When you have a startup and you start bringing in funding, you're proud that people want to invest but, somewhere in the back of your mind your conscious of the fact you're slowly chipping away at your own personal equity position. As you bring in more investment, you become more aware of this fact. As you sell shares, your own overall percentage of ownership decreases - dilution.
Often investors will look for a provision to their investment called anti-dilution rights. This gives the investor the right but not the obligation to put additional money into a company as other investment comes in. This way the original investor can maintain their current percentage ownership of the company in the long run - all the way to exit when the company is valued most. Many founders don't like this idea because they feel it forces them to sell more of the company than they want to with each new round of investors. The brand new investors want a certain percentage ownership or the investment is not meaningful enough for them. At the same time, the old investor doesn't want to give up their percentage ownership either. At this point, it's typically the founders who end up losing the percentage that the old money wants to maintain.
Most founders really hate being in this position but there are some really great things about this if you shift your thinking.
Making your selling easier. If your old investors are determined to kick in their anti-dilution rights then you can just work with that scenario. If they have 20% of your company then plan to raise less money with each round or each bridge (small raise of funds) round. If you treat fund raising as a sales pursuit then you already have 20% of your selling "in the bag". That's not a bad thing.
Kicking in cash when your trading in labor. Many start ups can't afford to pay every person or services company they need. Many start ups will convert billable hours as a cash investment and issue shares to those vendors. Although often necessary, you can end up issuing a lot of shares (diluting you) with no operating cash (hard investment dollars) to show for it. But wait, remember those anti-dilution rights, yes, this is when they kick in as well. As you are issuing shares to convert vendor debt into equity (shares), you are diluting the shareholders. This kicks in the anti-dilution rights of prior investors. So they must either invest money to maintain their percentage of ownership (hard dollars) or they get diluted along with you the founder.
If we use the example of an investor with 20% ownership and anti-dilution rights, then converting $100,000 in legal expenses to stock issuance would require that investor to pony up $20,000 in hard cash. That is money in the door. If you use this approach strategically then you may want to convert debt to equity at a particular month when your cash flow is low or delayed. This could end up making up for having to make a high interest loan or use a bridge loan that extracts a hit to your company's upward valuations.
Turn lemons into lemonade, let those investors have their anti-dilution rights and leverage the agreement to help grow your business. Best of success!
You might think there is some sort of magic to raising investment money. There really isn't. It's a type of selling and as with any sales there is a general sales process to follow.
Step 1 Your Sales Targets
Who are you selling to? Who your market is dictates lots of other things. Are you going to raise money from crowdfunds, friends and families, individual investors, angel investment groups, investment companies or banks?
Each market listed above requires a different sales approach. Crowdfunding requires a great story and consumer focused videos. Professional investors are most interested in market opportunity and projected financials. Instead of trying to break down specifics for each market we're going to run through, in general, what you need to prepare except for crowdfunding. Crowdfunding is a completely different effort. It's more about selling your dream and getting people to pre-buy your product and/or services before they are even close to being made.
This article is going to focus on traditional investment which is still the most common way companies get the money they need to grow.
Step 2 Marketing to Your Targets
Marketing is required in any sales process. Typically you'll need the following an executive summary, a business plan, financials forecasts and an offering document.
Executive Summary You need a single or two page doc (maximum) that clearly defines your offering (product, software and/or service), your market (be specific and tight in your definition), your value proposition (why market spends money and time with product), your team, revenue opportunity and return on investment for the investor.
Operational Plan Let's not go crazy and call this a full business plan. A classic McKenzie Consultants business plan is a waste of time and probably not applicable if you have little or no operational history. What you need is a plan that defines your operational and revenue goals and the step by step process you'll take to achieve those goals. The operational plan needs to tie to your financial forecasting. You'll spend money to advance and grow the business. Your money spend should ebb and flow (decrease or increase) based on where you are at and how long it takes to execute your operations. Operations = product development (phased), marketing/business development, support, administrative and sales. Please notice sales is last. If you hire a bunch of sales people to "pre-sell a product" you're going to get destroyed with costs and products that don't meet your market needs. A hammer only knows how to hit nails and a sales person... you get the idea. You as the founder are the sales person to start and probably for a lot longer than you'd think.
