Cash is like that foot injury from years of ballet. We feel it in every step. We feel it every day and at least once a day it flares up. It clouds our judgment to the point it can be debilitating. The lack of adequate cash is one of the most debilitating and stressful parts of being an entrepreneur. When we are worried about whether we can afford the gas to drive the car, it is hard to determine the most efficient driving route. As a result, making sure that the business is properly capitalized is absolutely critical. So here are some tips for having the right perspective on raising money for the business:
Clear and Concise.Everyone has heard they need the “elevator pitch”—a pitch that communicates the value of your business in the time it takes to make the trip in an elevator. The need to be clear and concise must permeate everything you do. This applies to every audience, but even more so to investors. You must be able to clearly and concisely explain the value of the business. You also must be able to concisely answer questions. When asked about a business model, your job is not to espouse the theory of business models, history of business models, properties of business models, etc. Simple. Short. To the point. If they want to know more, they will ask.
Resist the Temptation to Empty Your Balloon.When your balloon is full, and you have been thinking about the business nonstop, you are likely to have two reactions—both of which you must resist. The first reaction is to tell the investor everything about an issue and the second is to believe that the investor needs to know all the details to understand. Imagine an alien landing on Earth and stepping off a spaceship and asking, “What is the profit margin on your software?” Keep it simple. Investors look at hundreds of investments and will pass if they don’t quickly grasp the value of the business. Think of it this way:
When Clive Davis, the music industry legend known for discovering Whitney Houston and helping artists such as Earth, Wind and Fire, Aretha Franklin, Rod Stewart, Alicia Keys, Barry Manilow, Christina Aguilera, Carlos Santana, Kelly Clarkson, Leona Lewis and Jennifer Hudson was asked how he chooses artists from all the clutter. His response was that he chose songs “that made him tap his feet.”
Investors need to tap their feet.
Proactively Bring Up, Acknowledge and Address Weaknesses. Every business has gaps. Every business has competitive risks. This is especially true of early stage businesses. The way you address these gaps, tells a lot about you and the business. Proactively bring up your deficits and your strategy for strengthening your weak points—before you are asked. This is a pleasant surprise for investors. They are used to leaders defending or minimizing their weaknesses. They will respect leaders who are honest with themselves and willing to put heir talent on the line against the challenge at hand. If you acknowledge your weaknesses, and state a plan for dealing with them, it creates trust and credibility with investors.
Let the Business Sell Itself.Don’t hard sell your organization. Let your offering sell itself. How do you do that? Use points of validation by third parties—the market, customers, the press, and employees that have proactively joined your team. Investors won’t always believe what you say, but they will believe third party validation such as market interest (e.g., The Innovation Group at IBM featured our solution at their annual Innovation Event.”), customers (“Four of the largest banks in the country are using our solution.”) or key team members who have joined. your team (e.g., “Our head of technology used to lead the SAAS technology group at ABC Company.”) and well-known press. These techniques help you present key evidence of your viability with the validation of independent third parties. This is more powerful and credible than your personal assurance or effort to convince potential investors that your solution is “great.” Let the third parties of your world sell your business. Then it sells itself.
Avoid superlatives. Savvy investors aren’t swayed by the use of superlatives to pitch or vet a business. They have heard hundreds of entrepreneurs tell them they have “the most” revolutionary, “the strongest” new technology or “the best” user experience. When they hear these words, they may assume either that you have true belief in your idea, or that your passion clouds your judgment and the ability to face reality and respond accordingly. If the business is “the greatest” discovery yet, let them find that out without saying it.
Avoid attaching human characteristics to businesses. Businesses don’t have emotions. When you attach human emotions to businesses, it strains your credibility. In your job, do business solutions come across your desk where you say “I love that”? You might “love” a person, a dress, a book or a dog, you don’t “love” accounting software. You want investors to invest or pass based on the merit of your business, not on how you approach the process. By using these techniques, you avoid creating doubt in the mind of investors and let the business sell itself.
Never Act Like You Need Money. There will be times when you go into an investor meeting running out of money or when this investor is your only prospect. You may not even be able to afford the cab ride over. It doesn’t matter. When you walk into any meeting or take a call with an investor, never act like you “need” money. This shows an air of desperation and causes the investor to think, “If this is such a good idea, why are they out of money?” And, “If this individual is such a good leader, how could he let the business become underfunded?” I don’t care if you don’t have a dollar to your name, never act like you need money. You “want” money to take advantage of the market opportunity.
Loans versus Equity. We typically think that equity is the route we should take when it comes to raising money. But there are pros and cons to equity versus loans. Certainly, equity is not required to be paid back, but does require you to give up a piece of your business. Loans, on the other hand, do require payback but allow you to keep the ownership of the business. In face, many early stage companies have been using convertible loans that don’t require an immediate valuation and offer flexibility in terms of when (or if) they are paid back. In any case, make sure you take a hard look of the benefits of loans versus equity. In some cases, even though they may be hard to come by in early stages, loans can have some benefits that are worth considering.