Entrepreneurs! Increase your startup funding ask from investors. Here’s why…
Think back to your youth and the courage it took to ask your folks if you could “borrow” $20 to fund your next get-rich-quick scheme. Hold that memory, and now consider that running a startup and trying to recruit serious investors is in many ways similar. Back then, if your mother skeptically opened her purse and handed over an Andrew Jackson with minimal cross examination, you were grateful but knew in your heart that you caught her at an opportune moment and should have upped your request to $25, $30, or even $40. The thrill of your win was undercut by the ease with which it was achieved.
The stakes are greater for the entrepreneur, but the common thread between you as a precocious, scheming youth and you as the owner of a business startup is undeniable: You both need to convince the party with the money that you will spend it wisely. That means asking for enough money to cover your needs, and to look like a serious business builder.
Funding startups is expensive. Don’t shortchange your opportunity.
In a prior post we discussed how investors can be turned off by an entrepreneur who treads too conservatively with his or her funding request. You might ask: “Why is this a problem? Why wouldn’t investors be happy to put in less of their money to help me get my business off the ground?”
The fact is, capital requests that are insufficient suggest that you haven’t done your homework and that you might be unprepared for what you’re about to undertake. Besides, requests that are too low leave investors with little room to make any money on your deal. Some investors will take this as their cue to walk away, while others whose interest has been sparked and who are in a more beneficent frame of mind will provide a reality check and point out your funding request’s shortcomings. If you’re so lucky as to meet such an investor, let his or her critique serve as a pathway to bring investors back to the table. Do what they say, and don’t let them slip away.
Don’t let your burn rate burn you.
An experienced investor will want to see in your financial forecasts that you have a handle on your projected burn rate and that you’ve added in some cushion to cover it. You can be certain that you’re going to be burning through cash in the early stages of your business much faster than you anticipated. Writing in Forbes, Alejandro Cremades, author of The Art of Startup Fundraising, suggests that a good rule of thumb is to plan for a minimum of 6 months that will be laden with unexpected costs related to everything from marketing to production and more. Most importantly, you don’t want to go back and ask investors for more cash to bail you out because you didn’t anticipate expenses in your projections and ask for enough up front. That would be awkward, if not embarrassing.
However, if your funding request signals that you’re just trying to stay above water for the next couple of years before you expect to turn a profit, don’t expect investors to be banging down your door to get involved.
Allow for additional funds to invest in new opportunities.
You never know when opportunity will knock or when the market will take a dynamic shift. That’s why we recommend you consider building in additional dollars for what we call an “opportunistic budget.” These are funds that go beyond your baseline ask as well as your projected burn rate funds so that you are in position to take advantage of critical opportunities that may present themselves once you are up and running. Keep this in mind as you sharpen your pencil and do your financial and growth projections for years 3 through 5 and beyond. Rest assured, there will come a time when you see a great opportunity to expand your business, and that can come in the form of an acquisition or by purchasing the materials you need to expand at an insider price to boost your margins. Having the funds on hand to grab any type of opportunity can accelerate your drive for success.
Leave room for future investors; don’t give away too much ownership.
You’re rightfully proud of your business idea and you deserve a lot of credit for bringing your business along from the self-funding stage to the first official equity funding stage. Once you’ve reached the seed stage and are seeking more outside capital to support your business’ next growth spurt, you’ll want to be careful about giving up too much of your business ownership to investors in this early round. It’s important to keep a large enough slice of the pie to accommodate future investors who’ll want their own equity. Be careful not to give away so much that you lose control and become restricted in what you can do on your own.
That can wait for the day you sell your business and move onto your next venture!
Are you planning to raise capital for your startup?
At Fiore, we can help you navigate the startup process and develop the smartest strategy to compete in your market and move you forward with dynamic investor presentations that speak to your seriousness and credibility. We understand that investors want to see numbers. But the way numbers are presented doesn’t have to be dull or staid, they just have to be accurate.
This blog was written collectively by the Entrepreneurial Team at Fiore Inspires. Questions, comments or would like to discuss your business options with one of our team members? Fill out the comment form below or send an email to ideas@fioreinspires.com.