The following is the second in a series of 4 excerpts from  “How to Negotiate a Winning Term Sheet and the Best Valuation for Your Company”

  SECRET #4:

Minimize the leaps of faith: Get your Vision Validated by qualified and powerful third parties who could also help in business development process. It’s one thing for you to tell the whole world your product or service is great. It’s another thing to have that validated by a third party. The more you can do to have outside experts – in your case your Advisory Board – validate that you are focused on the right problem at the right time with the right solution, the stronger you will be in responding to the due diligence questions the investors will focus in on.

Also, the more you can do to line up Advisory Board members who might be able to influence future purchasing decisions of your ideal potential first customers, the stronger your ability to convince investors that you will be able to cross that all important first hurdle in finding someone to actually pay you for the product or service you are planning to build.

SECRET #5:

Minimize the leaps of faith: Get your Initial Customers lined up and referenceable. Even more important than lining up people who could help influence purchasing decisions of your ideal first customers – are the customers themselves! Do the hard work. Go out there and identify the ideal first potential customers – those customers who, if you actually land them, will be able to influence the purchasing patterns of your next customers because of their stature or reputation in the industry you’re focused on. Go in there and sell them that they will buy contingent on you delivering! And have them lined up willing to tell the VCs in due diligence that “Yes, these guys are smart, they’re focused on the right problem, and when they come back with the finished product we’re going to buy it from them, and here’s why…”  

Remember, sell the vision first. Have it validated by potential customers. And get them to be references in the due diligence process. This will directly help to lower your overall risk profile and give you critical negotiating leverage on final valuation.

SECRET #6:

Minimize the leaps of faith: Get your ideal Management Team in place or circled and ready to join contingent with funding. Remember that early stage investors are betting on the jockey, not the horse. Do everything possible to bring the ideal management team to the table before meeting with investors. Bring to the table a CEO or Director of Sales who has direct experience in creating a Critical Mass of sales for your exact type of product or service in your exact space – or as close to that as possible.

Problem: Most people will only commit to join a startup or early stage company that is already funded. So how do you get around that classic “chicken and egg?” By going in there and selling the hell out your vision to that key recruit and getting them to commit to join contingent with funding and once they are satisfied that the investors you are bringing in are the best investors to create tremendous value over the long term. Put that key recruit in front of the investors and let them both do due diligence on each other.

Just as you will “sell the vision” to get talented people to join your Advisory Board and line up your potential first customers – sell the vision to those ideal management members and bring them into the due diligence process in order to create Critical Mass around your opportunity and close the deal. Again, the more relevant “execution” people you can bring to the table who will help you get to Critical Mass and Exit, the lower your risk profile and stronger your negotiating leverage in achieving final valuation.

If you missed the first installment, visit www.angelinvestornews.com.

jparness@startupsuccess2002.com
Jeff Parness has raised $140 Million for growing companies from startups through IPO. He was the first Director of Investor Relations for IDT Corporation (NYSE:IDT), and helped raise $77 Million for Arbinet, the world’s leading telecommunications capacity exchange. His insights on selecting the best early stage investors to build long-term strategic business value are the subject of a Harvard Business School case study now being taught nationwide. In 2001, Jeff co-founded and successfully financed 3 startups: VenturiFX, QWireless, and QOptics which raised $11 Million from Warburg Pincus and now employs 45 people in New York City and Portland. For more info on Jeff’s newest products Early Stage Investors 2002™ and Finance Guy In-A-Box™, please see www.jeffparness.com.