Getting Reluctant Investors to Say Yes
I have been a nurse for 25 years and have come up with a product that will increase efficiency in hospital patient care. Looking for $400,000, I have presented to several angel investor groups and a local women's venture organization, but the negative responses have been unanimous. Although I already have a second mortgage on my home, my credit scores and annual income are excellent. However, my company has no revenue, and I don't have a sales or marketing background. How can I present a strong, winning case for the necessary investment?
—S.M., St. Paul Park, Minn.
It's not surprising that investors have been turning you down, given your lack of a successful business track record. "Investors aren't going to give money to an unproven entrepreneur with no experience in the medical product industry," says David Gass, CEO of Las Vegas-based Business Credit Services. He points out that new product ideas are worthless until intellectual-property protection (BusinessWeek.com, 5/12/08) is secured for them. "If you patent something unique and different, that will make the deal more serious for investors," he says.
Before you solicit funds again, patent your medical device, develop a prototype (BusinessWeek.com, 8/2/06), and write a business plan (BusinessWeek.com, 1/7/08) that shows a clear path to profitability, says Ray Silverstein, a small business author and facilitator of the President's Resource Organization, an online peer advisory board for entrepreneurs. You also need to bring together a team that includes some individuals who have the expertise you lack, such as management and sales. "Normally, it is friends and family who will put up the seed money, or people in your industry who see the outstanding merits of the product," Silverstein says.
You should be able to get intellectual-property protection and a prototype for a few thousand dollars, and you may find that you can then get an existing corporation to license your device. Firms that are already manufacturing hospital equipment have the funding and the distribution channels you lack, and may be interested in selling your product if you can show them it is viable.
If you decide to start your own company, you may be able to get going with less than $400,000 (BusinessWeek.com, 2/1/08). "Most people I work with pull their startup funding numbers out of thin air, and they include a salary for themselves at the same level they're making from a job, when in reality most entrepreneurs don't take a salary for at least two years," Gass says. He suggests you look for debt financing rather than investment, and use trade credit and leases for items such as computers and office furniture.
If your income and credit score are good, you may be able to get two or three smaller loans—say $100,000 each—from local lenders. "We've had clients get $750,000 in business lines of credit from several banks, even though no one bank would go in for that much," Gass says. If you open a new business account at the bank or banks you already do business with, some of them may offer you a business line of credit based on your history with them—a reason to establish relationships at several banks, he notes.
The problem with investors—even angels—is that most are looking for deals between $1 million to $3 million. If you patent your product and pull together a solid management team, you might approach angels asking for upwards of $1 million. Or look for funding from online peer-to-peer lending networks (BusinessWeek.com, 12/21/07), which vet people looking for money, match them with investors, and handle the administration of the loan.