What Investors want to know before they invest in a company

I recently attended a 4 hour forum for Venture Capital firms, Angel Investors,  Companies who are trying to raise funds and Companies who offer services to these parties.

It starts with an hour of networking where every one mingles with everyone, then there is a useful presentation to all parties, then there is a nice dinner while Companies looking for funds get a 15 min chance to pitch their project to all.  After this is over there is a panel of professionals who offers friendly criticism and advise to the Companies in how to improve their presentation.

An attorney guest speaker  spoke about the difference between a Business Plan and a Private Placement memorandum. He explained that: ”Entrepreneurs who are trying  to raise equity capital from family, friends, and other third party investors typically present their opportunities with a business plan. Often in a most favorable scenario. And many times Companies treat a Business Plan like an essay which is a big mistake. A professional Business Plan, carefully written is very important not only to potential investors but also for the entrepreneur. 

Sophisticated investors often immediately presume that the business will take twice as long to develop and be half as profitable as represented by the entrepreneur prior to commencing some level of due diligence. Should their discovery as a result of due diligence indicate the prospect for an acceptable ROI at an acceptable level of risk, savvy investors will often write the check.  The attorney emphasized the importance to have good backup to support all claims, to go over all the potential problems, the key challenges and not just the risk factors. The importance of a good marketing plan was stressed, to be specific as to why the identified target market is going to be buying/using the product/service. 

In our litigious society, when these businesses fail, deep pocketed investors, – be they third party, friends or even family – Investors may initiate legal action to recover their lost funds. Entrepreneurs need to know their personal legal and financial exposure and the SEC regulations that govern raising equity capital before they raise any funds. 

The Private Placement Memorandum (“PPM”) is an important legal document that is written to help protect the entrepreneur from this predicament. While elements of the business plan will be incorporated in the PPM, it may or may not productively serve as the primary document for presenting an opportunity to prospective investors.  And, crafting this document may be expensive. When to PPM, or not, is the question.

The Panel  of experts reiterated that they live in the trenches; preparing business plans and Private Placement documents, evaluating opportunities, and either facilitating funding or investing their own money. Their knowledge helps entrepreneurs better understand how to present their opportunity to investors and, more importantly, how to mitigate their legal exposure should the business under perform or fail.

Both the Venture Capital firms and the Angel Investors stated that specially in this economy there is a lot of money, and a lot in an understatement, money everywhere looking for places to be invested in. So many people are pulling their money out of banks and the stock market and looking for places to invested where their ROI may be better that the nominal fees banks are paying.

Overall is was a very informative, lively, revealing, interactive round-table discussion. I definitely plan to attend others in the future.