lender. Rather, that person is a gatekeeper between you and the mortgage you want. The broker doesn't care about you OR the house. He/she wants to evaluate whether you are likely to make the company more money or cost more money than the other 40 applicants on the calendar that week.

Your conversations will be more respectful of the investor's time, and more targeted for your own goals, if you realize that they DON'T CARE ABOUT YOU. Nor do they care if you make the world's best widget. What they do care about is making money. And since they have some to spend, and you want them to spend it with you instead of all the other entrepreneurs calling for the same reason, the conversation is inherently uneven. AND IT IS NOT ABOUT YOU. You want to convey two messages. 1) You understand their goals and priorities (because you have already researched them) and 2) Your business plan can deliver faster, cheaper, better results for those goals than your competitors, who, at this point,are EVERY OTHER ENTREPRENEUR IN ANYINDUSTRY who is also vying for their attention.

Therefore, do not spend all your time describing your venture in loving detail. Rather, realizing that time is money, prioritize your time by talking about money, particularly those aspects that this particular investor is interested in. For example, you may want to point out in the first three -five minutes that your management team is well equipped to make money in this market because of a proven track record. It is prepared to defend its business from competitors or market fluctuations with some well planned defenses, and that the market is a “rising tide” of growth with high profit potential. THEN INVITE QUESTIONS. Whatever you do, don't spend your whole meeting time talking. You want, and you NEED feedback so you can assess their questions and degree of interest/knowledge, so you can reframe answers in that meeting or as a follow up. Ideally, have someone with you whose job is to keep notes of their comments and also of when they took notes during your presentation. Then debrief with your management team about the resulting notes. If you visited ten viable investors who repeated the same questions or criticisms, and then made no funding offer, for goodness sakes, don't disregard them with, “They don't get it.” Rather, with the curtains drawn and the phones off, re-evaluate your plan in light of what knowledgeable investors had to say. Do you need to say it differently? Do you need to change the plan itself? Do you need a different presenter? Do you need to start allocating more time to running the company instead of running to investors? How long to your go/no go date? Don't be like a pregnant woman looking for a meal ticket. You need to be the meal ticket in order to attract … well you get the analogy.

4. DOES YOUR PRESENTATION HAVE OBVIOUS HOLES? DO THEY INDICATE NAIVETE OR PURPOSEFUL OBFUSCATION? (Either way, you have sabotaged yourself).

Anyone can find templates for business plans and read good and bad examples. Anyone who doesn't have the time or talent to write appropriate documents to pursue funding can hire someone. You don't want to make an amateurish first impression in a world of entrepreneurs who took the time to do a better job than you. After all, why would an investor trust money to a management team that can't even write a coherent business plan? Such a fuzzy document pretty much proves a lack of attention to detail that most businesses require.

The following are frequent weaknesses or omissions in the business plans of unfunded (unfundable) companies:

• Biographies: Management team biographies fail to indicate relevant experience in THIS PARTICULAR business area, success in relevant comparisons, experience with prior investors, or, worse, are contradicted by publicly available information in a way that absolutely undermines their credibility and honesty.
• Financials: Financial projections may be based on “pie in the sky” assumptions, like “no competition” or “flat fuel prices” or an assertive market share grab right away. Balance sheets may neglect to show costs/profits/taxes for logical elements that a savvy investor will see at a glance.
• Market potential: Among companies with good business plans, the best buggy whip manufacturer's documents are unlikely to compete with a business in a growing market. Similarly, an industry with low barriers to entry, many competitors, and a low cost provider advantage is less attractive than one with few competitors and a defensible wall to keep competitors at bay. Thus, high up front costs cut both ways – they may deter others from entering the market space, but they may deter some investors (but not others). Some businesses have the potential to grow and make enough money for “Mom and Pop” to enjoy a profit, but not enough for partners.
• Use of Funds: The use of funds should be inextricably linked to a path to profitability, not paying back debt, litigation, or overhead.
• Investor protection: The investment terms on a private placement should protect the investor. This demonstrates that management respects the importance of its investors. For example, incorporation in an investor-friendly state, an escrow account, a minimum raise before funds can be touched, quarterly or annual reports and meetings, audited financials, a knowledgeable advisory board, well respected securities attorneys, all increase confidence of the people whose money you want. If you seek money without having these, without understanding why they are important to the people whose money you solicit then you are likely to be rebuffed time and again, except by tricksters who aren't who they seem to be at first.
• Consistency, but with a wow factor. Finally, nothing in your business plan should conflict with any other easily accessible information about you, your industry, and your management team. In other words, your business plan must demonstrate that you know what is important, both to the future of the industry, your company, and to investors. So yes, selling securities in your company as a way of raising money means that you have to climb several learning curves, one of which is securities laws.

