For months, you’ve been grinding away alone and burning the candle at both ends to bring your business to fruition as an entrepreneur and the snowflake you so carefully fashioned into a snowball is starting to gain momentum and size. Your business is growing, but to scale it appropriately to the demands of the marketplace, you need capital – and your bootstrapping credit cards are already maxed out.
When your business gets to a certain point, usually within the first or second year, you find yourself receiving orders or service requests faster than you can fill them, but you won’t be turning a solid profit yet. Overhead is eating into any revenue you have coming in, and you’ve had to hire employees to meet demand, which also cuts into your bottom line. Maybe it’s time to start thinking about finding an investor.
If you’re considering asking one or more investors to put their hard-earned money into your fledgling enterprise there are several things you need to consider and get in order before you finish polishing your Shark Tank speech. Let’s look at a few of them.
How much capital do you realistically need? Sure, it would be great to have enough liquid capital to pay yourself a six-figure salary on top of purchasing all the resources you need and hiring all the help you can find to transform your snowball into a full-fledged avalanche of success. But remember, the more you borrow, the more you’ll have to pay back in accrued interest and possibly even a stake in your company. It’s a known fact that 90% of startups fail so before you start groveling for financial backing, be sure you only ask for what you need.
What type of investor are you looking for? There are two parts to this question. First, are you looking for an investor who will not only provide financial backing but also assume an active role in your company’s management and operations? Second, are you looking for an angel investor, a venture capital (VC) firm, or maybe you’re just looking to crowdsource your financial backing? For most startups, the valuation of your business isn’t going to be “there” enough to lure a substantial investment from either angel investors or VC firms – in fact, according to the Harvard Business Review, less than 1% of America’s startups are funded by VC’s.
What are you willing to give up to secure an investor’s funding? Nothing comes for free, especially not money. Whether it’s an obscene interest rate or a portion of the equity in your business becoming the investor’s, there will be a price to pay. The more an investor is willing to give up, the more equity they are likely to want – particularly if your company has a promising valuation. It’s important to know that with equity comes decision-making power, meaning, if you give up more than 50% of the equity in your company, your investor could potentially take over and terminate you. Just food for thought.
Before you seriously consider asking investors to back your company, be sure you’ve crunched the numbers several times to ensure there is no other way to come up with the capital you need. Crowdsourcing on platforms such as Kickstarter, Indiegogo, and GoFundMe are wildly popular these days, and the fees associated with raising money with them are much less than the equity or interest rate an investor is going to expect in return. If you can’t raise the funds you need through bootstrapping, crowdsourcing, or bank loans, an investor might be your last and best option.