The value proposition for early stage investment firms is simple. Their mandate is to raise money, invest those funds, then harvest that investment for the benefit of their investors. They ignore any cool or sexy aspects of a deal. Successful individual investors follow the same course.
When you deal with potential early stage investors, expect them to do a cursory due diligence to ensure you are what and who you represent yourself to be, and that your product or service has a real chance for success. If the capital source is interested, it will later do thorough due diligence, but only if it has an early feel for your credibility and potential.
Entrepreneurs should behave likewise with any capital source. Before contacting a capital source, be certain it has the interest and capabilities to do the type of deal you have available before you spend significant time preparing a presentation.
Here are three suggestions:
* Check the type of industry in which the investment firm has a history. If you are an IT company, chances are that ABC Information Technology Investors is a more likely investor than XYZ Biomedical Development Investors.
* Determine the size of the deals the potential investor has done. If you need $3 million and the investor only has done deals in the $100,000 to $250,000 range, you are likely wasting both of your time. Likewise, an investment bank that does $100 million offerings isn't going to be interested in trying to raise $3 million for you.
* Check if the potential investor is qualified to do a deal. I don't mean qualified as in "qualified investor" in the SEC Regulation "D" exemption sense, but whether the potential investor has the capability and the intent of making an investment.
Some people purport to be investors but are only poseurs. I know of incidences in which an enthusiastic and trusting entrepreneur was fooled into entering negotiations with a disingenuous entity, wasting time and effort and being thoroughly disillusioned.
Launching and funding a new enterprise is arduous, so make certain your funding efforts are well directed. Spend a little time to vet and qualify potential funding sources. Erwin Bruder (firstname.lastname@example.org) is chief economist & managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext. 2220.