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Thursday, November 25, 2010

VENTURE FINANCE – REALITY VS. RUMOR: Failing the Investor Tests - Part 2

Venture Finance - Reality vs. Rumor with Dick Brown

We’re now in the “financing dead zone”, classically the weeks between Thanksgiving and New Year’s. It’s well known as the worst time to try and initiate interest in potential investors. On the bright side, it can be a useful hiatus for you as time: to polish your Business Plan; review your venture; and, prepare your best efforts for a January assault on that investment channel from which you expect to obtain funds.

It’s a good time for me to add some sage (?) advice you may find helpful. In last month’s column we discussed some of the reasons that entrepreneurs don’t get funded. Just after submitting it, I thought: “Dummy, you left out the most common, overwhelming one … and, now you’ve probably created a disservice to your serious, competent reader that’s trying to make sense of the whole financing world.”

So, here’s “Brown’s Secret Dictum” on money seekers: “The greater percentage of all entrepreneurs fail to find financing because they are totally uninformed and unprepared.”

Unless you believe in Peter Pan and the Tooth Fairy you must first understand that entering the joust for capital is a long, arduous battle. If Henry had been so ill prepared, the chronicles of England would now be in French and historians would universally agree that at Agincourt the English army would have been better armed with slingshots and refilled Guinness cans than longbows.

There’s another truism here. The most unprepared of all entrepreneurs are the “poor souls” - those individuals pressing forward alone, without a team. As I’m a mentor to entrepreneurs you’ll not be surprised that I’m contacted by “the broadest array” of capital seekers – from the mature, rational businesspeople setting out to generate profits for themselves and all their investors - to the “fringe people” who are not only unprepared; have their own, contrarian view of the world; and totally reject any “common wisdom” on the proper way to interest investors and fund deals (and, they’re not interested in learning).

Rather than use this month’s column to give you more guidance on effective, rational ways to find capital, I thought you’d be interested in one reason professional investors all erect firewalls between themselves and entrepreneurs they don’t know.

It’s their protection against “assaults from the crazies” that accomplish nothing and waste their precious time. Since I have a published phone number and email address, I’m very often the red-meat for the far-outs that can’t reach the VC’s, angels and merchant banks.

Since the “loners” always seem to epitomize the worst, most irrational strategies to raise funds, I’ve included are a few, recent examples along with my strongest caveat for you to never sound/act/behave in a similar fashion … unless you want never meet a real person with real money that invests in real deals to make real profits.

Let’s begin simply.
I belong to LinkedIn, an on-line service I find useful. LinkedIn enables the creation of “groups” that share common interests and allows a simple way for group members to “chat” about issues that interest them and have these comments available to all. On occasion, someone will raise interesting, informative issues. However, most are trivial and hardly challenging.

One question that endlessly repeats itself in different forms is “I want to raise money for a venture and I’ve been told that investors no longer require business plans. Do I have to go through the trouble of writing one?” Once posted, this will be endlessly discussed by many contributors over several weeks. This always amazes me. The majority of respondents basically say: “Of course you do” and go one to define their definition of what a BP should include. If I closely read the comments, the “naysayers” all seem to be the “fringe people” grasping at an excuse to avoid some real work.

Example 1: One of them called me about helping him raise money.

I asked him the standard: “Do you have an Executive Summary and Business Plan?”

He said: “No. A friend of mine attended a summer class at Stanford and one of the instructors said: ‘Nobody writes business plans anymore since nobody uses them or ever reads them.’”

“How much money do you need?” was my next query.

“I’m not sure” he said, “but I’d guess about $3 million.”

My retort was: “I tell you what - when you find someone that will write you a check for
$3 million without you having the vaguest idea what you’ll do with it, give me a call. I have an inventor-client that says he can change seawater into gold and needs some funding. Otherwise, I can’t help you. I’d suggest you find and recruit the Stanford instructor”

He complained that I was being unfair and abrupt.

Another phone call:
Last week an inventor called. He had just filed a patent on a revolutionary heat-exchanger that will “change the world and solve the energy crisis”. He is the sole person in this venture. He didn’t have an ES or BP either.

