When you need to raise capital it can be all too tempting to think your business is so great that investors should just throw money at you. Founders have even approached me in the past with such sentiment: “Can’t you just bring in a rich person to see our facility? They’ll see what we’ve achieved without funding and surely they’ll be desperate to put down a million dollars…”
While your business is arguably amazing, most investors won’t see it that way. Not initially at least. So how do you secure the funding you need? Let’s explore below…
What if the perspective on funding started much earlier? Many investors and advisors want to see the founders invest alongside the early stage investors. Most founders scratch their heads at such folly – if they had lots of free cash lying around, why would they be engaging investors?
So what you need to do, as founder, is start building a tally from as early as possible on what you actually spend. And don’t forget to tally up the hours you spend. As strange as it may feel, it acts as a way of showing potential investors that you truly believe are fully invested beyond doubt in what you do.
Proven Revenue Model
A lot of investor presentations and business plans are full of holes. One of the biggest stumbling blocks can be fixed by addressing your revenue model. Investors look at how you propose to make money and want to know how you can back it up.
In many types of businesses a revenue experiment can be done for less than $5,000, even less than $1,000. It could be as simple as spending money on online ads, and measuring conversion. For example, imagine you spend $1,000 in advertising and only gain $1,500 in sales. Not great profitability but it is vindication the market wants you.
Based on the first experiment, you adjust the offer, change the text, add a video or whatever’s necessary and in the next experiment you spend $1,000. This time you gain $2,500 in sales. That may still not be where you want to be, but it changes your language to investors.
You can now say “We know that…” And if you’re questioned, explain the tests you’ve run and how you keep improving. Now put it into context of how, should they choose to invest, that will be their money increasing at that rate, if not more.
Now move onto to discuss the other side of the revenue model you want to test… Scalability.
I’ve seen countless calculations that say if $1,000 spent gives $2,500 in revenue that means $100,000 spent gives $250,000 in revenue. However, that’s simply not how it works in all markets. Instead you could be looking at $150,000 of revenue – not such a great result. What investors would like to see is some viral or customer-gets-customer effect that only shows up when you scale, meaning the $100,000 spent gives you $350,000 of revenue.
The best part of this principle? When you take a proven model to investors the conversation gets a lot shorter and a lot more successful…
Know your audience
This is vital. Learn about who and how you should be targeting the different types of funding and you can save valuable time and resource.
If you’re still starting out and trying to prove your business model works, don’t waste your time pitching to the big guys – save them for when you’re ready. Could your idea help advance society? You may find you’re eligible for a government grant you never knew about. Or maybe your marketing skills could carry a decent crowd-funding raise depending on the product or service you have to offer.
There are so many options available to you and you need to establish which is the most relevant to your business. This can be incredibly overwhelming which is why we put together our annual Challenge the Funder event. Register here to find out what option best suit you and your business.