Women: 5 business-financing mistakes to avoid

The majority of women entrepreneurs still aren't in the room when venture deals get done. Women attract only 4 percent to 6 percent of venture capital investments, which totaled $6.4 billion in 2007, according to Dow Jones VentureSource, a San Francisco research firm.

The reasons run a gamut. VC firms are still male-dominated. Women are new at the financing game. Women start businesses that aren’t always as attractive to VCs, among other causes. The bottom line: Women must work harder to secure financing.

So it pays to get your part right, and control as much of the process as you can.

After canvassing women investors, women business owners who’ve won major backing, and organizations that support women in business, here's a rundown of the most common mistakes women owners make when looking for funding.

5 missteps women make—and how to avoid them

Let's assume women looking for financing have handled the basics of due diligence. That means:

• The business plan is impeccable and clear.
• The financials are buttoned up.
• Any required licenses, permits, or certifications are current.
• Outside contractor and any employee agreements are legal and tidy.

With those assumptions made, here are the ways women often stray from the path that impresses investors or lenders.

1. The business model doesn't appear scalable.   Businesses that can grow fast by providing solutions to big, far-reaching needs or problems are the ones that attract VC money and infusions of capital in the way of loans and other investments. These days, that usually translates into technology, life sciences, or health-care companies.

   "But women tend to start service businesses, which are based on selling time," says Stephanie Hanbury-Brown, managing director of Golden Seeds, a Boston-based angel fund focused on women-run companies. "Or, they start companies in cosmetics, fashion, retail, food, or packaged goods." These kinds of businesses don’t usually grow fast.

   To persuade potential investors, an owner must demonstrate how the company can reach a size large enough to be worth the investment.

2. There's no clear exit strategy.   Similarly, women looking for financing don’t often consider how investors will get their payoff. Women may see the business as a long-term or lifestyle choice, but investors are interested in profits—big ones.

   As the owner, you must craft a strategy that will get money out of the business and to your investors, whether by becoming publicly traded, partnering with a larger firm, being acquired, or via some other exit. Women often do not present a strong analysis of revenues and profitability. Don't forget that investors primarily keep score by return on investments.

3. Women owners focus on the market, not the product.   Lenders and investors are plenty savvy. They may not know your particular arena, but they've heard hundreds of pitches, evaluated scores of companies, and are versed in trends and economic conditions. Investors want to get excited by a solution, not a problem.

   Women often tend to expend a lot of effort persuading investors to see the market opportunity, rather than talking up the key benefits and attractions of the product or service they sell.

4. The owner thinks the business is worth more than it is.   At early stages, women owners often put a value on the business that’s out of step with current revenues or sales prospects. That unrealistic valuation is likely to scare off investors and rounds of funding. Or, the unsupported high valuation makes women think shares in their businesses are also worth more than investors do. So, the women balk at giving investors a higher percentage of ownership that would attract funding.

   Future projections don't really count when it comes to securing capital in the early stages. It's all about the cash flow and how much money is needed to make progress or break even.

   There's also often a concern about squeezing the family. Like most entrepreneurs, women typically begin by investing their own cash and that of family or friends, and seek professional investors after that. So, let's say with $50,000 in revenues, an owner values the business at $6 million for investors so she can repay family after the capital infusion and still keep growing. But investors think the business is worth only $3 million or $4 million and don’t want to overpay. That creates a problem.

5. Owners don't do their homework.   Looking for funding takes research and education. You'll need to spend some time aligning your funding requirements with the right investors and groups. You should know:
   
   
   • The firm’s primary areas of investment;
   • What geographical areas they cover;
   • How they identify prospects;
   • What specialties the firm covers, if any, and by whom.

   Treat fundraising like a sales process, as if you’re pitching a client. You will need to send out e-mails, leave phone messages, and create bullet-point presentations that define your deal parameters. Just keep it all short and succinct.

   Besides online research and networking to learn more about suitable investors, it's also smart to cast a wider net and look beyond women-owned business groups. Don't take the risk of insulating yourself.

   Instead, head for where the deals are done.

About the author   Joanna L. Krotz is the founder of Muse2Muse Productions, a custom content company for business and consumer magazines, newsletters and digital imprints. Krotz has launched marketing Web sites and e-news portals, as well as created magazines and online marketing for a variety of companies. She is co-author of The Microsoft Small Business Kit, a 500-page guide to launching and running a small business.