Are you ready to raise funds, or are you seeking money for the wrong reasons? Your decisions and real need for investment impact your opportunities immensely.
We were young, we lacked experience, we needed money to operate, we thought raising funds was the only way to get started.
We were wrong.
The Wrong Reasons To Raise Funds
If you're an entrepreneur setting out to build a business, you might need to raise money or you might not.
“There are only
a few right
I've coached entrepreneurs who raised funds for both the right reasons and the wrong reasons. The entrepreneurs who raised funds for the right reasons generally improved their odds of success. The entrepreneurs who raised money for the wrong reasons doomed their companies to failure.
There are only a few right reasons to raise funds, but there are hundreds of wrong reasons.
A Short List of Wrong Reasons:
- It's Sexy. Let's face it, if you raise big money, you have more swagger at the local watering hole, bragging rights, and some great buzz among your peers. Who wouldn't want that?
- Because You Can. Money is not easy to come by, but you can raise funds at almost any stage for your business.
- You Can't Get Started Without Money. That's a load of B.S. Build a prototype, talk to potential customers, study competitors, refine your idea. In short, do your homework first.
- You Know Some Investors. Yep, we did too. It turned out they were not a good fit for our company and industry.
- Everybody Else Is Doing It. Keeping up with the Joneses is a terrible idea.
- You Want To Grow Fast. Is the timing right? Are you ready for it? Growth for growth's sake can kill you.
- You Need To Hire Good Talent. What can you outsource first? Are you prepared to start hiring?
- Expenses Are Growing Fast. If your revenue growth is slow, you’re a much riskier bet, and investors will command a bigger stake in exchange for their support.
- Success Is Just Around The Corner. We thought that the big investment, the big deal, the salvation event for our company was just ahead for years. We swung for the fences but failed to get anyone around the bases.
- You Need Income While Developing Your Idea. Investors don't care and do not fund R&D.
- You Want To Leave Your Full-Time Job. Figure out how to do this without needing someone else to support your break from the corporate world. You'll leave when you believe in yourself and your company.
- Fill In The Blank With Your Favorite Reason ____________________.
This list could be much longer.
In our startup, many of the reasons we sought to raise money were from the list above.
There is a difference between needing cash and needing investment. Most wrong reasons are a response to needing cash. The right reasons are all about fueling growth opportunities that investors can embrace.
The Right Reasons To Raise Funds
If you can demonstrate that your idea/product is attractive to the marketplace, then investors will be interested.
Investors are best engaged when their money can fuel greater success.
This is the hard work that entrepreneurs raising funds for the wrong reasons want to skip. Do yourself a favor and embrace the challenge of building a great company that will be attractive to investors.
In addition to demonstrating your product is attractive to the marketplace, investors want you to demonstrate knowledge and progress in several key areas. These include:
- Customer Knowledge. You know your customers, when, where how and why they will buy your solution. You leverage their feedback to refine your product and business model.
- Market Size and Readiness. You have a thorough understanding of the market and have determined it is large enough and profitable enough to be attractive to investors and to fuel significant growth.
- Business Model. You have developed a realistic model that meets your business needs and can be modified as you grow. You can demonstrate it is sustainable and scalable or have planned the clear path to both.
- Competition. You know who your competitors are, their business models, their messaging and whatever else you can learn about them.
- Team. You are building your team with strong industry knowledge and experience. You seek those with proven track records of entrepreneurial experience.
- Advisors. You have attracted top-notch advisors that will help you with connections, knowledge, objective & reliable advice, and additional resources.
- Traction. You can demonstrate relevant traction with accepted business measures. You are meeting projections, learning and refining as you move forward.
- Systems. You are putting in place systems and repeatable processes that will allow and support growth.
- Outsourcing. You have outsourced key activities such as accounting, legal and other foundational processes that require specialized knowledge.
- Milestones. You have clear milestones, know why they are important to success and are pursuing them with laser focus.
for the best
In our startup, we had solid customer knowledge but lacked understanding of how and why they purchased. We had a business model that would not scale. We lacked good advisors. We could demonstrate some traction, but not consistently.
As a result, we stumbled.
The above is certainly not an exhaustive list of what investors look for and value in a startup. It is, however, far more than most entrepreneurs typically do before they attempt to raise funds.
Build Investor Relationships
While there is no formulaic key to success and raising funds, you substantially increase your odds of success by focusing on building a great business first, then raising funds when it is appropriate to do so.
Build relationships with investors now and learn from them.
Earn investor respect and trust as you execute on your business plan. They'll help you know when you are ready to fuel your company with investor funds.
When you raise funds for the right reasons, you are raising funds for the best reasons.
For now, fuel your company with your hard work.