You should have your operational plan written with no more than one paragraph for each KEY DETAIL in your operations plan. I also like to put a financial cost summary (simple and short) associated with each section. This will save people from bouncing between your financials and this document.
Financial Forecasts Create a cash flow model of your business. Money in is at top (investments, loans, sales revenue), operational spending comes next (R&D, capital purchases for operations, salaries, etc.) and administrative expenses come last (legal, accounting, rent, utilities, etc.). The cash balance at the end of each month (cash in minus cash spent) gets carried over into the very first line (very top) of the next month. If your business is complex then you can create different tabs for details on revenue generation, expenses, etc. but you need a month-to-month summary for investors. If you're smart you'll make all the fields editable and formulas are used to add up and subtract your numbers because the specific numbers will get changed a lot.
Pitch Presentation You need to consolidate the three documents above into a 10 slide (no more) power point summary presentation. REMEMBER your audience and the document's purpose. You are selling an investment that needs to appeal both emotionally and intellectually with potential investors and those that can introduce you to investors. Simple, simple, simple is very important. One main idea per slide and no more than 4 supporting facts/details. That is a total of 10 (or fewer) key points and potentially 40 supporting details. That is a lot of information.
You need to present enough to wet interest and not so much that they are confused or overwhelmed. Leave them wanting more!
Step 3 Build a Sales Funnel
A sales funnel is a simple visualization of how process (not impulse) sales take place. It's a series of steps with people falling off interest with each step. You may have 4 or 5 steps to your sales process. From first sales contact to winning investment will have a percentage of people who say no or just ignore you (getting an actual no can be refreshing you'll see) every step of the process. The idea is you have to "stuff" a lot of leads into the top to get the few investors who commit funds at the bottom - hence the funnel or pipeline.
How to Build a Pipeline There is no right or wrong way to build a pipeline. Most importantly you need to speak to anyone who will listen to you. Secondly, you need to clearly communicate in very little time the value you offer. Thirdly, you need to learn to qualify who you are speaking with as an investor or someone who can introduce to an investor or investment option. Fourthly, you need persistent follow up.
Some common ways to build investment leads. Go through your list of family, friends, colleagues and acquaintances. Let them know what you're doing and what you're looking for. Contact your business contacts. Join a startup group or organization. If appropriate, look into an accelerator or incubator startup program. Create a listing and profile on Gust.com. Look up angel investment groups in your area/region and apply to present. Look up startup investor pitch groups. Use a legal and/or accounting firm that is known to connect startups to investors.
From this base of leads you will be introduced to more and more people. It will be the base of a larger and larger sales pipeline.
Tracking Your Sales Funnel You ABSOLUTELY must track your sales pipeline. You can start with a simple spreadsheet. You can use airtable.com for free and use their sales pipeline template. It's a simple sales management tool but much more powerful than just a spreadsheet (especially if this is a shared effort). Put down the key contact information for each lead. Record how you got that lead. Record relationships to other leads. Track the date, time, type and details of each interaction with them. Estimate their interest with each interaction. Mark dead leads as "lost" if there is no chance of either getting investment or getting an interaction with others.
Updates for Your Leads You should get in the habit of creating update emails to all your leads (blind copy the email addresses). This keeps you fresh in people's minds and gives people the opportunity to either contact you again or to refer you to someone else. Continue this habit when you launch your startup. You never know when you'll need additional funding or you can use that list to shift and help you recruit sales opportunities, business development and employee recruitment.
Step 4 Terms and a Term Sheet
A term sheet is a document that lists the high level business agreement of the investment. This SHOULD NOT include the specific legal language. The "legaleze" comes as the last step (and it's expensive). Ideally you can come up with a term sheet with only minimal feedback from attorneys and towards the middle the end of the negotiation. As with buying real estate purchases put "allowing attorney review language" as part of your term sheet. The term sheet is only binding through the completion of the next phase so usually if you screwed up on the term sheet and realize it later you can have an out without it being expensive or "damning" to your future and continued fundraising efforts. It will burn time however and could wreck the relationship of that party you were negotiating with so don't take this process lightly.
