Chris Tanner, Esq.
Here is one way to ask for money from an investor.
Have an existing, provable, independently user base (or potential users) that can be objectively verified. Do not try to sell a “trust me” story. There are too many other good opportunities for investors, especially now, during this awful economy.
Try to focus on inventions where you can completely self-fund the entire development cycle, end-to-end, without having to ask for money. Then, make at least some $sales, even if some of those sales do not return your costs/unit (selling at below costs). Then and only then, ask for capital.
If you have chosen an embodiment or service or business model that is far beyond what you can afford, and cannot prove out your market without a great deal of additional capital, then you have chosen unwisely.
Next, in your Offering Documents or Term Sheet, emphasize how many units you have already sold, and how many units on-hand in inventory. Further, be prepared to be asked how much money have you already spent. This gives an investor some idea of your level of commitment. However, it also gives an investor an idea of how inflexible you may be, and your likelihood of throwing good money after bad, and/or you expecting the investor to reimburse you for your sunk costs.
If your sales are zero, please explain why. If you got it partially built, but then ran out of money, please explain why. Please explain HOW did this happen.
Next, many investors despise potential revenue projections, and especially when they are unsupported by any actual data. Instead, have everything be plausible and supportable. Also, make your time-window no more than 3.5 years. Include something like “if you put in e.g. $.75M today, you should have your money back within e.g. 3.5 years, with an ongoing revenue stream of $XXX,000/year, as well as rights of first refusal on follow-on products”. And then justify these numbers, and not using rubbish revenue projections with no basis.
Convince the investor he will have his money back within 3.5 years. No time-horizon should be longer than that. Also, be clear that your “sunk costs”, how much you have already put in, will be subordinate to the investor. The investor gets his money back first. Your sunk costs should not be the investor’s concern. As soon as the investor realizes you expect to be paid back first, he is now in the position of subsidizing your early mistakes. No investor wants that, but many inventors, with bloated ideas of the importance of their invention, insist on being paid back first. This is a death sentence.
This brings us back to the original point. Strive for inventions that you can afford to build, yourself, start-to-finish, where you the inventor completely control the means of production, all the way through. Investors want no part of half-finished speculative mere ideas that haven’t been built and can’t be built.
Chris Tanner, Esq.
Chris is 22 year patent/trademark attorney and has worked with numerous small businesses and startups. Chris sees a lot of the same mistakes over and over again.