I advise my clients to be open to having a larger number of smaller investors rather than one or two big ones. Why? There are two reasons: (1) it’s easier to reach your fundraising goal when you allow lower minimums per investor and (2) when each investor puts in a relatively small amount, it is very unlikely that any of them will try to micromanage or bug you with constant requests for information. Because they have put in an amount that is not ‘make or break’ for their financial situation, they are far too busy to worry about your day-to-day decisions.
I have raised money four times from hundreds of investors, and I have never had a single one become demanding or irritating. On the contrary, all of my investors have been patient, supportive, and tolerant when things haven’t gone quite as planned.
What do you need to have in place to take care of your investors and meet your financial obligations to them?
- A professionally managed accounting system that allows you to track your investors
- A process to ensure that you have up to date contact information for your investors including W-9s so you can report to the IRS the payments you make to them
- A system for providing regular updates—a quarterly email newsletter works great
- A process for making payments to your investors in accordance with your agreement with them—this often involves sending an annual dividend or loan repayment to each investor, via check, ACH, or wire.
Of course, the more investors you have, the more time and effort may be involved in maintaining these systems and processes. I recently sent out about 140 checks to investors and am now trying to track down those who haven’t cashed their checks yet.
Don’t let the thought of these obligations deter you from raising money! Depending on how you design your offering, most of the effort happens just once a year or even less frequently. And the benefit of having supportive investors—who have no interest in telling you how to run your business—far outweighs the relatively small effort needed to treat them well and pay them for the use of their money.
If you would like to get my eyes on your particular situation, please apply for a strategy session, and we’ll reach out if it’s a fit.
Here is an exercise we recommend in order to make sure you get your fundraising done within a reasonable amount of time.
1. Imagine you have reached your fundraising goal. You are looking at the list of all your investors and how much each one invested. What is the lowest amount that someone invested and what is the highest amount? Try to create a clear picture in your mind of your investor list and the amounts invested.
2. In your imagination, scan the list and estimate what the average investment size per investor is. For example, you may picture that you’ll have some people come in at $5,000, some at $10,000, a few at $25,000, maybe one or two at $50,000, and one at $100,000. In that case, you may estimate the average per investor to be $20,000. You can use this tool to decide how much you’ll ask for from each potential investor: http://www.jennykassan.com/blog/7-steps-for-making-the-big-ask/
3. Now, take the total amount you want to raise and divide it by the average per investor. That will tell you the approximate number of investors you’ll have when you reach your goal. So, if you want to raise $400,000, you’ll end up with around 20 investors.
4. Multiply that number by 10. That is the approximate number of potential investors you’ll need to talk to about your offering. (This assumes that an average of one out of ten people you talk to will say yes—you may do much better than that, but it’s best to be conservative). In our example, this would be 200.
5. Divide that number by the number of weeks you would like to devote to reaching your funding goal. This is the number of people you will contact per week about investing. So, if you’d like to reach your goal within six months, divide 200 by 26 weeks—you need to contact 7-8 people per week.
6. Assume that for each contact you’ll need to spend 30-60 minutes on average. Multiply the number of people you’ll talk to per week by the average number of minutes you think each contact will take. That is the total number of hours you should schedule into your calendar for contacting potential investors. Add at least half that many hours to give yourself time to follow up with people who haven’t yet given you a definitive answer. In the example above, I would assume eight hours per week plus another four for follow up—so a total of 12 hours per week should be spent contacting potential investors.
7. Now block out that time in your calendar for the number of weeks you gave yourself to reach your goal.
If you use this method, you’ll keep your momentum going and get that fundraising done before you know it!
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