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You Can't Fund Your Business with Guesses, Wishes and Dreams!

Whether it's in the early stages of your business' life, or in order to grow your business beyond simply what you can generate from cash flow, at some point, you'll probably need to raise capital to better fund your business.  However, there are more mistakes made in the funding process than almost any other aspect of a small business. And few entrepreneurs approach this very critical undertaking with the kind of planning, precision and discipline it requires. Guesses, wishes and dreams won't make it happen, but they, often, drive the capital raising process.

Most business plans for funding contain tons of research about the market, and, usually, some well-thought-out strategies and tactics.  Most typically, the financials, have that "magic hockey stick," seemingly so necessary in every plan, probably, either developed by the entrepreneur's accountant with or without the entrepreneur's input, and they all tie out nicely. But rarely can the numbers be defended.  Regarding the capital being sought, there's usually a paragraph or a section with words to the effect, "...we're looking to raise between $X and $Y to do A, B, and C..."No timing, not much detail.

As I've noted in several other blog posts, investors invest in the people, not just the business. How comfortable is an investor going to be if he/she is counting on you to use his/her investment wisely, but you can't even determine, with any precision, how much you need by when, and for what?

Funding your business is not like writing a letter to Santa, promising you've been a good little boy or girl and wishing and hoping that he will not only give you what you asked for, but a few extra goodies he had sitting around his toy shop. Funding doesn't work that way. It requires disciplined work and, more important, a real understanding of both the process and "the numbers."

So here's some guidance to take the guesswork and wishing out of capital raising and keep you out of trouble:

Know what you need/why/when - No "about's" or ranges.
Have a financial plan that's tied to rational strategies/tactics/milestones and run it by your closest advisors. Determine the specific amount you need for what specific purpose(s) and by when to fund that plan. To do this you really need to understand your own "numbers," and where you will have a cash flow shortfall and why, in order to make your plan work. Be precise. No "about's," no ranges. If you want to build in contingencies, do that; but it still comes down to A NUMBER!

Don't spend it before you have it - "interest" doesn't mean investment.
Most investors are professionally courteous and will show interest when you pitch them.Real interest comes after.  Still, many entrepreneurs misread a couple of good meetings and begin acting as if the money is already committed, calling off other investor meetings and planning for spending the capital. Success is not gauged by how many meetings you have with them, but by the depth of their questions and due diligence. But at the end of the day, the real measure of how interested they are will only appear in your bank account...or not!It's not over until that occurs.

Investors will be your partners...probably for life! Choose wisely.
It's a given that an investor has to bring more than money, whether that be contacts, industry expertise, etc. However, if the chemistry between you, the entrepreneur, and the investor group is not good, at the outset (for example, you find them off-putting or even obnoxious), it won't get better. And if they do invest, you be partners for the life of your business (or as long as either side is involved in it).It's like a marriage.If you don't like the "warts" early in a relationship, they ain't going to get better with time! So, sometimes, the money isn't worth it.

Don't do it alone (but don't get taken by "wild promises").
Engage advisors who had experience in multiple capital raising projects and can advise you in every aspect of the funding process, including plan development.You will have to compensate them for their time. Be careful of "finders" who will promise you they have a boatload of contacts and attempt to take a % of any successful funding they introduce, but do nothing else.If you engage anyone to raise capital for you, they should guide you and manage the entire process from plan development through funding.And they should be registered broker-dealers (it's actual an SEC violation to take a % of capital raised without being registered to do so). Their compensation will usually be an upfront payment and a % of the funding raised.

You can't fund your business with guesses, wishes and dreams. You need a plan and you need to understand the landscape you will be approaching and how to best approach it. And that takes some precision and a lot of discipline.

"The Entrepreneur's Yoda" knows these things. He's been there. May success be with you!

What's your experience been in trying to raise capital? Include any in your comments.It will help other entrepreneurs!

If you like this post, by all means, share it with your networks and colleagues.

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1 COMMENT(S)

2014-01-27 23:17:17 by Charlie Southern

Great article. I have see all to many times where a business whether funded with investors or funded from within decides to make decisions that negatively affects the function of their business continuity and in most all cases I have seen ends up with the business closing soon after, when relying on the projection process. This being businesses living beyond their means, hiring excessive amounts of employees in unnecessary positions and expanding into areas that do not support the main reason for being in business, which is to get your product to the end-user.

My philosophy has always been to enjoy the steps of growing pains; not live beyond your means and have a plan to expand the growing business in segments and only doing so once you have reached that fail-safe limit in the need for expansion. Projections are a great tool to keep in mind when evaluating the possible next direction of your business, but relying on them as absolute truth is most always a recipe for disaster.

Sure everyone wants to look like the top dog on the block, but that doesn't necessarily mean you have to spend boatloads of money to do so. And so many times that is the case when it comes to investor monies weather the check "is in the mail" or you have already received the investment.

My secret has always been to find you "niche" and expand your product or service within that market or area you are aiming for. Once you have completed the task at hand use you equity, investor money or cash flow to expand into surrounding markets or additional products or services that will compliment your existing customer base. This is true weather your company is experiencing slow growth, or your in a period of major ramp up or expansion.

Again, I have seen all to may time when a business or service chases after every possibility, business large or small, and running there resources so thin that the ability to make good on your offerings become near impossible.

Its okay to reach for the stars, but having a sturdy latter with support from the ground up is most important.

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