Securing Investors and Structuring the Deal 307tests, it may be moved along to more senior people for serious review and eventually
lead to a presentation by the entrepreneur to an investor committee. This enables per-
sonal factors and chemistry to enter the equation. The question-and-answer session that
follows (or interrupts) the presentation will demonstrate the entrepreneur’s mental agili-
ty. If the meeting goes well, the evaluation phase begins.
Sometimes the screen takes place without the entrepreneur even being aware of it. A
relatively new phenomenon called pre-emptive financing has emerged. Pre-emptive
financingoccurs when the investor approaches the entrepreneur before the entrepre-
neur needs or asks for money. The initiative comes out of the blue because the investor
is trying to buy equity in a company with big potential and avoid the higher price and
bidding war that might ensue later on. The entrepreneur has a great deal of power in
this situation. Companies targeted for pre-emptive financing are online companies with
solid business models, and young companies in wireless communications, computer
games, and consumer internet services.^18
The Evaluation. In this phase, the plan is dissected and evaluated from every con-
ceivable angle as investors perform due diligence. Because professional investors use
money that is not their own, they are legally obligated to protect their customers’
finances by thoroughly investigating the potential of the proposed business. Legal opin-
ions and certified accounting expertise are required. The process of due diligence has
precisely the same intent as it does in the initial public offering described in Chapter 7.
It is a costly and time-consuming process lasting six to eight weeks.
The evaluation process is more an art than a science. In some cases there is a genera-
tion gap between entrepreneurs and investor-evaluators. Young entrepreneurs are pro-
posing businesses like mobile phone services to investors who are not their target cus-
tomers. David Cowen, a 40-year-old father of three, manages Bessemer Venture Partners
of Menlo Park, California. On any given day he might discuss their ventures with peo-
ple half his age dressed in tee shirts and flip-flops. He has had to learn to download, to
blog, and to drink beer with the students at Stanford. He has had to shed his buttoned-
down image to acclimate to the next generation of entrepreneurs.^19
The Decision. After the due diligence phase is completed, investors make their decision.
If the decision is “no,” entrepreneurs should press for their reasons. They need this feed-
back before beginning the long and frustrating process again. Common reasons for
rejection include:
- Technological myopia. Technological myopia is the fatal flaw that causes entrepre-
neurs to become so caught up in the excitement of their technology, processes, or
product that they neglect to analyze the market or develop a marketing system. - Failure to make full disclosure is a most serious error. If entrepreneurs fail to divulge
pertinent facts that are later discovered, the reputation of the team is damaged and
it becomes less trustworthy in the investors’ eyes. - Unrealistic assumptionscan take the form of exaggerated claims about the product or
the market that are then used to produce overly optimistic and improbable forecasts.