2.01 – Starting with a Plan
Two common attitudes about start-up funds can make securing funds more difficult. These are:
- "The more money I get, the better. I can use as much as I can get."
- "My business plan numbers are just estimates – the investor will tell me what I need."
If you’re thinking like this, stop right now. First, why seek more investment money than you need? Every bit of capital invested in your business costs you some equity (ownership) in your company. Additionally, having too much money might lead to poor decisions because you may not think as carefully about how you spend it.
Secondly, while your business plan financials are estimates, they need to be well-researched estimates. Investors may discount your rapid sales growth estimate, but they want to know that you’ve carefully considered all your numbers and that they make sense.
This lesson shows how to raise capital for your business the smart way—starting with a plan.
Starting with a Plan
Before you talk to anyone about money, have a plan in place. Create strategies for targeting the right amount of money from the right sources. Here are some guidelines for putting together a plan that works:
- Seek what you actually need, not what you think you can raise.
- Define Growth Points: Look at how your company grows and define when you’ll most likely need capital.
- Consider Funding Sources: Identify the sources of money available at each phase.
- Align Activities: Ensure your business activities let you tap into the correct source of money at the right time. For example, if planning an initial public offering (IPO) in three years, start establishing the systems, controls, and professional management needed before the IPO.
- Monitor Capital Needs: Track your capital needs to avoid returning for additional rounds too frequently. Every time you seek more capital, you give up more stock, reducing your ownership percentage.
By preparing for future capital needs, you can position yourself for success. One technology company that produces custom productivity and e-commerce applications maintains a good position to raise capital by:
- Creating value with long-term customers and great products
- Running a profitable business
- Keeping cash flow positive
Achieving these goals from day one can make it easier to raise growth capital when needed.
Financing a Traditional Business
Traditional businesses typically follow predictable financing cycles. Here are the phases of financing for a typical business:
- First-Phase Funding: This phase involves getting seed capital to prepare the product and business for launch, and funding to begin operations and achieve positive cash flow.
- Second-Phase Funding: This phase seeks growth capital. The business has proven its concept and now aims to grow, often driven by customer demand. Seek capital in advance of needing it.
- Third-Phase Funding: This phase usually results in an acquisition or buyout. It’s the harvest phase for entrepreneurs and investors, often involving a buyout or IPO within three to five years to provide the cash investors need to exit the investment.
Financing for E-Commerce
The Internet has introduced business models that don’t fit traditional financing phases well. Internet-based businesses require a strategy that is part formula and part artistic achievement. Here are suggestions for navigating the capital maze for e-commerce businesses:
- Seek Smart Money: Fund a traditional business with money from friends and family, but seek early-stage capital for an Internet concept from experienced investors. The source of funding is as important as the amount.
- Use Advisors: Get introduced to money sources through advisors. Conduct due diligence on investors to find those with experience in your business type and compatible firms in their portfolio.
- Consider Compatibility: Don’t rush to accept the first term sheet. Compatibility with the investor is crucial since they influence business decisions. Evaluate options and get to know the partner you’ll be working with.
- Focus on the Next Stage: Choose a deal that provides enough money to reach the next financing round and an investment firm that adds value through introductions, contacts, and advice.
- Launch Quickly: Get your website up quickly and start collecting feedback from potential customers. This data is valuable when discussing your business with investors.
- Hire the Best Management: Investors prioritize the management team over the business concept. Invest in the best management you can afford and leverage strategic alliances if needed.
By following these strategies, you can raise capital effectively and position your business for long-term success.
