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 will not see it that way – not initially at least. So how do you secure funding? Let’s explore below…
What if the perspective on funding started much earlier? Many investors and advisors want to see 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?
What you need to do as a founder, is start building a tally as early as possible on your actual spending. And do not forget to include the hours you spend. As strange as it may feel, it acts as a way of showing potential investors that you truly believe you are fully invested in what you do.
Proven Revenue Model
Believe it or not, but a lot of investor presentations and business plans are full of holes. The good news is that one of the biggest stumbling blocks, your revenue model, can easily be overcome. Investors look at how you propose to make money and how you can back it up.
In many types of businesses a revenue experiment can be done for less than $5,000, often for even less than $1,000. It could be as simple as spending money on online ads and measuring conversion. Imagine you spend $1,000 on advertising and 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 and whatever is necessary, and in the next experiment you spend $1,000. This time you gain $2,500 in sales. That may still not be ideal, but it changes your language to investors.
Now you have at least some facts to present to investors. If questioned, you can explain the tests and how you keep improving. Put into context, it shows at what rate – if not more – their money would be increasing, should they choose to invest.
Let’s move on to discuss the other side of the revenue model you want to test… scalability.
I have encountered countless calculations saying “if $1,000 spent gives $2,500 in revenue, that means $100,000 spent gives $250,000 in revenue”. That is 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 comes into play when you scale, meaning $100,000 spent gives $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 save valuable time and resource.
If you are still starting up and trying to prove your business model works, do not waste your time pitching to the big guys – save them for when you are ready.
Could your idea help advance society? You may find you are 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.. You need to establish which is the most relevant to your business.
As this can be an incredibly overwhelming task in the first place, we are here to help you! Our annual Challenge the Funder event will provide you with answers and a hands-on toolbox for your further journey.