Is Your Company a Candidate for Outside Investment?
Q: I’m building my business. Should I search for venture funding, find an angel investor or just bootstrap it? -- Peter R.
Peter, if I had a dollar for every time I was asked that question, I could probably fund your company -- and several others. Raising capital is something almost every entrepreneur considers at one point. After all, your business needs money to get off the ground, grow and, in some cases, survive.
Thanks to social media, crowdfunding and the relative affordability of technology, the barrier to entry for startups has never been lower. But that just means there’s more competition for investment capital. According to crowdfunding platform Fundable, angel investors or venture capitalists fund less than 1 percent of startups. Compare that with the 57 percent that receive loans or credit, or another 38 percent that are financially supported by friends or family. It’s not because investors don’t have money to spend; it’s just that too many entrepreneurs put themselves in the wrong place at the wrong time.
If you fall into any of the following categories, seeking outside capital isn’t the best use of your time. (Sorry, but it’s the truth.)
Related: 5 Business-Funding 'Rules' to Break
First: You have limited scale. Don’t mistake “My business can be successful” for “My business is investable.” Imagine you’re pitching the investors on Shark Tank, who commonly tell entrepreneurs, “This is a great business, but not an investment.” If investors can’t see a massive return on their money -- at least 10:1 -- they won’t bite.
Second: You’re not willing to share decision-making. When someone else’s money keeps the lights on, your power is diminished, and your investors’ demands can be a huge burden.
Finally: You need it to survive. Outside investment isn’t a Hail Mary for when times get tough. If you’ve already run out of cash, you’re already out of luck when it comes to wooing investors.
Still think you’re a candidate for outside money? Better know your numbers. Investors want to see proof of concept and that your business works -- something they call initial traction. Monthly revenue of at least $10,000 is a good benchmark. But the most important stat is your burn rate, or how much money you use each month. Investors will use that figure to determine when you will run out of cash, and how that timeline coincides with other benchmarks. If you’re burning $20,000 per month and projecting three years until you hit profitability, a $200,000 investment won’t get you very far. So make sure the cash you’re requesting considers not only your valuation but also the cost of running -- and growing -- your business.
Which leaves us with the most important question: How much money do you really need? Focus on your next milestone and when you want to hit it, thinking in terms of 12-, 18- or 24-month increments. How much will that growth cost? How many new employees will you need? How much will you need to expand marketing or update technology? Add it up, and break it into a monthly figure. Let’s say you need $20,000 per month for operating costs and expenses. A reasonable raise would be anywhere from $240,000 to $360,000 to get you through the next 12 to 18 months.
Remember: You don’t need to raise money to grow your business. But if you strategically position yourself in a way that makes sense and appeals to investors, you just might find yourself in the elite minority of startups that receive outside funding.