According to the Entourage founder Jack Delosa, there’s one golden rule for startups when on the hunt for funding.
“You must make your investors’ money,” Delosa says.
But to do this, he says founders need to view their companies as much more than just money-making machines.
“Your business is an asset, not just a vehicle to generate cash flow and profits,” he says.
“You need to start looking at it as an asset of which profit is only one driver.”
According to Delosa, there are five key mistakes that founders make preventing their startup from raising capital.
Delosa says entrepreneurs should ask themselves three main questions that will always be on potential investors’ minds.
“How might I lose my money? When will I get my money back? And how much money might I make?” he says.
“Initially they will be scanning for any risks, so do your due diligence and assess the risks, have advisors assess the risks and come in prepared to respond.”
It will take at least two or three months for a startup to become investor-ready, he says, and a lot of work is involved in this process.
“I could introduce you to 10 investors today but if you’re not prepared, all you’re going to do is burn those relationships,” Delosa says.
“Don’t go in with grandiose statements about how you’ll be the next Uber by year’s end, but with clearly expressed proof of concept, a strategy to get up and running and details of the team you’ve pulled together to make it happen.”
Startups that are on the hunt for outside capital need to build up a strong team of mentors and advisors, Delosa says.
“The people within and around the organisation will be the number one thing on the investor’s list,” he says.
“What mentors and advisors are there that you can engage to build an advisory board?”
He says entrepreneurs need to find a balance between doing their company justice and not asking for too much when pinpointing a valuation.
“There is often a discrepancy between the value an entrepreneur is asking for and the valuation the investor thinks the business is worth,” Delosa says.
“You want to be defending a high valuation provided it is still fair and reasonable and representative of the true value of the company, but you don’t want to be arguing such a high valuation that it becomes unattractive as an investment opportunity.”
This involves consulting with your team and outside advisors too.
“You need to do your due diligence before the investor does,” Delosa says.
“Once you’ve prepared your investment strategy, run it by your advisors.”
It’s not enough to just present a strong business with traction, founders should also be showing investors when they expect to be making them money and providing an exit, Delosa says.
“To demonstrate that you will be making your investors money, you need to have an exit strategy in place,” he says.
“Nominate a date or a milestone or an event when the investor has the option, but not the obligation, to exit their investment.”
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Denham Sadler is a former editor of StartupSmart. He was previously a journalist at the publication and has worked as a freelancer for the Guardian, the Saturday Paper and the ABC. In his spare time he likes puns and jaffles.
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