Reprinted from Wamda.com. You can find the original article here.
Assad Hamzeh is the founder and CEO of Sharakeh (www.sharakeh.net), a Jordanian company that connects entrepreneurs and business owners to venture capitalists and angel investors and provides advisory services.
I am in the business of introducing entrepreneurs seeking funding to investors. Being based in Amman, I have met many highly motivated young Jordanian entrepreneurs who have great ideas. Unfortunately, many of their products fail to launch simply because they lack knowledge about pitching to an investor and negotiating deals.
Entrepreneurs and investors here tend to the look at the project from two very different angles. Entrepreneurs tend to be emotionally attached to their projects, and want to protect them from being taken advantage of. Investors tend to look at projects as risky ventures that could threaten their assets. If there are no formal shields in place to guard against the potential risks, they will not invest.
Doubt can be a healthy factor driving negotiations. But when one or both sides walk out on a lucrative business opportunity due to unrealistic fears, it’s unproductive. Unfortunately a lack of mutual understanding is a primary obstacle that I see in the entrepreneurial ecosystem in Jordan. Entrepreneurs think that investors are out to steal their projects, and investors think that entrepreneurs are out to rob them.
So here, I will offer tips explaining how to rely on formal structures rather than allow unfounded suspicions to rule the day.
Here are my top five tips for entrepreneurs:
1. Create a good business plan summary.
Even if your business model is great, it won’t matter if the investor cannot easily understand it. Often when entrepreneurs come to pitch to me, I read business plans that are too short and incomplete, or too long and too technical.
An ideal business plan write-up should be 10-15 pages long, and should have an executive summary that explains the concept in one to two pages. Investors don’t want to read 80 pages of details to understand if they like the idea or not. Give them just enough material to get interested, so that your summary is a good foot in the door to future discussions.
2. Don’t be afraid to share your idea.
Often entrepreneurs are afraid of presenting their business plan because they are concerned that the investor will steal the idea and create the company himself. But refusing to show an investor a business plan is like going to a doctor and saying “I feel bad somewhere in my body, but I can’t tell you where.”
If you have a good idea, go and register for a patent, and do whatever it takes legally to protect your idea. But don’t withhold a business plan, and don’t ask for a nondisclosure agreement either- mistrust will kill a deal.
Believe me- ideas are a dime a dozen. And in reality, it’s difficult for someone else to take your idea and implement it. If you’re worried about sharing an idea because you think anyone can do it, perhaps it’s not that great.
3. Give investors a specific plan for partnership.
Often I see entrepreneurs that don’t know what they need from an investor. They will ask for a vague investment anywhere from $50,000-500,000, and won’t include shareholder or partnership agreements.
It’s best to create a plan for the partnership. Explain whether the investor will be an active member in the board of directors, and what his or her voting rights will be. Offer a specific amount of equity. If you say, for instance, I will give you 30% equity and put you on the board of directors, then you can negotiate whether he or she votes, and on which decisions. This will put the investor at ease.
4. Don’t overestimate the value of your company.
Often here, entrepreneurs will overestimate their market. They will begin with the population of Jordan- six million- and determine the size of their market based on too large a slice of that population.
Or instead aiming first for a local market, they will aim to scale up right away without taking into account the costs of new staff, new facilities, and new management structures.
Another mistake is underestimating the competition and undervaluing the risk. It’s important to do good market research across the board and accurately predict the impact of these factors and the size of your market.
5. Be ready for a real partnership with your investor.
Finally, I often see that many business owners are not ready and willing to work with investors as true partners. They tend to present themselves to the investor as though they do not want to be questioned. They would simply like to take a monetary investment and then work to deliver a profit.
Again, this fear of partnership stems from entrepreneurs’ misperception that if they bring investors in as partners, the investors will somehow kick them out and run the business themselves. But investors don’t want to run a business. And a formal business agreement will set clear guidelines for the partnership.
In general, investors will see right through you if you try to sideline them from the start or obscure information. It’s best to engage investors as the powerful mentors and facilitators that they can be. When you walk into a meeting with an investor, bring your confidence and research to the table but leave your suspicion at door.