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Want to know What are our Private Equity Deal Killers?

By : Ziad K. Abdelnour| 27 May 2010
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As part of Blackhawk’s close group of family and friends; and to set the record straight, we thought we’d share with you the Classic “deal killers” that we encounter when reviewing the more than 2,000 business plans submitted to us on the average a year. By “deal killers” we really mean the generic statements for you to avoid when submitting your “Elevator Pitch”.

We hope this short list will better assist you fine tune your “Value Proposition” when approaching us for funding.

The solution seems to be to have a set list of deal killers and to stick to that list regardless. The problem of course is that you could miss great deals and there’s merit in looking at deals on a case-by-case basis. But we’re sticking in here to when in doubt, kill it, because you simply don’t need to take undue risk.

The following list is not exhaustive, but outlines a few scenarios in which we’d kill a deal in an instant.

1. There is no competition.

Perhaps no other company sells a product substantially similar to yours, but this does not imply a lack of competition. Any substitute product, process or service that satisfies the same need as your business is a competitive solution. Stating that no competition exists reveals either a lack of research or imagination on your part. We interpret the lack of competition as evidence that the market is undesirable or having need of consumer education. Such a statement is an instant deal killer for us.

2. The existing competition is (lazy/stupid/pick an adjective).

Denigrating your competition will detract from your business plan more than it adds. The statement offers us no insight into why your company will succeed against an entrenched company.

If the competition has failed to seize the initiative due to its organizational structure:

a. Speak to the lack of incentives implied by this type of organization.
b. Identify weaknesses in the competition that are difficult to change, as opposed to poor leadership, which is relatively easy to change.
c. Offer us information about the competitive landscape rather than invectives against existing companies.

3. Company founders have invested $X worth of their time in the company.

We like to see that the founders of an entrepreneurial company seeking funding believe in their business enough to make investment and personal sacrifice to sustain its survival, but do not confuse the two. While foregone salary represents an economic cost of the venture to an entrepreneur, it is not an investment into the business. Investment translates to “cash” spent for costs related to starting and developing the business. If you have spent a significant amount to do this, please make sure to include the figure somewhere in the financial section of your business plan. If not, you are asking for trouble.

4. Our channel partners will sell our product.

Making the sale of your product somebody else’s problem is not the solution to the marketing section of your plan in 9 out of 10 cases. Your product is competing with alternatives in your industry and others for your channel partners’ time, so the incentives in terms of volume, margin and strategic benefit (ability to sell corollary services) must justify their commitment. If your marketing plan is dependent on this strategy, provide compelling evidence that it is viable. If not, you haven’t done your homework and will most probably not get our attention.

5. Our projections are very conservative and we will break even or be profitable 1,2,3 years from today:

If you haven’t already generated profits and haven’t attracted enough clients to show us you’re actually running a business v/s just tinkering with ideas, you are most probably not fit for us. Track record for us is indeed key and we’d go on a limb and back an entrepreneur who made it big time and lost it all than funding someone who never generated profits and is still conceptualizing his/her thoughts. Ideas are a dime a dozen. Execution is all.

6. We will sell into the $X Trillion global (name any) market.

Incorrectly sizing the market gives us the perception that management lacks either the knowledge to assess who would buy the product or the integrity to delimit this statistic accurately. Business for us is “War” and the only way to winning is to be armed with the right “intel”. Short of that, you are asking for more trouble.

7. Absence of information regarding how funding will be used.

We like to know WHY you are raising capital. Most entrepreneurs seeking funding provide us with a dollar amount they are seeking to raise without any explanation of the use of proceeds. Make sure to provide a breakdown of where the dollars go. The devil is indeed all in the detail.

As the cliché says: lemons ripen early, plums ripen late. That is, if the deal looks like a lemon early, it probably is a lemon.

Looking forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

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