If there’s one saying entrepreneurs definitely understand, it’s “money doesn’t grow on trees.” It is earned from somewhere. As one of America’s 28 million small businesses, you’re in the trenches daily thinking about where your next round is coming from, mostly because the financial health of your company, and ultimately, your bottom line, depends on it. You know that in order for your business to not only survive, but thrive, you’re probably going to need to raise capital. Raising money is among the many challenges that entrepreneurs face, but it doesn’t have to be the hardest one. Angel investors invest in over 61,900 companies each year, and VC’s write the biggest checks with an average investment size of $2.6 million to seed stage companies. So, how do you cash in on those Benjamins? After helping 200+ clients in your shoes and 10 years of experience ourselves as business owners, here’s how we advise you to raise investment capital, and a few things you should consider when doing so:
Start at the grassroots and be prepared.
Understand your customer base, the ins and outs of your product, and what customers like and dislike. If you haven’t already (and we hope you have), develop a business plan that outlines the steps you’re planning to take as well as the goals you’re hoping to achieve. Without establishing a clear business model, you are in a weak bargaining position. It also goes without saying that you should practice your pitch. Anticipate potential questions from investors and be prepared to answer them honestly and with evidence. Being able to show your accounting records will certainly impress potential investors and show them you’re serious. You’ll be able to show potential revenue as well as growth records.
Consider all of the steps.
Raising capital is like climbing steps, and every step you take should increase your valuation. From an idea on a napkin to customers using your product to building a team, every step leads to the next. As you climb each step, your goal is to determine how to get one step closer to the next phase of increasing your valuation.
Bear in mind, every time you raise, you lose a little ownership in your company. At each step, you also want to consider how much capital you’ll need to achieve each goal. Know your limits in each step, and determine at what point you’ll need to move on. Go after the right investors at the right stage of your business. You’ll start with friends and family move to angel and seed investors and then finally move to VC. Raising money isn’t linear, even though it seems that way. It’s more of a step function; you are hitting milestones every tier of the way.
Understand your agreement.
By now, you know that you should never sign something unless you’ve read it thoroughly. Once you’re at a stage where you’re ready to accept offers, understand the agreement on your desk. Read through any terms and conditions, and consider having a second set of eyes look over the documents, too (i.e. a lawyer, advisory board, or mentor who’s been in your shoes before). Take a look at the documents listed on the Y Combinator site, and be sure you have a basic understanding how a cap, a discount, or preferences might affect you down the road. Understand, too what both parties are getting out of the deal. What are your obligations to your lender/investor, and what are their obligations to you? Knowing this will help pave the way for an honest partnership.
Determine the cost of the investment capital.
If you’ve watched an episode of Shark Tank (catch our clients, LovePop, in action), you know there’s always a price to an investment. Will you be paying interest, giving equity in your company, or both? Something is always expected in return for the investment. Consider what’s easiest (and most realistic) for you to agree to do. Doing so will ensure that your obligations are manageable and ultimately, successful. Another reason to pay attention to the cost of your investment capital? Knowing your ultimate return. Make sure that your valuations are where they need to be. If there’s a cap on your valuation, it can be punitive to your company if your company valuation goes beyond the cap.
Have a plan for expansion.
Once you’ve experienced growth in your market, it might be time to bring on a venture capitalist. You should think of raising VC as similar to hiring a boss. If you go the VC route, you’ll likely encounter a partner that will want to exercise some control over your business. As you explore this option, consider who you’d want to partner with and look for things like whether you share a common vision and how this partner fits into company culture. Regardless of your decision, have a plan and be prepared.
While raising money can seem daunting, it’s what makes day to day operations run smoother and more efficient. Once you’ve raised sufficient capital, you’re well on your way to establishing a booming business ready to take-on your market. There’s nothing stopping you.
Want to learn more about how bookkeeping can help you if you ever find yourself in the shark tank? Talk to an expert.