Why does the investor want a lead investor?

I was sitting in the conference room looking out on the river. The investor was telling us he was interested in investing. It was a wonderful moment for me. The investor outlined the services they offered, people in their network who can help, and how they were there for the long-term. He accepted all the terms in the term sheet. Then, right at the end, he said they couldn’t be the first investor in any venture and that as soon as we had another institutional investor, they would co-invest.

I assume they are doing this to reduce their risk or is it some obtuse negotiating tactic?

Investors want us to change our strategy, what should we do?

We built a platform that will allow chocolate and nut producers to bypass the middleman and wholesaler. This will give them higher margins and more liquidity. We have a partnership with FairTrade, five manufacturers, and three retailers.

Given the nature and geographic location of the producers, we created a global platform. We have invested over $100K in it and have completed beta testing.

We sent our business plan to five investors. Two said they had no interest given the size of the addressable market .The other three said that they needed proof of concept in a local market, meaning one country. Our platform and partners can’t accommodate this.

The investors told us the risk of global launch was too great. What do we do? Modify the platform and focus on one market or seek other investors?

Investors want us to change our strategy, what should we do?

We built a platform that will allow chocolate and nut producers to bypass the middleman and wholesaler. This will give them higher margins and more liquidity. We have a partnership with FairTrade, five manufacturers, and three retailers.

Given the nature and geographic location of the producers, we created a global platform. We have invested over $100K in it and have completed beta testing.

We sent our business plan to five investors. Two said they had no interest given the size of the addressable market .The other three said that they needed proof of concept in a local market, meaning one country. Our platform and partners can’t accommodate this.

The investors told us the risk of global launch was too great. What do we do? Modify the platform and focus on one market or seek other investors?

A fundraiser wanted equity even if she didn't raise any money for me

I wanted to use a convertible note to raise the first $400K for my company. It meant I wouldn’t have to have the expense of a formal valuation and it gave me degrees of freedom. Most of the people I’d be talking to are friends and family, so I wasn’t overly concerned and didn’t want to give away equity at this stage.

At a party, I was introduced to a powerful woman who raises equity for companies in Africa. She was so self-confident and unshakable in her conviction that one only used equity to fund startups. I listened to her and asked questions. I came away thinking I was wrong to use a convertible note.

I told others I trusted what this woman said and they said that a convertible note still made sense and that I should talk to other people, including people who had used this woman to raise funds.

I tracked one person down who was very satisfied with her work. But she had raised $25m for a series A. She said I should talk to other people who did not have such a good experience and where the fundraising efforts failed. When I spoke to them I learned this women took equity even if she failed to raise funds. I also learned she tended to undervalue the company to make the raise easier.

I went to her and said I would use her services but that she only got equity if she was successful. She refused my terms.

A trusted advisor told me I wasn't a strong leader and needed better people

I’ve been turned down by eight potential investors. It is me or the business? I was getting depressed and thought I should stop. I didn’t know how to make sense of what was happening to me. The investors were so aggressive. They wanted me to make mistakes. They just seem like nasty people.

My sister’s husband is an investor and I went to get his advice. He said it was part of the game to ask hard questions. Investors also want to see how you stood up to stress and adversity. He said he would come to our office to meet the team. When he came to see us he asked everyone questions about the business. He asked for data on customers and competitors.

At the end of the day, we sat down together to review his day. He said he wasn’t impressed by the team or their knowledge of the business and the market. He thought they were all nice people but didn’t have the skills to grow the business. Few understood the business model. Above all, he said they lack passion for the business. Then he said it was my fault for choosing weak people and not educating or communicating with them. Great leaders hire great people. Good entrepreneurs hire people that can scale the company to new levels.

He then asked me about the business plan. He listened to my answers then said I didn’t understand the business and couldn’t explain the operations or its economics in simple terms. He said he wouldn’t invest in me or my business because I couldn’t determine the size of the addressable market, the intensity of competition, or how to differentiate ourselves.

He told me this was real life, not a business plan competition. He said in order to be successful, I need better people, a stronger board, and better results. He said no one would invest in me or the business if I didn’t make these changes.