A term sheet is an item by item list of the main business terms of the investment. Here's a general example of what you find in the term sheet. It's by no means comprehensive. It's also just a little thumbnail of what is negotiated and each point below can have large implications for you as a founder, especially if things don't go well financially. You can find great resources and sample documents at the National Venture Capital Association website under Resources.
There can be many other items but they usually fall into these types of buckets. A signature by each party binds the terms. This doesn't get you the money. The last AND LARGE hurdle is the investor agreement.
Step 5 Closing the Investment Contract (Investor Agreement)
Theoretically, the terms in the term sheet will need to be discussed, clarified and/or elaborated on but will never be renegotiated. If you move to the contract stage it's expected to define what "bankruptcy means" but you shouldn't need to adjust shares issued, etc. if the company does go bankrupt. You must keep one thing in mind though. This final stage is a due diligence stage in which the investors will be digging into prior investment documents, accounting statements, legal filings, etc. Sometimes things "pop up" and there is a little negotiating around it. Also, sometimes the negotiating takes so long that some final documents are moving targets like cash flow statements and the company may take on debt, increase/decrease inventories, etc.
As the founder you may want to consider negotiating a limit or "cap" on the legal expenses you will reimburse/pay for the investors. Attorneys love unlimited billable hours. It's recommended to let the investors create the initial investment contract. This should save time in this process. You need solid legal representation from a firm that has done this type of contracts before. Your attorney to date may not be the correct attorney(s) to assist with this process. Please be skeptical of their abilities and make them "earn" this business.
Try to get general agreement on disputed issues between the business people and the final language to the attorneys. An attorney is protective and will make most issues sound "critical". The reality of an issue's weight in importance is usually somewhere in between pivotal and benign. A deal can fall apart at this stage. An investment deadline can be useful for both parties.
When the agreement is concluded and both parties have signed you should get the investment payment. A wire transfer of funds is preferred. A check will have you waiting to see it actually clear into your accounts before you know it's all and finally over. Believe me you want to get this over asap.
So how long does this process take? It depends. Getting to a term sheet can take a few months or forever (never get done). Term sheet and contract negotiating is typically 3 to 6 months. Can it get done sooner? Yes, but that takes a special kind of "magic".
Treat investing as a sales process and bring in the money. Best of luck to you!
It Ain'T Over Til It's Over
Fundraising for a startup is a curious dynamic of psychology. There is the interplay of greed and fear that draws in and keeps out investors. When it comes down to negotiating a final investment there are two dynamic and polar opposite attitudes. Optimistic entrepreneurs and pessimistic financiers.
Investors may think what you're doing is great and work to make a deal BUT until the money is wired into an account, "it ain't over".
I've never met a pessimistic entrepreneur who is seriously trying to make a go at their business. You just can't withstand the pain unless you're passionate about the cause. It comes with the territory. But that pessimism is often blind to the myriad risks to starting something new. In a Silicon Valley mantra of fail fast and learn. Someone is funding the failure and the learning.
It's experienced money that knows the odds disfavor the startup. Oh, there are a few glad handing "unicorns" out there. In this case, everyone throws money in a pot at crazy valuations and everyone high fives around the meeting room. Those kinds of deals are rare. Most deals I've been involved with are intense, ongoing and involved four letter words being flown about.
Despite the pessimism over startup risk, people do invest. But how do you get optimism and pessimism to "kiss"? Here are a few bullets from my experience.
Entrepreneurs need to sell. Fundraising is selling. It's not presenting. It's not lunches. It's not logical arguments. It's not passionate hype. Selling is a process of building a pipeline of interest, qualifying interest, determining what they're trying to buy and CLOSING THE DEAL. I know entrepreneurs that can network like the dickens but they don't know how to ask for money. They get nervous about closing. Sign up for Salesforce.com. Treat your fundraising like a sales process and ask for the money in part or preferably in full.
