Go to the Globe and Mail homepage

Jump to main navigationJump to main content



Six ways to scuttle a deal Add to ...

It pains Stuart MacDonald to hear a bright young entrepreneur utter something like, “We have no competition,” or “The product sells itself,” or “Within five years, Google will buy us.” Hearing those, he quickly pulls the plug.

The Toronto-based angel investor, who started Expedia.ca, has endured endless pitches for financing and has the capital heft to show for it. These days, he spends his time running Tripharbour.ca, the cruise ship search engine, and meeting with entrepreneurs who need financing.

Like a first date, those meetings can be over quickly, Mr. MacDonald says.

“I use the three-finger rule: Is it easily profitable, easily sustainable and does it matter to customers? It’s a simple thing, but you’d be surprised.”

Mr. MacDonald is just one of hundreds of Canadian financiers who, upon meeting entrepreneurs and asking all the obvious questions, have been stunned at some of the answers.

So, based on conversations with a cross section of financiers – from angels to venture capitalists to initial-product-offering front men – here are some mistakes you’ll want to avoid when seeking money.

An idea, not a plan

Never say, “I have this really good idea,” or “This has always been a dream of mine.” Nobody wants to hear about an idea. You must have an actual business and not a dream, or your banker will take a pass, says Mike Bonner, vice-president of commercial banking at Bank of Montreal.

Any good business starts with a solid plan, and entrepreneurs seeking financing must have one in tow.

“We need to understand the customer, the business and the industry – in that order,” says Mr. Bonner. “In the early stages it’s really about the business plan, the planning and preparation.”

It doesn’t have to be complex, he says. Details can be added and strategies adapted, but the core plan must be in place.

Mr. MacDonald also wants to see a tight presentation, even if the meeting takes place over coffee. And he wants to see confidence.

“This should not be an open-ended conversation,” he advises. “Angels have their own perspectives on almost any opportunity – if you don’t guide the conversation they will take over.”

In which case, Mr. MacDonald isn’t likely to hand over the cash. He says if business owners don’t have a clear sense of what they need, then they don’t need it that badly.

“Be clear about your business plan, potential problems, the market and what you’re looking for.”

The long-term view

Don’t offer up business projections that look 10 years out – no one can predict the future, and it is not in your best interest to try.

“We’d never ask them for that,” says Mr. Bonner. “We really don’t want to see any more than one year.”

Mr. Bonner says a BMO loan officer couldn’t take such stats to his or her boss. Long-range business projections won’t factor into the final decision because there are simply too many variables.

“We need evidence,” says Mr. Bonner. “You need to help the banker do his due diligence, and he could never include that.”

Bury mistakes

Never attempt to hide a poor credit history. A credit check is the first step in any due diligence process.

“We have to take a good look at management and how they handle finances,” says Mr. Bonner. “It’s a good proxy for future viability of the success rate of the business – and remember, bankers don’t like surprises.”

In fact, bankers will often walk away based on evidence of just one unwelcome surprise. But that doesn’t mean someone with sketchy credit won’t get financing.

“They should come prepared to tell us why they may have had credit problems,” says Mr. Bonner.

“There could be very good reasons and we could help them deal with it.”

The same is true with any existing or potential problems with your core product or key markets. “Get out ahead of these questions, cut them off in advance and tell us what you’re going to do to solve them,” he notes.

Blue-sky thinking

Pinning a valuing on a startup is incredibly challenging, but it must be done. Don’t approach a potential financial partner without having a realistic assessment of your financial needs.

That means valuing your company, first, and then knowing how much money you need now.

“Come with a number in mind, even if you’re not sure, because this is eventually what we’re going to need,” says Mr. MacDonald.

Adds BMO’s Mr. Bonner: “It’s much better to ask for a specific amount. What we really don’t want to hear is, ‘So how much can I get?’”

Zero equity

Don’t bother lining up for a loan if you haven’t invested in the company yourself.

“One of the first things a banker will want to know is how much of your own funds will be at stake,” says Mr. Bonner. “Bankers want to share the risk, they don’t want to take it all on.”

It will also help if you can show that you’ve attracted other outside investors – even family and friends – prior to applying for the bank loan.

Also, don’t expect to get a loan if you’re planning to use it to pay off the founders or early investors.

“At this stage the money is supposed to be for product development, a sales force, improving market strategy, that kind of thing. The founders should get out when we get out,” says Joe Timlin, vice-president of investments at Vancouver-based GrowthWorks Canadian Fund Ltd.

Line up a buyer

Never tell a potential investor that you’re planning to build a company to be acquired by Google in five years.

“If your goal is too narrow, it won’t work,” says Mr. Timlin. Maybe Google won’t be around in five years. Maybe new technological advancements will open up new markets for your company that no longer align with Google.

According to Mr. Timlin, entrepreneurs must focus on the basics: having a clear business plan; understanding the product, customer, market and competition; and then building it out.

“You need to be broadly focused on building a great company,” he notes. “Great companies have many great potential outcomes.”

Special to The Globe and Mail

Report Typo/Error

Follow us on Twitter: @GlobeSmallBiz

Next story




Most popular videos »

More from The Globe and Mail

Most popular