Three things to do before you talk to investors – Part 3

Three things to do before you talk to investors – Part 3

Too many entrepreneurs jump right into raising money before taking these three important steps.  This is the main reason for the horror stories you hear about entrepreneurs whose investors are making the miserable.  Do these three things BEFORE having any conversations with investors to save time and lots of potential future headaches.

This post talks about the third thing: Get clear on how much to raise.

Method 1: Financial Projections

Financial projections help you see gaps in your cash flow which might require you to bring on outside investment to prevent running out of cash. Many businesses raise capital when they are first starting out because it takes time to reach breakeven (when revenues meet or exceed expenses). If you can calculate how much of a shortfall you have before you reach breakeven, you know that you probably need to raise about that amount to be able to keep the doors open and not run out of cash.

If you do not yet have financial projections, use our simple template.

Method 2: What do You Need?

Another approach you can use for determining how much you need to raise is to think about what you need to purchase to take your business to where you want it to be and how much that will cost. Here is an exercise to help you do that.

1. Make a detailed list of the things you need to buy over the next year or two that you cannot buy with current cash flow (or other resources such as barter).

2. Put dollar amounts next to the items you listed in Step 1. Add a 10-20% contingency line.

3. How will having that money affect your business? For example, if you hire two new sales reps, will that lead to more expenses e.g. will you have to hire a COO? If so, add those expenses to the list.

4. Consider creating more than one scenario. For example, if you focus on one line of business versus another, your needs will be different. Create multiple scenarios for each possibility. It is often best to choose the scenario that allows you to achieve breakeven while raising the lowest possible amount of money. You can also create scenarios for different amounts – you may want to raise a minimum of $300,000, but you should also consider what a larger amount could make possible and consider setting a “stretch goal.”

Want to learn from Jenny live?  Come to Fund and Fuel Your Dreams in Oakland March 8-10.

Interested in learning more? Get in touch!

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Three things to do before you talk to investors – Part 2

Three things to do before you talk to investors – Part 2

Too many entrepreneurs jump right into raising money before taking these three important steps.  This is the main reason for the horror stories you hear about entrepreneurs whose investors are making the miserable.  Do these three things BEFORE having any conversations with investors to save time and lots of potential future headaches.

This post talks about the second thing: Get clear on the exit strategy for your investors.

Which of the following fits your goals best?

☐ I want my investors to make money when I sell the company in 5-7 years.  Before the sale, I will invest everything I have into making the company an attractive target for acquisition by a bigger company.

☐ I want my investors to make money when I sell the company in _____ years.  I will look for a values-aligned buyer or maybe sell the business to my employees.  My investors will have to be patient because this could take some time.

☐ I would be open to considering the sale of my business, but I don’t want to be pressured to sell it to the wrong buyer.  I would like my investors to get paid out of profits/cash flow on a regular basis so that they are not in such a rush to have me sell the company.

☐ I want my investors to get paid when I take the company public.

☐ I want my investors to get paid by selling their investment to someone else.

☐ I want my investors to stay with me forever and only exit if they really need their original investment back.

☐ I want my investors to get paid an amount over time that equals a certain multiple of their original investment and then exit once they’ve reached that multiple.

There is no right answer!  Choose what fits best for you and your highest vision for your business.  Then design your investment offering for the exit strategy you choose.

Want to learn from Jenny live?  Come to Fund and Fuel Your Dreams in Oakland March 8-10.

Interested in learning more? Get in touch!

If you are interested in working together, send us an inquiry and we will get back to you as soon as we can!

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As a thank you for subscribing to our email newsletter, you will receive a free copy of my ebook entitled Get the Right Money from the Right Investors.

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Three things to do before you talk to investors – Part 1

Three things to do before you talk to investors – Part 1

Too many entrepreneurs jump right into raising money before taking these three important steps.  This is the main reason for the horror stories you hear about entrepreneurs whose investors are making them miserable.  Do these three things BEFORE having any conversations with investors to save time and lots of potential future headaches.

This post talks about the first thing: Get clear on your goals, values, and non-negotiables.

Goals include

  • How many hours per week you want to work
  • How much vacation you want to take
  • What salary you want to pay yourself
  • How big you want your company to grow
  • How quickly you want your company to grow
  • How long you want to run your company
  • What you want to have happen with your company when you’re ready to leave it
  • How you want your company to impact the world
  • How much control you want over major decisions

Values include

  • How you want your employees to be treated
  • How you want your suppliers to be treated
  • Quality standards for your product or service
  • Standards related to your contractors (e.g., would you contract with a manufacturer that has been fined by the EPA for polluting?)
  • What effect you want your business to have on the environment (e.g., air quality, production of waste, carbon footprint)
  • What effect you want your business to have on the communities where it does business
  • Your view of the importance of transparency—e.g., whether you want to share detailed information about your company with your employees, investors, and maybe even the general public

Which of these are so important to you that they are non-negotiable?  Picture an investor walking up to you and offering a check for a million dollars. What conditions would make you refuse the check?

