I am often asked how to find the right investor to invest in an entrepreneurial business. The question often comes from an entrepreneur who is about to run out of money and wants me to introduce them to someone that is going to write them a check by the end of the week. For the investor/entrepreneur relationship to work effectively, a relationship of trust and understanding has to be cultivated during the pitch and due diligence process.
How prepared are you to ask investors for funding?
Would you ask a friend of yours on Monday to introduce you to a spouse you can marry on Saturday? I hope not! So why would you think an investor relationship would work that way? The message you are sending is essentially, “I’m a poor planner and waited until I was in trouble to take action.” Not a good way to start a relationship involving asking for money, is it?
Getting ready to find an investor begins long before you think you will need the money. Preparations include thinking through how to build a business that investors will want to invest in, that they can identify with. You have to maintain credible data on your financials and your potential client base so that each time you meet with an investor you can definitely and consistently communicate your position.
How confident are you that if the right investor comes along, you are prepared with accurate historical and projected financials? Can you show the investor you have thorough knowledge of the financials, cash flow, burn rate, use of proceeds and return on investment? You have to know your product inside and out as well as the financial numbers behind it. You will get drilled on it when you meet with investors and it will feel like the worst spelling bee you ever participated in if you are not prepared. Do you feel confident?
If the answer is, “Not confident…” make the investment in your business to prepare. Let’s schedule some time together to dive in to gain financial clarity and understanding. Let’s talk. Contact me at firstname.lastname@example.org to set up a no-obligation 30 minute discovery call to see how we might work together to prepare you to meet with potential investors.
Countless Americans seem to have an insatiable desire for immediate gratification. This drive for gratification has led to an increase in “on-demand” start-ups, such as Uber, one that is frequently in the news these days. These start-ups address needs such as transportation, food, entertainment and beauty treatments. The short-term euphoria derived from the instant gratification meets a perceived (or even real) need, resulting in billions of dollars being available to fund these companies. Investors have bet the companies will build enough revenue and momentum to go public. With an opportunity to exit through an Initial Public Offering (IPO), they can get a great return on the investment. The IPO market has allowed some unprofitable, high-growth companies to pass through the gates and create hope for others – including Amazon and FitBit.
History often repeats itself – there were many “on-demand” start-ups during the dot.com boom in the 1990s that were unsuccessful, including Webvan, known as poster child of the dot-com “excess” bubble, according to techcrunch.com. My belief is that the initial euphoria of immediate gratification is then seized by the control freak in us who wants to choose our product. For example, when the apple from the grocery delivery shows up with a bruise or we cannot communicate with the office manicurist, the urgency for immediate gratification dies and we drive to the grocery store to pick our own perfect apple or to the spa to get the manicurist of our choosing.
The success of Uber has given the on-demand space an extra surge of enthusiasm and creativity. Many riders frequently use Uber because they appreciate the experience and the price. On the one hand, this is a great business outcome; the fact remains, the company eventually has to make money. Uber continues to struggle with growing regulatory issues that will eat into revenue, create higher operating costs and, ultimately result in higher rates. I recently landed in the New Orleans airport and requested an Uber car at the airport. An immediate and distinctive pop up on my phone alerted me that all Uber rides were $75 from the New Orleans airport due to city ordinances. This is compared to a $15 cab ride to my client’s office. I cancelled my Uber request and went to the cabstand.
The message to entrepreneurs and business owners is that we can learn from history, and basic business fundamentals are clear – you have to make money selling the product. Investors expect a return on investment, and at some point will be unwilling to continue to fund a losing proposition. Keep your books and records current to ensure all your products are making money or, by default, you could be making the decision to fund a loss leader.
Sunday began the week with the Holiday of Love – St. Valentine’s Day. How do love and emotions influence our decisions about business and investing?
Many people have used the services or read about a Unicorn or a Unicorn “wanna be” without even knowing it. Fortune.com defines a Unicorn as a once mythical, now reality, start-up business valued at more than $1 billion and includes Uber ($62.5 billion), Airbnb ($25.5 billion) and Snapchat ($12 billion)*.
Jacksonville-based Fanatics is a local Unicorn valued in excess of $3 billion that is putting Jacksonville on the start-up map according to a First Coast News report (http://fcnews.tv/1om5Exd)
Speed to market for a unique new idea is critical for start-ups. The exuberance of growing a company fast can generate more endorphins than the Boston marathon, while the adrenaline rush can lead an enthusiastic business owner to burn through huge amounts of cash in an attempt to gain market share. This cash burn must show traction – is the cash you are investing to gain market share paying off? Are the dogs eating the dog food or, in other words, are you acquiring as much of your target market as you project or need to justify continuing to increase the value of the Company and command the incredible valuations such as in the previous examples?
The basic principles of running a business, i.e. the eventual need to generate enough revenue to create a profit remain a core value of building a business. For example, if the cost of production plus acquiring market share is more than what you are selling the item for, that’s a no-win situation down the road. Using metrics and projections, founders and owners must continue to evaluate building enterprise value in order to provide a return on the investment to shareholders.
My experience serving as the Principal of a Private Equity Firm and as a CFO of small and large entities provides a depth of experience that can help with the analysis your business needs to understand if you are on the right track for building enterprise value. Please contact me to discuss your unique situation.
* http://fortune.com/unicorns/. Note these are estimates of the companies’ enterprise value based on the latest rounds of private financings. These companies are private and it is difficult to find the exact valuation.