I’ve learned that raising money for your business is, most often, a waste of time. All too often business owners let money raising take them away from the money making by working in and on the business itself. I’ve also learned that absolutely nothing is “in the bag.” Whether you’re doing an M&A deal or simply raising money for your business from accredited investors, promises and talk of funding mean very little until all the agreements are signed and the money is safely in the bank. Most important to the process is the adherence to a few simple, succinct rules that will help you avoid—in whatever way you can—the potentiality of failing in your endeavor to raise money for your company.
Revenue A Must, Profit Preferred
The very definition of a startup includes the lack of revenue and profitability, but if you really believe in and are confident in your business plan, then you should probably at least begin working through the plan before seeking capital. The likelihood of raising funds substantially increases when you can show specific demand for your product or service. Walking into an investor’s office with several large, high-profile purchase orders in your hand makes the process move much more smoothly.
But some investors have become even more intense—especially since 2008. Rather than just revenue and high-margins, they like to see healthy and growing profits. This is one of the main differences between private equity and venture capital. Private equity investors place value on the cash flows the business produces, not just on the ethereal “potential” of a promising business plan and some existing revenues.
If you’re looking for a small business loan, like those provided by the folks here at Lendio, it’s important that you have some viable gauge of your creditworthiness. Small business loans often require collateral, personal guarantees and personal or business credit checks. If neither you, nor your business have a credit history, it can make procuring debt financing for your business venture that much more difficult.
A business associate of mine actually made a specialty out of getting a generic business license, putting a couple of credit cards in the business name and using them off-and-on for a year or two. Then, when it came time for the business to expand its credit card limit or go to a loan, there was at least some history behind the credit of the company. While it’s tough to get a large loan with such a strategy, it can be used for short term borrowing for things like inventory.
Track Records & Connections
Have you run a successful venture in the past? Who with? What was the outcome? It’s often not only about who you know, but who you are. Yes, it’s helpful to get in the door by knowing someone, but that someone is going to want to know some things about you as well. The first point above often plays to this. You may not have a large track record in a previous business, but you’re likely on the right path if you have existing customers from your own hard-fought efforts. Of course, having a rich uncle who also believes in you helps too.
The more money you want, the easier it can be to get, especially if you’re running a successful, profitable business. But nothing can kill your money-raising hopes faster than being disorganized in your financials, especially over long periods. Some private companies are pretty shoddy in the startup phase of their business in keeping good records. This can make an eventual attempted foray into public offering much more difficult.
Get on the QuickBooks bandwagon as fast as possible. Work directly with qualified accountants and eventually auditors to ensure your books tell the true story of where your business is and where it could go. If your financials are solid, you’ll also not have to worry about an eventual acquirer holding you accountable for some net working capital number that wasn’t fully disclosed. In short, the better your financials, the easier it is to convince investors and buyers that your story is true and accurate.
Capital is the life-blood of a growing business. It’s also one of the biggest roadblocks to scalable business growth. Unfortunately, procuring the capital necessary for such lofty ambitions isn’t always easy. Additionally, avoiding the few key missteps we’ve outlined are not fail-safe either. Even after crossing all your t’s, there’s still a high likelihood of falling flat on your face. But when you only have one shot at something—like a pitch to investors—there’s never such a thing as over-prepared.
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