Take it from a venture capitalist.
The Entrepreneur Insiders network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question, “What’s the worst thing you can say to a potential investor?” is written by Ibrahim AlHusseini, founder and general partner at The Husseini Group and FullCycle Energy Fund.
I have been an entrepreneur since I was a student at the University of Washington. I launched my first enterprise from my dorm room at age 20. After a decade of building multi-national companies, I decided I wanted to empower other entrepreneurs, so I became an investor. Since then, I’ve backed diverse ventures ranging from waste supply management and renewable energy companies to women and girls’ empowerment initiatives to an Academy Award-nominated political documentary.
Over my career, I’ve learned some ground rules for working with investors that are paramount to raising funds and making a good impression. If you apply these tips and lessons that I’ve learned from advising companies everywhere from Beverly Hills to the Vatican, you can find success, too:
Do your homework
It seems obvious, but many don’t go far enough or don’t know how far they should go. Domain expertise is essential. Know your vertical and the ecosystem it belongs to. Success is about anticipating where the market is going and meeting it there.
Show that you have a convincing path to profitability. Demonstrate a clear understanding of the risk-reward ratio that needs to be established. Explain with clarity how the investor’s funds will be used. And no matter how exciting your elevator pitch is, don’t forget about the business plan: Execution is 90% of the game. How are you going to spend this capital to create a sustainable, profitable, and scalable enterprise?
Lay out all relevant data about market need, market size, competitive advantage, your management team, revenue and cost projections, and exit plan. If you don’t bring analytical and credible information to the table, don’t expect investors to take the next meeting.
Move personal issues to the past
If this is not your first proverbial rodeo, expect to talk about your past in detail. Being a serial entrepreneur can be a good thing, but investors will want to know what drove you to this new project, why you’ve left past businesses, and, of course, what state you left them in. This is part of the investor’s professional and personal due diligence: Are you stable and committed enough to be worth their investment?
Make sure you’ve cleaned up any skeletons in the closet before you meet with an investor to make your business pitch. If you have a mixed track record, explain the extent of the lessons you learned from your failures. This way, the investor knows that you’re both forthright and seasoned. And if there are personal issues affecting key persons in the company, resolve them before seeking funding; rarely do past personal issues remain in the past.
If you’ve had previous business irregularities, explain them, and tell the investor why they won’t be a problem again. And if there are serious past issues—nepotism, for example—really make sure that you’ve addressed and eliminated those before you move forward. No matter how great your idea is, you will have trouble garnering enough confidence in investors to encourage them to deploy capital in your venture unless you’ve made it clear that you’ve dealt with earlier problems and, in doing so, have matured as a business professional and can handle the massive task at hand.
Remember that investments are not immune to failure
Don’t understate the risks associated with your venture by making it sound like a sure thing. That shows a lack of understanding. It’s not a sales pitch, after all. It’s an invitation for partnership. No investment, no matter how financially viable, technically feasible, or desirable to customers is immune to failure. To be sure, aggressive optimism has its place—all entrepreneurs should be big thinkers and change agents—but arrogance is a warning sign.
A corollary to this: Never tell an investor that you don’t have any competitors. This is never true, and it just shows that you haven’t done your homework. Competition is good. Prove to the investor that you’ve done your market research, and talk about the market need and competitive advantage. Acknowledge risk, and be open to any challenges or questions your investor might have. As an investor, I can personally say that we will want to probe you—no matter how strong your proposal is—so it’s essential that you come to the meeting with an understanding of the market, as well as humility, flexibility, and a willingness to listen.
The best ventures I’ve backed have been informed by factual analysis, led by honest teams, and are tempered by the realities of the market. That’s what led me to invest in Synova Power, a waste-to-energy company with potential for both financial and social benefit. Synova came to me with a smart, informed business pitch and a business plan that had the potential to operate globally. They understood their market and knew what the business challenges would be. Those are the kinds of projects that inspire investors like me.