If you don't know what to do or you lack the gumption to chase deals then bring in a minority founding partner to get it done.
You have to be positive throughout the process. It's so hard to be positive because entrepreneurs tend to take everything so personal and everything is stressful but you have to stay upbeat, positive and responsive all the time with investors. If an investor is hammering you don't back down BUT don't step up either. You need to reflect their concerns, address them and remind them that this company is going to make everyone a lot of money. Upbeat, positive, always.
Don't Nit Pick. I recommend in any negotiation to write down three categories for negotiating must have, nice to have and sacrificial lambs. The must haves make the deal worth doing. They should be no more than the top three things you need out of the deal. Usually a minimum amount of money is on the list. Other things can be maintain company control, get a particular valuation minimum, pay yourself some sort of salary, etc. IF YOU GET these top things (no more than three) then the deal should be negotiated in full. If not, pass and move on. It's a numbers game.
It's best to have some range or flexibility in the Must Have's. For example, you may say "we need a per share valuation of $4 to $7 per share". You have a range and it allows you flexibility as you negotiate. If you just say I need $7 per share then you may end up compromising big time on other items.
The nice to haves and sacrificial lambs are those things you ask for and great if you get them but you don't throw out the deal over them. Ask for them because the odds are you'll get some of them or you'll use them to get your must have items.
Don't nit pick the items. I've worked with entrepreneurs that get their valuations but Nit Pick and fight about anti-dilution or clawbacks if there is a down round. These things kill deals. Guess what? If you mess up with other people's money they usually expect you to get punished more than them. If you think about it you'd want the same thing.
On one hand you're telling them this business is so great you'd be crazy to pass on it. On the other hand you're saying well you know there is risk and if that happens we're all in this together. It just doesn't work.
If no clawbacks (a clawback is a revaluing a prior investment with more shares over failure of a company to achieve goals) is a must have then put it on the must have list BUT you only get three so think it over.
Agree on Terms and then Shut Up. There are two phases in getting the money. You have to agree to the high level terms of the agreement on how much money, how much equity, timing, board seats, what happens if the investment goes bad, etc. These things go in the term sheet. This is stage one. Your hard negotiating should happen here. This is usually before lawyers get involved so it's "free". It takes up time but little money.
The second phase is the lawyering, the write up of the actual investment contract. You can come to terms but that doesn't get you the money. The investment contract signed gets you the money. The contract phase is expensive because attorneys are involved. In this phase you should ask questions, get language modified and/or cleared up, address issues not listed in the contract, etc BUT YOU SHOULD NOT BE NEGOTIATING TERMS AGAIN.
Two potential outcomes result if you start renegotiating: 1) the investor walks, 2) the legal fees go through the roof. In most cases, the investor will insist you cover their legal fees if you do this.
If you realize you negotiated a bad deal then walk away from the deal. Don't swing back into changing the terms. You will almost never achieve a deal at that point. You'll save your mental health, legal costs and your reputation with investors.
Document Your Issues and Concerns Succinctly. When you negotiate terms the biggie items get out of the way quickly like investment amount and valuation but there will be many other items to consider. When you are getting to fine points of concern then I recommend you do a write up brief. Give the concern a title, i.e. Funding Timing. Paragraph one, title "Situation" and list one paragraph describing the situation (no more than five sentences on the situation). Paragraph two, title "Resolution" and list one paragraph describing what you think the best way to resolve the situation is (no more than five sentence on the resolution you propose). Paragraph three, title" Key Advantages" and list one paragraph on the benefits to both parties.
This method takes emotion out of the issue and gets a thought framework created that addresses both parties. At the very least it will create a constructive dialogue. It will also reduce the risk of long drawn out phone calls. Investors hate long, drawn out phone calls.
