By: Dr. Chris Wedding, Managing Partner OK, so you’re now ready to take your business to the next level by growing faster with outside investors. And you’ve already had the “come to Jesus” realization that giving up a percentage of equity and profits just means that you get a smaller piece of a bigger pie pumpkin, instead of owning a larger piece of a smaller pie (or one that’s already been destroyed by mold and cockroaches.) So, are you ready to hit the road, rack up those frequent flyer miles, pitch to 50+ investors, pre-order the champagne bottles, and get ready to play ping pong in the office between customer meetings? Maybe. But let’s agree that there is always room for improvement, and that no one is ever really ready for anything. (Except maybe Michael Phelps.) Here are 11 items to consider when you get ready to raise investment capital. 1. Your Vision Are your 5-year plans for the company both ambitious and believable? If you lack ambition (e.g., 3% growth per year), then you might elicit yawns from investors. If your projections are not believable (e.g., zero to 40% market share in 3 years), then you might instead cause laughter. (We’re big fans of humor, but not this kind.) 2. Competitors Do you have competitors? Please do not say, “No.” That’s a surefire way to have your follow up emails and calls ignored. Competition is a sign of market validation, that others believe your idea is a good one. Now the important part: Why are you better? Have you created a table showing 3-6 competitors (column headers) compared quantitatively (e.g., scale of 1 to 4) across 5-10 attributes (rows of the table)? And once you’ve done that, and done so honestly, will your competitive advantage be obvious to investors? 3. Runway How much capital do you have in the bank to cover both operating needs (i.e., to continue advancing the ball on the proverbial court) and fundraising expenses (e.g., travel, marketing costs) over the next 6-12 months? Or how much near term revenue do you expect to realize with a high degree of certainty? If it’s not enough to cover both buckets of expenses, then you may end up out of breath, sweating and exhausted, before reaching the white tape at the finish line. 4. Prepared Materials - Teaser, Pitch Deck, Financial Model Based on our experience, I am confident that you are confident that your financial model, pitch deck, teaser, and related fundraising materials are 90% ready to go. However, the devil is in the details. (And we don’t want any devils.) Moreover, there is power in many minds and many eyes taking an outsider’s perspective on your company or project opportunities and challenges. It is common to spend 4-8 weeks conducting internal due diligence and recreating or refining these materials. 5. Your Brand Brand building may sound like an afterthought, or a consideration only for Fortune 500 companies. However, research suggests that many customers’ buying decisions are largely made before we ever talk to them. Their unconscious analysis is based on word of mouth and online research. Here are questions for which you need to have the right answers:
6. Your Team Does your team have the relevant experience and credentials to convince investors that you all can “get *$#! done”? This is about breadth and depth. How are they compensated - salary, commission, equity? How motivated are they to see the company succeed? And how about an Advisory Board? Having one helps build credibility and support customer acquisition and/or deal flow. Nobody knows everything, so stand on the shoulders of giants and tell the world how great those shoulders are. 7. How much is enough? It’s easy to err on the side of raising more money vs. less. But the flip side, of course, is that larger amounts of investor capital may mean a greater burden (e.g., collateral at risk, size of financial returns required) and lack of control for you (e.g., equity ownership). However, the opposite is also true: If you raise too little capital, then you either do not make it to the next important milestone where additional value is created, and/or you are stuck in capital raising mode too frequently, to the detriment of actually running your business. Finally, the amount of capital you seek to raise is a large determinant of the type of investor that will find your venture interesting. 8. Strategic or Financial Investor As a refresher, financial investors -- e.g., banks, VC, project financiers -- place capital primarily to generate financial returns directly from the entity into which they invest. On the other hand, strategic investors -- e.g., corporate investor -- may be investing to generate returns from your company as well as from synergies that are created through overlap among your expertise and theirs (e.g., different product lines, divisions, geographies, customer base). They tend to be slower to invest, but can sometimes offer preferred investment terms, consider higher valuations for your company (i.e., you get to eat more of that pumpkin pie), and/or create lucrative distribution channels. 9. Use of funds How will you invest the capital? Why do you plan to allocate dollars that way (versus other scenarios)? Be ready to explain the logic and provide details. Expect to be questioned as if you were sitting in a dark room under a bright lamp in an old industrial warehouse. (I exaggerate slightly.) 10. Risks No investment is without risk, unless you want to get rich on US Treasury bonds. (Good luck.) And it’s never fun to be blindsided by critics. So, please, please, please do not ignore a thorough discussion of risk factors when talking to investors. However, don’t forget to also provide a point-by-point response for how you seek to minimize those risks. Below are examples of risk factors to address:
11. Unit costs Detailed financial models with multiple scenarios and various Excel tabs are not the quickest documents to digest. Similarly, 5-year financial projections are helpful but only show aggregated analysis. What investors really need to understand in the initial conversation is this: A customer-, site-, unit-level assessment of costs and benefits at a high level (e.g., one slide). From this, they can assess the strength of the business case and move on to hear the rest of your pitch. 12. How thick is your skin? Our job is to ask tough questions, and to play the devil’s advocate. We are on your side, but based on our line of questioning, it may seem like our goal is bury your business plan and financial model in red ink. Au contraire. Our constructive criticism prepares you to handle the tougher questions when they come from investors. We’re like benevolent drill sergeants who guide you through boot camp so that you’re prepared for your best showing when trying to earn investors’ confidence. To learn more about the capital raising process, here are three related blogs we’ve written on the topic:
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