Of course, your goals and values can change over time as your company evolves. But the clearer you are now about what is important to you, the easier it will be for you to make sure that the way you raise money is in service to those goals and values.

To learn more, check out Raise Capital on Your Own Terms.

Want to learn from Jenny live?  Come to Fund and Fuel Your Dreams in Oakland March 8-10.

 

 

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Do you have to lie to raise money?

Do you have to lie to raise money?

A recent article called Step-by-Step Fundraising Tactics from the NYC Legend Who Raised $750M basically says that yes, you do.

The “legend,” Kevin Ryan,  says that if you’re feeling uneasy about how realistic your projections are and a VC asks you point blank about it you should say “We are absolutely going to make those numbers.”

He advises, “Investors need to feel that you’re going to build a big business and that you have no doubts about it.”

Do you feel uncomfortable having to hide your realistic and honest opinions about your business?  Don’t worry, says Ryan, “You basically start to believe your own bullshit after a while, and that’s a good thing.”

How is it that one of the most well-known and celebrated sources of start-up funding, venture capital, is based on lies and exaggerations?  Even crazier is that both sides know it.  It’s a game that is played by bizarre rules, rules that don’t favor the honest and humble entrepreneur.

Is it any wonder that we are seeing so many VC-backed companies fall apart as their leaders blatantly flout regulations, condone toxic workplace cultures, and lie to inflate their numbers?

Here is a solution for entrepreneurs looking for funding: don’t seek VC funding and find investors that value honesty, authenticity, and integrity.

Need help figuring out how?  Come to our March training for women entrepreneurs – Fund and Fuel Your Dreams Live.

The image I used for this post comes from the amazing article, Sex and Startups.

 

 

 

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A simple formula for presenting your investment offering

A simple formula for presenting your investment offering

A wise business person shared this great formula for communicating about your investment offering:

  • The proceeds of this raise will be used predominantly for X and Y.
  • These initiatives (X and Y) will lead to increased sales and profit for the company, which makes this a great financial investment
  • In addition, these initiatives (X and Y) allow us to further our mission.  Here’s how . . .

Here is an example of how this might sound:

  • The proceeds of this raise will be used primarily to help us grow our new professional publishing division.
  • Growth of this division will improve our profitability because margins in the professional publishing market tend to be higher than those in the trade segment of the market where we have traditionally operated.
  • Growth of our professional publishing division will also allow us to reach more people with our world-changing message.  The professionals and academics who are the consumers of information in the professional publishing space are people of influence — reaching them will allow us to greatly broaden our influence.

 

 

How to tell an investor what return on investment you’re offering

How to tell an investor what return on investment you’re offering

What do you say when a potential investor asks what return you’re paying?

Let’s use this example of a projected payback (this could be equity or debt):

Original Investment Amount (year 0) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Return
 (1,000)  50 75 100 125 150 175 200 250 300 400  1,825

The simplest way to calculate return is called “cash on cash return.”  This tells you the amount of cash the investor can expect to receive from her investment.

This is what venture capitalists mean when they talk about 10X return.

In the example above, you could say you are paying a 1.825X return (you are paying back the investor her original investment multiplied by 1.825).  You could also say that you are paying an 82.5% return (you are paying back 82.5% on top of the original investment.

To calculate this you use the following formula:

(Total cash received by investor – Original investment)/Original investment

Using the example above: ($1,825 – $1,000)/$1,000 = 0.825 or 82.5%

One thing to note about this measure of return is that is says nothing about how long it takes for the investor to receive the return.  Because of that, it is not the best measure of return.  A measure of return ideally should take into account both the amount of money received AND how long it takes to get it.  Why?  Because of a concept called the “time value of money.”  This means that a dollar today is worth a lot more than a dollar ten years from now.

If you want to calculate the return on investment in a way that takes both money AND time into account, you use something called Internal Rate of Return (IRR).  The good news is that this can be calculated a spreadsheet program.

Here is the formula: =IRR(A1:K1)

(A1:K1) means you highlight all the cells that contain the original investment plus the annual projected return.

Here is an example:

A B C D E F G H I J K L M
1 IRR Original Investment Amount (year 0) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Return
2 9%  (1,000)  50 75 100 125 150 175 200 250 300 400  1,825

 

The formula in cell A2 is “=IRR(B2:L2)”

Interested in learning more? Get in touch!

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