I then asked him what role he planned to fulfill.

He said: “I just want to sit in my CEO’s office and recruit many, many talented people who’ll engineer all the wonderful products that can be made from this technology … then; manufacture, market, sell and support them. I won’t get directly involved myself.”

My reply: “How about picking just and easy one and making a prototype-product, selling some and proving that the technology will work?”

“I don’t need to do this because my “paper design” is perfect.”

“Next problem: You’re the sole entrepreneur. Nobody invests in one person for the simple reason that if they die, the venture dies with them. In my view, you need to assemble a team and prove it works.”

“No. I just need you to find my funding of at least $3.5 million first. Also, your approach would mean that I’d have to get directly involved.”

I responded: “Sorry. I’m not interested.”

He hung up.

A couple of hours later I received an email saying I’d never be successful because I was so negative to new ideas.

There was a lone entrepreneur that had been after me to help him raise money for some time. He had generated a PPM (Private Placement Memorandum) and was anxious to have me review it. I agreed with the understanding that I was making no commitment beyond this review.

After my review, I called him. “I just want to make sure I understand your marketing plan. Your PPM says you’ll recruit consultants that work under your logo. Then, potential college students and their parents can consult with these people about all the issues relevant to picking the best college. Each of these consultants pays your company a listing/promotional fee of $29.95/month. The consultants then bill each client separately and collect their fees. Right?”


“So this means your company never collects more than $29.95/month per consultant. Right?”


“In my view - you’re shortchanging yourself and won’t ever see a profit. Further, your financial forecasts show just over $5 million in sales in Year 5. That’s very modest growth and not likely to impress potential investors. However, there’s a further problem – at most, each consultant is paying you roughly $360/year. Just simple arithmetic says that to reach that $5 million, you’ll need 13,888 consultants – that you’ll have to recruit and manage. Since that’s about half the number of people attending an NFL game, don’t you think this is may prove to be a tad difficult?”

At least he didn’t hang up but said: “I don’t think your review of my PPM should be so critical and you’re unfairly faulting all the work I’ve done for two years … and, besides what do you know about marketing anyway?” Then, he hung up.

A brief summary: I do not know why individual entrepreneurs are prone to act in such irrational fashions nor to ignore more traditional, proven approaches to problem solving. I do know I find such phenomenons every 2-3 weeks.

One possible explanation - I have been told that some people have a new “generational problem” called “entitlement”. They believe that the world “owes them” and that they will be endowed with wealth and fame regardless of their lack of learning and they disregard any “conventional behavior/wisdom”. Further, they pay no mind to how ill-informed or irrational they act. Maybe this is true. It might be a good thesis for a term paper in psychology.

This still doesn’t answer why so many of them call me.

There’s one other thing. I spent substantial time writing a book for entrepreneurs. I tried to cover all the basic issues about fund raising from the history of VC’s to writing business plans. I’d never defend this as “great literature”, but it’s short, simple and cheap and can give one a glimpse of the whole game in one evening.

I encourage all my clients to read it. I’ve found a correlation – almost all of the sincere, mature entrepreneurs read all, or at least part. None of the fringe people ever do – it seems they universally have the attitude – “I want the world to conform to the way I want it to be and I’m not interested in receiving any education to the contrary.” Amazin’


Dick’s company, American World, publishes his book: How to Raise Money, Insider Edition. Dick feels he put in “everything you’ll ever need to know to raise money”. It includes extensive tips on how to raise money, including the common pitfalls that await the unwary entrepreneur. It costs only $9.95 and is available as a downloaded file at

If you have questions, comments or suggestions, send them along. Contact Dick at American World ( You’ll get an answer.

For more information, please visit Dick's TNNWC Bio.

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1 comment:

JR said...

This is an interesting article.

Indeed, I have ordered and read Mr. Brown's book, "How to Raise Money, Insider Edition" and consider it an outstanding resource and value.

IMO their is NO REASON why any serious entrepreneur would not invest the time and money in his book.

Highly recommended!

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