Don't Make Old Issues the New Money's Problem. Don't create headaches for new investors. The deal overall is stressful enough. There may be contract items with prior investments that cause the entrepreneur issues. There may be payment or conversion triggers on the deal. That is the entrepreneur's issue to deal with and resolve. DON'T make it an issue for the new money. They didn't cause the problem or issue so don't clog up time and energy for them in dealing with it. Go back to the old investors and get it all tied up for the new deal.
Always Be On Guard. After several conversations with potential investors I've seen many entrepreneurs start to get casual and even chummy with the investors. That's usually when they say too much or change the nature of the conversation. The new money is not your old college chum. Shut up and remember item number one. You're selling.
Don't talk about your personal financial stress or how your wife is threatening to divorce you if you don't raise the money. Don't talk about that outsource programmer that took $20,000 from you and gave you crap code. Don't tell them you have no clue how you'll recruit 100 new employees in three months. Don't say, "I think we're committed to doing this" [true story on this one]. Just don't start down those roads. You are selling. You are selling. You are selling.
Do you lie? No. Do you cover up? Of course not. Just don't treat the investors like your therapist. Stay on your game through getting the check. Your a real person so have real conversations but don't say too much or off the wall things.
Keep Success In Perspective. Often entrepreneurs go into agony over "how much they're giving up of their company". I like people to think of it this way. If your business is wildly successful it won't really matter how much you own at the end. You'll be fabulously wealthy.
If your business fails it won't really matter how much of the company you own when this happens. You won't make a dime.
Doesn't that really sum it all up? Why are you fighting so hard to keep that extra 1% to 5%? If the company is a middling drag along it won't matter much either. Stop being greedy and realize the risk for those putting in money.
Happy, helpful investors are better than getting no money or having irritated, pissed off investors, particularly if problems crop up for your company.
Eyes on the prize! Bring in that money.
But who do you talk to? You really have three choices. Amateur, experienced and professional investors. What's the difference? A lot.
Amateur money is anyone who doesn't invest in startups. That is most people including your mom.
Experienced money is anyone who has made investments already in startups. Usually, but not always, these folks are qualified investors. That means they make a big annual salary and/or they have a lot of money socked away (other than their house).
Professional money is wholly focused on providing financing to new and young companies. Notice I say financing. You'll find that professional money may structure something that is outside stock. In the end, money is money regardless of the structure.
So where do these sources of money come in? Well they almost always follow in progression. Amateur money is usually the first to come in and fund. Often this is the "selling the dream" phase. You talk about new products, new markets and grand opportunities. The issues of a plan, talent and execution are usually explained with "that's what the money is for". Most times Amateur money is your immediate circle or one layer deep from there.
In this case you'll be setting the terms for the investment. Amateur money has little tolerance for spending money on legal documents and creating an investment term sheet is expensive. You'll create the term sheet and the amateur investors will have legal review (maybe). Usually the individual contributions will be relatively small. $5,000 to $25,000 is the norm per investor. The decision cycle of yes or no to invest is usually fast, even immediate.
The focus for these investors is big reward. Often there is little conversation about risk, set backs or reversals of fortune with the company. All eyes are focused on "a bright and rosy future".
Experienced money simple means they've made other investments to startups or early stage companies. Angels come in after the initial company is up and running. You've made some progress in the business but you're usually pre-money (not generating any incoming revenues yet).
Experienced money can invest individually or as part of an angel investment group. Usually they are qualified investors. They often love to talk about their other investments. Let them rave on but know that if they don't tell you exactly how much they invest, it usually means it's "the minimum" to participate. It's okay to ask them what their investment range is. I assume their low end range is the norm. Usually $25,000 to $100,000 per investor is the norm.
Angel investment groups can be a way to get a larger pool of investment but the odds of getting investment from these groups is usually pretty low. One large investment group in Chicago at an entrepreneurial group I attend boasted that over 100 companies apply for 10 investment presentations a year. When asked how many were funded last year they said three. Is it worth the time to apply? I guess three companies would say yes and around 97 would say no.