5) YOUR PRE-MONEY VALUATION IS BASED ON POST FUNDING POTENTIAL

Many, many CEOS have highly inflated pre-money valuations for their companies, often based on projections achievable only IF they get first and second round funding to embark on the necessary steps to achieve any profit in the marketplace. If you need initial investment to launch the process by which to earn that high valuation, then your pre-money valuation is, like adding up the angles in a geometric proof, not the same as the total amount that depends on that initial infusion. It is much lower. This is wholly obvious to investors and should be to realistic entrepreneurs, too.

Inflated valuations may sound great, (“This company will be worth $10 billion!) but when entrepreneurs penalize the rare, early, risk taking investors with such an inflated pre-money valuation, they discourage the very money they need to even start the path to profitable dreams. Any start-up that can't even get off the business plan page, much less into the market needs to give up plenty of the company, like half, to make the high risk investment worthwhile. Some piddly 10% for the life blood needed at that point is insulting to the investor whose money you desperately need. Just as the guy with bad credit pays a higher interest rate, the company that needs the money the most has to give up the most to get it.

EXAMPLES of COMPANIES which, to my knowledge, never received a term sheet.

1. Touchy-feely: One CEO spoke with passion about how her healthcare solution could save lives, but she couldn't describe how and when it could make money.
2. A deep hole: One CEO had excellent reviews by past customers in a very crowded field of low cost competitors. To compete, he cut his prices just as fuel prices escalated, so the company has been losing money for several years. The solution? Solicit investment in the hope of having deeper pockets to wait out unfunded competitors who may bail out of the market.
3. A deeper hole: One CEO had an excellent presentation, but needed money so quickly and desperately that he scared away all but the vultures, who decided to wait until he went bankrupt to pick up the assets.
4. Bad financial reputation: The management team, which was obliquely described in the business plan, was revealed in Internet searches to have IRS liens, foreclosures, and bankruptcies. Prior “sold” companies appear to have been retained and renamed.
5. Unproven model: One business plan front loaded expenses for a national marketing campaign without having first proved receptivity in even a regional or local market for the product and price point, much less field testing its (to-be-developed) distribution network and manufacturing capability for large scale sales. In other words, they could envision the business as a huge success, but they couldn't demonstrate how to get there.
6. HUH? One inventor was so secretive about his invention that no one could figure out what he did, much less what the business model might be.
7. Takers: One company's PPM offered no escrow protection and no minimal raise required to spend investors' money. The potential company was to become a regional bank.
8. Day Late and A Dollar Short: Every few years the financial news is abuzz with the latest NEW THING for supposedly making easy money. (1) Develop vacation real estate in various parts of the world. (2) Develop specialty TV channels to sell jewelry, start a food show, pawn something, or move to Alaska. (3) A few years ago, a lot of unemployed financiers wanted to start hedge funds and now they want to get into crowd sourcing. What's the commonality? All of these eager people wanted to embark on these new adventures with SOMEONE ELSE'S MONEY.
9. No investor friendly structure: “I have an idea” is not a business. Investors don't invest in ideas. They invest in businesses, because corporations offer structures that can protect investors. Some businesses aren't even incorporated or are incorporated as S corporations or are registered in states less friendly to investors. In such cases, the entrepreneur is essentially asking for a personal loan/gift, not a protected investment, and will not attract any funding except from Mom, Dad or Aunt Edna (statistics vary, but the gist is that only 5% of start ups make it past the family and friends funding round to outsiders. This doesn't mean that they all fail. This means that the successes are able to move ahead with no further investment.
10. Use of Funds: The primary use of funds in a business plan was for a salary and an office, which happened to be rented from a relative. A subsequent round of fund-raising was envisioned to actually grow the company.
11. Not scalable: Some businesses are essentially local, “Mom and Pop” endeavors which could succeed with a profit for the owner, but are unlikely to generate enough in the short term to get an investor excited, much less pay him/her back.
12. Personality problems. Entrepreneurs are by nature creative, innovative, independent, optimistic people. But many early stage entrepreneurs tend to have difficulty letting go, and delegating to others who may have significant abilities to contribute. If you are soliciting a stranger's money, you are essentially recruiting a partner who will be looking over your shoulder. Take the money/take the partner. You can't have it both ways.
13. Note there are scurrilous “entrepreneurs” who are frauds and scam artists, soliciting investment in sham companies for personal gain. Make sure that your company name and management names have no taint upon them and no similarity to others. You don't have a second chance to make a first impression.

If you are not getting traction in your funding search, you are by no means alone. Recent research indicates that among angel-level investments circulated amongst American investors, about 17% attracted some funding during the first half of 2012. 83% did not. How many of them represent some of these five common mistakes? If worst comes to worst, maybe some learned that they did indeed make the world's best buggy whip, but the inventor needs a day job, a business in a rising tide industry, or perhaps, a financially savvy advisor and spokesman.    

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