What does the business need from the deal?
It might just be cash. It could be cash and connections. It could be cash and expertise. Sure straight cash is great, but if you could also get a charismatic, ex CEO of a major corporate, who is also a marketing expert and speaks Mandarin as an investor and you’re in the business of exporting Ugg Boots to China. The gravitas and experience that this person brings is going to open doors and give your business a huge chance of success.
Who is your ideal Investor?
Getting money from a complimentary business with a large customer base to sell to is ideal. This is a quick way to supercharge users and revenue. Its win win, you grow and they get an innovative service / product that they can offer to their clients.
If someone invests in you because there is strategic fit, this has the added benefit of warranting a very high multiple. The high multiple is justified given there is a business benefit other than the underlying revenue and profit. For instance, Microsoft purchased Skype for $8.5B which was 8X Gross Revenue and 40X EBITDA, a crazy valuation. They didn’t buy it for the revenue (trivial for a $90B p.a revenue business), Skype was purchased because it was a strong and revered consumer brand and a service they could integrate into their Office 365 offering. Their business case to the board was not the ROI of Skype as a standalone product, it was bundling the service into Office 365 which made it compelling.
What are the metrics that matter?
There is no bigger turn off for a potential investor than an entrepreneur who doesn’t know the metrics that matter, the ones that are going to drive the businesses value upwards and give them that 50X pay day. I was recently in a meeting with a founder of a marketplace product and a potential investor. The founder was spruiking some pretty high active user numbers, the VC then asked how many of these were revenue generating. To which the founder said that’s coming later, with no explanation of how. Poor form!
How much cash does the business need?
To answer this, you need to understand your cost structure and long term revenue model for the next 18 months to three years (you would need this for your valuation calculation also). In the early stages costs are probably the only thing you can accurately predict. How many heads do you need for tech, how much marketing spend will you need to support the growth and how much runway (months) does $x investment buy.
If your pre revenue or have minimal revenue, asking an investor for 24 months’ worth of runway is dumb. You will be handing over the keys to the house, while you move into the granny flat. Your much better off doing a small funding round now (say 6 to 9 months of runway) and doing a larger one, ideally once you reach an inflection point for revenue and customers.
What is your story?
Facts tell and Story’s sell. Everyone loves a tale with a happy ending. What is yours? Where are you going to be in three years? How are you revolutionising your given market? Be careful not to be too grandiose. VC’s and Investors have innate BS detectors, honed through hours of meetings.
What are you willing to give away?
Before entering negotiations, you need to think through what you’re willing to give away. Are you willing to become a minority shareholder? You could have a board to answer to if the investment is big enough. You may lose control of the direction of the business. There is a lot to think about here, you need to be prepared before you enter the heat of battle and negotiate your businesses worth.
Are you ready? The most obvious piece.
If your books are a mess, reporting is shoddy, metrics are not traceable to a system, tax returns / GST not lodged etc, you’re not ready to begin a capital raise. You won’t get through due diligence and will therefore get no investment even if you have agreed a price. If you get to the due diligence stage and the investor pulls out thousands of dollars spent on legals will have been wasted, not to mention all the time, effort and emotional energy that goes into a deal.
Our part time and outsourced CFOs have extensive experience raising both debt and equity. Click here for some funding case studies.