Attract Investors by Sharing the Risk
Q: I have a great business idea, but no money to get started. A friend told me that since I came up the idea, I could find investors who will put up all the money. How can I raise the most money without giving away a large percentage of the company?
A: Just because you have an idea does not mean that investors are going to line up outside your door to throw money at you. Unless you have an idea that is truly astounding (those ideas are even more rare than friends with good advice), I can tell you from experience that you will have a very hard time finding a credible investor who is willing to write you a check. A savvy investor will not only expect you to have skin in the game, he will demand it.
What do I mean by "skin in the game?" Have you ever heard the phrase, "No skin off my nose?" Perhaps you've heard a variation of the phrase with the skin coming from the teeth or a different part of the body, but since this is a family-oriented column, I will use your nose. What the phrase means is: I have nothing to lose because I have no skin in the game. If you don't have skin in the game, the chances of getting investors is pretty slim.
Having skin in the game means you are willing to make a significant investment or financial commitment to your business venture. If you aren't willing to put your own skin in the game--or put your own butt on the line, as I had an investor so eloquently say to me once--why should anyone else be willing to risk his or her money in your business idea?
Before you start trying to raise money, ask yourself how much money do you really need and what will the money be used for. If you only need enough cash to buy a delivery truck and a few supplies, that is a much easier task than trying to raise money to build a factory and hire 100 workers. It is best to raise more money than you think you will need, but don't try to raise $1 million to fund a hotdog stand.
Be prepared to give up a reasonable share of equity in exchange for the investment made. When someone makes an investment in your business, he or she will expect a fair amount of ownership in return. If you offer investors a small amount of ownership in exchange for a large investment, you are not going to raise much cash.
So, how do you go about funding a business if you have no cash on hand to invest? There are a variety of ways to raise money, but be warned that whenever you accept money from anyone, there are strings attached. If the business fails, you may find yourself deep in debt and the relationship with your investors strained.
Many experts recommend you raise seed money by asking friends and family to invest. I've beaten this dead horse before: Never accept money from anyone you might have to sit next to at Thanksgiving dinner. Even if your friends and family are begging you to take their money, think long and hard before accepting. Sure, if the business succeeds and they all make back their investment with interest, you are the hero of the family. But more often than not, you will find yourself sitting next to someone whose life savings you lost (that's right, the loss will be blamed on you personally, not on the failure of the business), and he's not very happy about it. And he's holding a rather large carving knife. And he keeps referring to you as "the turkey."
Some entrepreneurs turn to angel investors to help seed the business. Angel investors are typically successful entrepreneurs or professionals with money to invest in start-up ventures. Most angel investors, especially those that built their own business from the ground up, know what it takes to start and grow a business. They epitomize the phrase "been there, done that." Angel investors are not only a good source of seed capital, but can also offer a wealth of knowledge and guidance. Some of my greatest mentors have been angel investors who took the time to share not only their money, but also their experience and wisdom.
Be aware, however, that angel investors (especially those that are not true entrepreneurs themselves) are not particularly fond of losing their money, so get to know the investor before accepting his or her check. Do not insult investors by asking for references from other entrepreneurs whom they have invested in, but do a little quiet research on your own to make sure an angel's goals and personality are a good fit with your own.
Tim W. Knox is the founder, president and CEO of four successful technology companies: B2Secure Inc., a Web-based hiring management software company; Digital Graphiti Inc., a software development company; and Sidebar Systems, a company that creates cutting edge convergence software for broadcast media outlets; and Online Profits 4U, an e-business dedicated to helping online entrepreneurs start and prosper from an online, wholesale or drop-ship business.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.