The best way to wrangle up a bigger pool of investment with angels is to find a "top dog" investor. This is the angel that has lots of experience and has been involved in several deals. This angel has probably helped negotiate terms. Most importantly - this angel has friends that follow their investment lead. If you can find that "arch angel" then they can create an angel investment group for you. This person can't be a broker only. They need to be putting in their own money.
If you can't find a top dog then you'll have to "herd the cats" and get a bunch of individual investors to get involved. Often you'll need to create the initial term sheet yourself to start negotiating. It's very hard to get the first couple of commitments but once you do you'll find others are less afraid to "jump into the water".
The focus for these investors is reward without undue risk. They want a plan for the use of funds. They want to know when the money will run out and when the next fund raising investment will come in. You will have more conversations about outstanding shares, dilution and valuation scenarios than amateur money. With all this, they will probably have limited conversation about setbacks but be prepared with contingencies.
Professional money is a whole different animal. Professional money usually can fund an entire round. A million dollars is the low end and it goes up and up from there. Professional money will often have a minimum of three to five million. They view the legal as sunk costs so why not do bigger deals since the legal expense is the same as small ones. There usually is a very high level of financial due diligence. Due diligence can also include a review of current staff, patent reviews, legal reviews of prior term sheets, etc. Often it's very thorough. If you are in a financial pinch, smart money will use that as leverage against you. Smart money will be looking at good times and put in contingencies for bad times. Mostly, professional money will seek to limit downside risk and maximize upside return.
What does that mean? Professional money is going to maintain and share fully in the rewards of the success in your company. They are also going to make sure you as the entrepreneur will get the brunt of the cram down (dilution of shares) if the company starts running into trouble and has a down round (negative valuation turn).
This is not to say that the relationship with professional money will be ugly but it will be serious. They have one mission - minimize risk and maximize gain. The relationship can come with other benefits including a vast network, deep pockets and a great bargaining partner for the next round, a sale of the company or an IPO.
To have a shot at professional money you'll need great potential prospects, a solid foundation to your business and revenue generation (doesn't have to be profitable though). When you negotiate your skill level needs to be high so you'll need help in understanding the ins, outs and protections associated with this level of deal.
A note on not getting into trouble. No one can tell you specifically how you should pursue funding. There is just a vast ocean of money out there but it tends to be all found through relationships, introductions and consistent determination. There are a few truisms:
Best of luck to you as you seek funding. Persistence pays off. Keep at it but know it's a lonely game.
by Seth Temko
I think sometimes entrepreneurs get a bit snobby. "Franchise? Yuk! It's someone else's idea." Well I can tell you that starting a franchise requires about all the necessary skill sets that are applied to any other startup. They also have a MUCH higher success rate. And, with thousands of existing franchise systems in the US you can find a franchise for just about any market or business type- from consulting to yogurt shops. The nice thing too is often franchises are easier to get funded than a traditional "tech startup" and now crowdfunding is hitting franchises.
What may make a franchise even more appealing is a site that's turned the whole "Kickstarter model" onto starting franchises in a community. I can tell you one thing for certain. You don't start a bricks and mortar franchise in a community unless you get community support. (Read more on this Retail Openings - Success in 3 Marketing Phases).
So what if the community supports you financially? They literally invest small amounts of money into the founding of your business. Now that's putting your money where you're support is. Of course those community members that invest in your business are certainly going to be some of your best and most vocal customers. I've known a couple of private community athletic centers that have had "founding members" that have put in money for life memberships and other perks, $10k minimums. That is a bit much for many, although they were able to put the money together eventually.
But this is the idea of much smaller dollars being put in on average by many more people- Kickstarter for franchises. The site, CrowdFranchise, has been around for a couple years and has a couple funding successes. They are still working on critical mass so they don't have the range of projects you'll find at other crowdfunding sites but it's probably the cheapest way you'll ever be able to say you are "a owner" in a local joint in your community. It could also be an interesting funding alternative for those of you seeking to fund a franchise and build social marketing and do market validation simultaneously.
