The need for capital never ends. As an entrepreneur, you might have started building your business via bootstrapping, but now find that you’ve reached a point that in order to continue to expand and scale up, seeking outside capital seems to make sense. Securing capital for the next phase of your company is important and can be a big decision. As such, it will require you to have a thorough understanding of various aspects of your business.
Some key points to consider:
1. How would you use the money?
It’s simple to say, “I need to grow my business and I need to get money to do so.” It’s much more difficult to know how you would use it.
Recognizing where your business is today and where you want it to be tomorrow is critical to its success. This means you need to know where to invest. Asking yourself some questions can be a good start: Where do I need to hire more talent? Do I create a product extension? Do I create a value-added service? Do I sell more into existing clients? Do I go after new clients? What about going after new geography? Often business owners struggle with these types of questions. Evaluating your business, its potential and its risks is helpful in that it forces you to think about your business critically. It’s important that you have good insight into your company and are working with advisers who can provide you with assistance in figuring out the answers to those questions.
2. How much capital would you need?
Broadly speaking, the answer to this depends on the business, its growth stage, the purpose of the funds, and the risk you’re willing to take. It’s imperative that you be realistic here. A solid business plan requires a risk-adjusted approach in identifying and quantifying the funds that are expected to be necessary for each investment planned.
Utilizing a financial model is a meaningful analysis, as strategy and finance go hand in hand. Once you have a financial forecast you can see, in a more concrete way, which areas of your business might need more resources and how much money the investments will require. A few steps to get this started:
- Project the amount of capital that will be invested. For instance, how much will a new marketing campaign cost?
- Project the revenues that the investment would potentially generate. Create scenarios for a range of possibilities, including base case, best case, and worst case.
- Project the timeline. How long will it take for those revenues to occur? What would be the break-even point?
3. What are your potential sources for getting this capital?
There’s a continuum of sorts in the world of capital sources. You will likely be reaching into your own pockets or seeking support from a smaller circle in your network at the beginning, but as your business grows you’ll find the need to approach an increasingly-sophisticated investor base, which seeks maximum return for assuming the risk of a growing venture.
Self-funding can be appealing since it allows you to remain completely in control of your business. However, you also could miss out on the potentially invaluable guidance of others, such as advisers and venture capitalists. Another option early in the business could be to reach out to the Triple Fs—family, friends and fools. Their investments are essentially rooted in their trust in you. These checks tend to be smaller but could be a good source to get you to the next level.
There’s also the crowdsourcing route—Kickstarter and GoFundMe are among the more prominent sites—and some sites that target accredited investors who can write bigger checks, such as Seed Equity and Fundable. These methods allow you to validate your idea in the marketplace, but you still will need to engage in a rigorous campaign with strong marketing in order to drive people to support your venture.
If your business has grown to a point at which you’ve got a real product and a track record of sales; when it’s in need of bigger capital for its next stage of growth, you can approach angels or venture capitalists whose vision and interests align with yours. With the introduction of institutional investors, you’ll want to be comfortable with the idea of giving up some control in exchange.
Other potential sources include bank loans, lines or credit, and grants from the government.
In Recruiting Outside Investors Part II: Evaluating the Right Fit, we’ll explore some additional ideas to consider when evaluating outside investors, namely, the characteristics of debt and equity investments, ways to figure out which might work best for you and your business, and the importance of investor “fit.”
Navigating the road to successful capital raising can be a roller coaster, but proper preparation and advice can help you create the optimal structure for you and the company. As venture capitalist and author Richard Harroch puts it—“It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So plan for that.”