How does an entrepreneur with little or no track record gain credibility? Typically, they gain credibility in two ways — they borrow it and they demonstrate it.
Borrowed Credibility. When entrepreneurs surround themselves with people who have credibility, they gain credibility themselves. In business, reputations are paramount. When well-respected individuals vouch for an up-and-comer, it is meaningful. There are lots of ways someone can vouch for you as an entrepreneur. They can provide services to your company (great attorneys, accountants, recruiters– if they work with your company it means they were willing to bet on your success). Business leaders can lend their name to the company as an official advisor. They can invest in the company (if industry experts or startup/product/marketing gurus invest in your company, it is a huge vote of confidence in what you are doing). Also, business leaders have no more valuable resource than their time, so if they go on your Board, it is a huge recommendation of you and your company.
When it comes to borrowed credibility, there is perhaps no more important act than the initial introduction you are given to an investor. If you have no track record and you cold call an investor, you have huge reputational obstacles to overcome. This is particularly true because many investors will assume that you were either unable to find someone to make the introduction or too naive to realize the importance of an introduction. Either way, your likely success as an entrepreneur will be sharply discounted. On the other hand, if you are introduced to an investor by someone he or she trusts and respects, you are well on your way to a trusted relationship yourself.
Earned Credibility. The other way first time entrepreneurs gain credibility is to earn it. There isn’t a clear path to earning credibility. You don’t produce a particular amount of diligence. You don’t deliver a particular number of industry reports. You don’t call or email to followup a particular number of times. What you need to do is be really smart and well informed about the business you are pursuing. The best way to earn credibility with investors is to have good answers to the questions you are asked. Credibility also comes from doing what you say you are going to do. It means following up on a question from a meeting. It means hitting numbers you say you will, or closing on a customer you expect you will.
If one of these techniques for garnering credibility is good, all of them together are great. Get introduced to an investor by someone he or she trusts. Build an advisory board and board of directors of industry experts and admired professionals. Do your homework — know everything there is to know about the market you are pursuing. Welcome questions about your business — answer them well when you know the answer and admit when you don’t. And always do what you say you are going to do — whether that is delivering promised followup materials or hitting your numbers. In combination, these techniques can give any entrepreneur, no matter how young or inexperienced, the credibility necessary to attract great investors.