Check out the pitch. The site is straight forward and easy to understand.
by Seth Temko
Crowd funding is a new way to finance something new. It's catching on by storm with billions of dollars funded for 2013 and a huge growth curve projected for 2014. Perhaps the number one thing you need to be successful - a good story teller. Crowd funding is supplying money to the arts, sciences, software, videogames, electronics devices, you name it. These projects run from a few hundred dollars to millions in financial need. For those who raise the funds they all have a good story, presented well, as a foundation to their successful financing.
I spoke with Pavan Bapu this past week who is completing his first Kickstarter campaign. It's been quite a success.
He felt the number one reason he was going to do well and did do well on Kickstarter was the fact he had a good story to tell about his brand. This comes across in his promotional video. Gramovox is a combination of nostalgia and modern technology. Beyond that Pavan is a bit of a romantic and this comes across in his design, his communications and his video. You can view his Kickstarter project here.
His video is warm and inviting. It's about something beloved from the past brought to the present. Ultimately he associates Gramovox with times past when people got together to listen to music - a social time that builds relationships.
The design is unique and definitely retro but it's the music as a shared experience that really resonates as a brand. People like the story and ultimately 771 (and counting) have chosen to make that story part of their lives. I see Gramovox as bridging a gap between the iPhone (your device of isolation and solitude) and a casual social gathering. The look and feel connotes simpler times. You see it in its simple design. Yet, even though the design is simple, the horn is a focal point, some might say, even a talking point.
Novel, fun, social and connected to technology most people carry around in their pocket - a compelling story that's raising money and a good example of telling a story in crowd funding.
You're always going to have some customers who at some point are looking for a "break". They need to delay a payment. They ask for a price discount. They say they are short on cash flow. A good policy is to do a little poking around. "Trust but verify", Ronald Reagan had famously said.
Given the bonanza of information on the Internet. We've found a great way to verify is to look up home addresses on Zillow. In case you haven't used the www.zillow.com it's really simple. You enter in an address and a map pops up showing a history of what homes are estimated to be worth. You'd be shocked at what real assets people may have yet they're looking to you to give them a break.
It's also a great filter for checking on boasting. Some people talk about how much money they can bring a business deal. You can lease a flashy car cheap to drive up to a business meeting, but it's not as easy when it comes to where you live. We'll use Zillow to see what the current value of their home is.
Fast, easy and free- it's time to verify your trust.
by Seth Temko
Most people I speak with that have never done fundraising are singularly focused on raising a dollar amount. How can I raise X dollars as quickly as possible? I think most "newbies" miss the mark completely when it comes to investment. The first question you should ask yourself is, "What kind of money am I looking for?"
You see your financing partners are just that "partners" in your business. Think of your money partners just like you would any key strategic vendor. If you were hiring a marketing firm would you hire a firm only because they are the cheapest? The answer is, it depends. How big is the project? How critical will they be in the future of your company? Are they performing a routine and low value task? Do they specialize in your industry? The money involved in hiring the vendor is only one part of the answer.
If you want a routine template website created which is low fee then price may be the only real factor. But, if the effort is critical to your business, at least in the current step, then no way is the price the only thing you'll be considering.
I see raising money in the same light. If you're only looking to raise a small amount of money, let's say a couple hundred thousand, then it probably doesn't matter if the money comes from mortgaging your house, "passing the hat" to some wealthy individuals or boworring money from relatives. The assumption here is the money itself is the only critical factor. In the grand scheme of things the amount of money isn't "do or die" to your company or to the investors.
But let's say your in a more critical phase of your company. Let's say you've already bootstrapped for awhile (read about that here) or that you've already raised some smaller capital and future investment has now moved beyond those investors. You really need to think about what you're looking for. Do you need investors that have management skills/talent inhouse you can use? Do you need investors that can fund not just this phase of your company but future phases? Do you need investors that have the connetions to help sell your business or take the business public? Do you need investors that have connections and can open doors into your market? You can see the criteria move beyond just the money. What is the value you need from your inestors?
