I have had my fair share of ideas to start businesses, most of them when I was younger, so I was never concerned with the issue of raising money. It is worth saying that a lemonade stand, organizing a garage sale with my friends, or buying large 24-packs of soda and reselling them didn’t demand much initial capital. So, I researched the topic, interviewed various investors, and figured out the main points to look out for when raising money for a new business.
The baseline:
Various buzzwords are popular: venture capital, angel investors, a slew of acronyms like ROI, ROE, net and gross profit, and various “series” like A, B, C, etc. Those investors are not angels, the alphabet of acronyms can be deciphered, and their money is not grossly caught with a net. The long story made short is this. There are two ways of raising money: selling equity and acquiring debt. Debt is loans taken out personally by the entrepreneur or by the business. Raising money through selling equity is the entrepreneur selling off shares or part of the business. Most entrepreneurs start with an idea and if they can’t fund it themselves, they look for outside funding. That is considered the first “round” of funding – it is aptly called the “friends and family” round. It is followed by more formal rounds called Series A, B, etc. Angel investors typically focus on early-stage investing. They invest in a company before any official rounds of raising capital. However, they are far from angels. In return for taking the risk, they take a lot of the equity in return. Once a company is up and running or raising money, there are financial metrics that investors care about. Return on investment (ROI) or return on equity (ROE) are all fancy ways of trying to forecast the return on a particular dollar amount of investment. Gross revenue is the overall amount of money (usually sales) a company is bringing or is expecting to bring in. Net profit is that amount minus expenses of the business (basically, what is left after expenses = profit). All of that is a lot but hopefully shows that fancy words can be interpreted and acronyms can be deciphered, so there is no reason to be intimidated by them.
Where to look?
A lot of entrepreneurs find that information to be overwhelming, and that is more than fair. So, let’s try to decipher some of the fog around it. Some people are shy to ask, but there are resources such as the Walker Program and other resources for small businesses that offer counseling and funding. There are outside resources that are free and can be done remotely. Linked in the footnote is a government website specifically for small businesses and a website that has an enormous number of free classes available.[1]
Other than that, there is the route of self-funding or asking family and friends. Most people throw around the words angel investors and venture capital and other forms of funding without realizing that they are hard to find and come by. Venture capital (VC) firms are specific with what they look for, and angel investors are unavailable to some without some personal or professional connections. But there are ways to improve your chances of securing that funding – by being prepared and knowing what they look for.
What do they look for?
After researching and interviewing a few angel investors of early-stage startups and philanthropic investors, I have come up with a cheat sheet. Here are a few main points that investors look for in particular:
- A scalable idea;
- A passionate and knowledgeable leader; and
- Demand for the product.
A scalable idea is easy to understand, but not every business is scalable. It is much easier to scale a business that isn’t dependent on a “critical man.” All this means is that if the business is hinging on one person or their talent, for example, if the business is one person drawing intricate portraits of dogs and their owners side by side, that would be much harder to scale because it is one person with the skills and the limited resource of time. Whereas a spice rub that can be packaged and sold on a larger scale would be a scalable business. That is a very rudimentary example, but one that illustrates the difference between a business that can be scaled quickly, and one that can’t.
When investing in any business, one of the main investments is the team. The investor wants the team, of course, the leader specifically, to be passionate and knowledgeable. Passion usually translates in various ways to a successful venture. All the individuals I have interviewed have said that passion is a large part of the equation because if the entrepreneur lacks it, the chance of success is minimized due to a lack of care about the venture. Passion can take many forms and expressions, but its presence is key. Knowledge is imperative and can be either present or hired. What that means is that a knowledgeable leader may run into a situation where they must realize that they do not have all the answers. That is perfectly okay! It is imperative to know that and be open to hiring, getting advice, or even acknowledging that they need help to get the answer. It is perfectly fine to say – ‘I don’t know, but I have someone I can ask’.
The last point is important because there is a reason that no matter how good of an innovation one makes to a VCR, there is simply no demand for them anymore. There needs to be a market and demand for the product. Demand can be proven by particularized market research (which may be necessary for a super innovative idea) or by an existing demand (like there is for spice rubs). But importantly, the investors will not be interested in investing in a product that they see is in a dying market.
There is another factor that was alluded to by a few of the investors – oversaturation. The new business might already exist (i.e., a wedding photographer, or a hair salon), and that is perfectly fine. However, if a Google search shows that the local market is oversaturated with 50 photographers for a town of a few thousand people or that there are too many salons within a few block radius – both would be a red flag to the investors. Oversaturation forces a business to much further lengths to fight for survival, much less success. So not only does there have to be demand for the product or business, but there must be enough of a scarcity in the market for the business to have a viable chance at capturing some of the market share.
Concluding thoughts:
There are a lot of factors to consider, and there is a need to take off the rose-colored glasses when looking at motivational quotes like Wayne Gretzky saying: “You miss one hundred percent of the shots you don’t take.” I ask that you be realistic and use every possible resource to succeed. Because the lesser-known part of the quote is that Gretzky followed up with – “Even though there is only a 1-5% probability of scoring”. So, be energized and hopeful to propel your business forward, but be prepared and realistic to handle any hurdles. Best of luck!