We made so many changes to the plan it confused everyone, including ourselves and our strongest supporters

We wrote our business plan for the seed round from friends and family. We sent it out to five people for feedback. We received some great feedback and modified the plan. We didn’t change much of the strategy but we made a lot of changes to the financial model.

We revised the plan and sent it to three more people for review. We got more input and didn’t know what to do when the changes suggested contradicted one another. We ended up using changes and ideas from the people we thought would invest in us. We went through this process four times and ended with a business plan, which differed from the original in many important ways.

The round was schedule to close at the end of the month so we contacted everyone we thought would be interested in investing. A number of people who had reviewed the plan along the way asked for the latest up date. They all responded that the plan didn’t make much sense anymore and they wouldn’t invest. One person asked if it was our plan or the seed investors.

We weren’t able to raise the seed round from our friends and family. We ended up alienating many of the people who were our strongest supporters. We had confused everyone including ourselves.

The investors' board members prevented us from taking outside investment then gave a lowball offer

The first institutional investors wanted to have three Board seats. We decided to allow for seven seats but only filled five at the start. The Board meets every two months and deals with all the routine issues.

Business was growing and we could see from the cash forecasts that we would need more money sometime next year. We wanted to start raising money immediately so we wouldn’t run out of money. The Board members from the investors objected. I thought about it as a tactic that would make us more vulnerable to a lowball offer. The less cash we have the less leverage we have.

A friend said he was interested in investing in us. We met, agreed on terms, and then started the due diligence. Everything went well and the offer was reasonable.

We agreed on a term sheet and all that we needed was Board approval. The investors’ Board members voted no even though we only have six months cash left and this was the right thing to do for the company. We tried to appoint more Board members and the investors’ members rejected that too.

Two months before we ran out of money, the investor offered a loan that would convert into equity 35% below the offer we had from my friend.

Is this legal?

The financial model that got funded isn't one we're committed to

I’ve been working on the financial model for over a month. We’ve been over and over it and I think we have it pretty much right. We included it with the business plan to a range of investors. The first response focused on the gross margin and our pricing strategy. We answered all the questions and modified the model. The second investor was concerned about the growth and working capital requirements. The third investor wanted us to lease our equipment rather than buy it.

All three wanted to invest subject to their concerns. When we factored all their input into the model the results were very different from our original ideas. Their input meant the cash flow was better but margins were depressed and the cash flows remained negative for a longer period. 

We sent the revised model back to the investors. They all had additional questions and suggestions and wanted more modifications. We then went to the investor who we hope would lead the round to see if we could get some consensus and agreement around one model. The investor agreed and we closed the round, but it took three months longer than we had planned for, took up a lot of time, and left us with a plan that we weren’t that committed to, but we did have the money.

How can I start a family on the salary the investors want me to take?

I didn’t take a salary for the first year of the business but now I needed money to live off of. My friends in the corporate world earn six figures. In my country, someone with my degree would earn $70-80K. I was told investors look at how much a CEO proposes to pay themselves. They don’t want the CEO using the business as a personal piggy bank.

I need to raise more money but don’t know what to put in the business plan for my salary. I finally settled on $40K; this was just enough for me to get by. The investors agreed to this and wanted to keep this until we raised more money. My heart sank; how was I supposed to survive on this? I want to marry my fiancé and start a family. I feel like I now have to choose between having a family and my startup.

Pitching with no results is getting exhausting and eroding my self-confidence

Our pitch was good. We practiced and rehearsed it with several people. We had a list of questions we though investors might ask and prepared answers for these.

At the first investor, only two people came to the presentation and they were our age – late 20s. They listened, thanked us, didn’t ask any questions, and left the room.

The second investor focused on the cash flow and said the work they did showed with a 1% margin drop there was an 18% reduction in cash flow. We couldn’t explain this and promised to get back to them.

The third investor kept interrupting us, so when the hour was up, we were still on the third slide.

By this time, I had lost my self-confidence and didn’t want to do another presentation.