Finally, what is the ethical and moral character of the funding partner you're seeking? If you're just looking to build and flip a business to maximize financial return in the least time then an aggressive, no nonsense venture capital firm will help you stay focused on that goal. If you're seeking to create a long and lasting brand then you need to find a partner with a track record of funding other companies that have had those goals. At the end of the day you need to meet and understand who would be on your board of directions from those companies and you need to think about how well or not you think you'd be able to work with them. That means you need to interview your funding companies and the people you'd be working with and in some scenarios, working for. You need to due your own due diligence. You need to ask them for references and you need to find out what their reputation is. Check on the profiles of all the partners and find out who is supplying their money that they're managing.
Remember the courtship for money is formal and many times friendly. Once the money is onboard then things get real.
Decide if the only thing you need is money.
Define what value beyond money you need brought to the table.
Create your vetting list for potential funding partners.
Do your homework on potential partners.
My friend in California is on a road show shopping a tech company involved in the credit card processing business. It's an existing business with several million in revenue. Since Square, Paypal and others have come out with personal credit card processing devices this dull space of credit card processing has gotten hot. They're looking for a $50 million dollar valuation and they are getting a lot of meetings. Large funds with billions are inviting them to meetings. It will take a few months but they'll pull in a deal.
A good friend with a multi-year start up has been doing part-time investing networking. She's been going to investor presentation events and investor socials. She's had a couple conversations and she's on her way to a term sheet. She'll bring in between one and two million.
So, what does this all mean? It means the stock market is doing well, yields on banks and bonds are pathetic and the economy has recovered enough that people are willing to accept more risk and invest in new and growing companies. You can look up government numbers, etc. but talking to those seeking investments is the truest way I know of to get the pulse of the investment community.
In my conversations I'm hearing about positive results for those seeking $1 to $50 million. It's not that it's easy. It hasn't been easy to raise funds since the crazy days of the dot com frenzy but raising funds is doable and with effort you can get competition for the investment. This is one of the best signs for those seeking funds. Multiple offers means you can 1) increase your raise amount (if you want to), 2) you can negotiate better terms (give away less of the company), 3) you can push for lump sum investment (as opposed to pieces for milestones), and 4) it will accelerate the time to complete the term sheet and get the funds.
It also reduces your risk of getting squeezed. This happens when your current business is running low on cash and is in risk of shutting down prior to funding. If this happens then a single investor can "smell blood" and stretch out the process to increase their negotiating leverage.
The money is out there. Happy hunting.
by Seth Temko
Ultimately at some point every business owner thinks about selling their business. Unless you have an automatic transition out through existing business partners or family members involved in the business you'll be faced with selling your business. In general selling your business is very similar to selling a home. First you need to get people intersted in the "house". Then you need to get them to make you an offer. Finally, you both need to agree to a deal and execute.
How much "curb appeal" does your business have? People shopping for a home often look for a house that looks generally "neat and tidy" inside and out. A manicured lawn, flawless paint job and a tidy/clean interior are important to getting people to start "envisioning themselves in the home". What is your business like? If you have facilities and vehicles are they in good repair and tidy order? Are your offices filled with piles of papers looking for a file drawer? Are your employees curteous and knowledgable?
Ask someone you trust but don't know too well to walk your walls and give you an honest opinion of the encounter?
Is it easy to recongnize the value of your business? Someone looking to buy a business needs to be interested in your industry and find value in your business. Make that easy for them. You need to show them how your business stacks up against the competition. Lead with your key strengths such as reputation in the industry, key customers, employee retention, high profit margins, etc.
Ultimately your business is going to get valued on tangible assets such as property, plants and equipment and cash flow. So, pay down your debts, take a very serious look at trimming your overhead and build up the bank accounts. If you do your job well you'll be tempted to keep the business for yourself.
So your tangible assets will have a dollar value and you'll get a multiple of your revenues. That is what the price will be determined by.
A final point is to get multiple bidders. Just like a house, getting more bidders drives up the price and shortens the time to get a deal done.