5 Things You Should Never Tell Investors

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Are you hoping to raise some capital to get your business off the ground? Are you anxiously waiting for the day when your bank account is flush with newly-injected investor cash? Are you thinking about presenting your business plan to a group of Angel Investors or Venture Capitalists?

If you answered yes to any of these questions, then this is something you need to hear. According to Scott Shane's book The Illusions of Entrepreneurship, not very many start-up companies receive funding from formal investors. His research indicates that less than one-tenth of one percent of all start-ups receives VC money, accounting for less than 2% of all small business financing. And, only 13.4% of the angel investors are actually accredited, meaning most angels are actually informal investors, not high-profile sophisticated investors who mandate fancy presentations, well-coiffed business plans, and attractive 10X returns. (10X refers to a return of at least 10 times the investor's initial investment.)

This data is not meant to scare you away from seeking the funding you need, but it should clarify that a very small minority of new businesses ever find themselves in front of sophisticated investors. In case you ever find yourself trying to convince one or more of them that your business is worthy of their cash, here are five common faux-pas you should never say in your presentation.

1. What do you mean by cap table?

First of all, this refers to your capitalization table. It defines all of the current shareholders/members of your company and projects how that will change with this and future rounds of financing. It was not too long ago that an up-and-coming business received a coveted invitation to present to an angel group. Upon investigation, the company had sold some stock to friends and family in the early days but had no idea how much stock each investor currently held. To make matters worse, there were no legal documents formalizing these transactions. If a potential investor learns of this, they will most likely turn and run the other direction.

2. If we could just capture 1% of the market...

Hopefully you have never heard anyone say this about the potential of their business. If a sophisticated investor hears it, they will shut down any further interest in your business. They may appear to be listening, but they are not. Why? If an entrepreneur has not bothered to do enough research to figure out what a realistic market penetration would be, then investors will draw the conclusion that it is not worth their time or their money. Trying to justify the potential of your business with such a statement is really saying that you are going to short-cut in every other aspect of your business, and that is not an attractive quality to someone who is going to trust you with their money. Know your market, segment it into as much detail as possible, and show them some realistic assumptions and why you think you will achieve them.

3. The first thing we plan to do with your investment is hire a bunch of attorneys and really expensive consultants.

Oh, this will make them cringe. They may even get a little red in the face as they recall the amounts of their money that have been wasted on non-growth-oriented expenditures. Investors want their money to be used to grow the company. They want their money to help develop new products or improve the penetration of your company's current products. Sure, some legal and other professional fees are necessary and value-added, and you may even need to use a little of the investment to handle those things. But ultimately the investors need to see how their money will help the company grow and increase the value of their investment.

4. I'm not planning on hiring a management team. I will do it all myself.

Why would you ever say this? You have a big ego? You can't let go of control? Or, perhaps you have so little vision of your company that you cannot even imagine the days when you will need help running your business? This last question is exactly what potential investors think when they hear this statement. Besides being the most common mistake made, I have never seen a company with this attitude get funded. Every company that breaks free from their start-up roots gets to a point where it is too much for one person to manage. Show some vision, humility, and savvy by thinking about your company at 10 to 20 times its current size. Then build an organization chart of what experience and talent you will need around you to build that successful business. This is not a sign of weakness -- it is actually what the investors need to hear and see from you!

5. I'm not sure what my company is worth.

When you walk into Wal-Mart you don't see price tags that say: "We're not sure how much to charge you for this." So why would you want to say this about your business? You have something to sell: equity in your business. Know what it is worth (implying you do some homework and have some logic behind your number) and ask for that price. Sophisticated investors will always do their due diligence to see if they agree with your asking price (and they never will), but they will lose interest if you haven't put enough thought into your company to try and figure out what it is worth.

This is a guest post by Ken Kaufman. Ken focuses his professional efforts on helping entrepreneurs maximize cash flow, improve profits, and obtain clarity.