The equity obstacle course

Once you have created a business plan designed to pique the interest of potential investors, don't expect an equity investor to read your plan and hand you the money. First, you must overcome four major hurdles on your obstacle course to victory.

First hurdle. Your plan must survive the initial review by equity investors. Most plans are weeded out at this initial stage because of some major weakness. It usually boils down to this: You didn't convince the investors you could achieve the results you proclaimed. If they doubt the written document, no amount of persuasion on your part will convince them otherwise.

Most venture capitalists will just return your plan at this point with a polite note saying, "Sorry, we aren't interested." If this happens to you, try to determine why. Call the investor, and ask for recommendations to strengthen your plan before submitting it to other investors. Listen closely to what you hear; you will need to correct any deficiencies in the plan before pursuing other financiers.

Second hurdle. If your plan overcomes the first obstacle, potential investors will be interested enough to invite you to make an oral presentation. Investors will have a number of questions to fire at you. They will want to know more about the personalities and capabilities of your management team.

Investors need to know your management team is committed to the battle that lies ahead, even if circumstances change. Based on your comments, they will form a conclusion as to your team's integrity and its capability to accomplish your plan.

This does not mean that your team has to be "perfect." A small weakness won't scare off investors, as long as you don't try to hide it. Investors can probably help you overcome a minor deficiency; for example, if you have a key management position as yet unfilled, solicit their help to fill this position with a top-notch individual.

Third hurdle. If the investors still like what they see, they will begin their due-diligence process of investigating you, your team and your company in depth. This effort consists of four phases: market research, management team assessment, product investigation, and financial analysis.

The investors will perform some form of limited marketing research. If you performed your marketing research well, they will probably verify several of your results and accept the rest. If you did not do a thorough job, their marketing analysis will be much more thorough, adding several more months to the process.

As part of this process, they will check the members of your management team as well, interviewing references in detail. If they find any past skeletons someone tried to hide, you can kiss their money goodbye.

The investors may utilize outside consultants to study your product, in an effort to determine if there is some weak link in the technology or the producibility. If you already have an up-and- running company, this effort may be minimal.

Finally, they will conduct a thorough analysis of your financial projections. Even though you may have proposed a specific combination of debt and equity, they may believe a different ratio is appropriate, or perhaps an infusion of capital in stages, as certain milestones are reached. Keep in mind you are dealing with financial specialists; it's wise to listen to their recommendations.

Fourth hurdle. If you survive the due diligence effort, the investors have an idea what the final structure of the financing arrangement should look like, and so do you. The trouble is, your ideas are probably different. Therefore, you must negotiate the final structure of the deal. There will probably be some give-and-take on both sides as you try to work out what is best for the financial health of the company.

Once you make it past the last hurdle and land your money, don't become complacent, because the race isn't over. You're only halfway there, because now they expect you to produce the results you promised.

Scott A. Clark welcomes your comments and contributions. You may send him your ideas for column topics by e-mail at mail

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