Entrepreneurs, is your business investment ready?
In his first column for Startups, Blottr.com founder Adam Baker outlines the mistakes many first-time founders make when seeking early-stage funding – and how to avoid them
I network a lot. Partly due to the fact I want to evangalise about my business, Blottr.com, but also because I love speaking to other entrepreneurs to share learnings, ideas and experiences.
I have met many interesting, inspiring and intelligent people over the years but when talking to first-time founders, one common theme crops up. Entrepreneurs think they need to raise money immediately and often try to secure funding long before they are ready.
Raising funds in these economic conditions is tough and it has certainly sharpened entrepreneurs’ focus towards their business plans and shifted the routes they take to raise cash at seed level.
Yet still, I meet businesses who massively over-egg their revenue projections, many are still at concept stage, most have no pivot plan and the valuations placed on the business by the founders are, at times, hugely over-exaggerated. It leads to many businesses simply not being ready for outside investment.
So as someone that has raised both venture capital (VC) and angel money, I’d say to first-time founders looking to raise money at seed/start-up stage:
Bootstrap it yourself
Find a way of financing the business yourself (between the founders) to get the business past a proof of principle stage. This is important for many reasons:
a) By self-funding, you are able to create real, tangible value in the business, so when you begin talking to outside investors you have a more valuable proposition. This helps your negotiating power and should result in you getting a much more positive equity-for-cash deal.
b) Talking to investors before you even have a product is crazy, in my opinion. You are asking the investor to take a huge risk, as you cannot prove any kind of traction or real-world appetite for your product. Investors are less enthusiastic about financing a business from seed without some form of proof that you’re hitting key metrics/milestones.
c) Investors like founders to have skin in the game. If you have nothing at stake to lose, then you increase the nervousness of the investor and they’ll be much less likely to invest in you.
Find great people
You can’t do it all on your own. People make businesses…
You’ve heard all the clichés before, but they stand up. Through existing contacts and networking, find other great entrepreneurially-minded people to get involved. This can be as a founder or NED (non-executive director). NEDs are basically advisers who usually take a few share options for their time.
The advantage of a NED is they get deeply involved in the strategic side of the business. Whoever you decide to bring into the business, ensure they have the right skill-sets, experience and contacts that fill an existing gap. A small business could benefit from one to two NEDs on the board.
As a bootstrapped business, you are forced to be prudent with costs. I take this mentality through with me, despite having raised outside money. Ramping up and increasing your monthly burn rate is dangerous and puts huge pressure on a business, especially if it’s pre-revenue. Running out of cash is the quickest way to fail.
Be prepared to pivot
I have never had a business where I didn’t need to pivot at least once. How you think the business will evolve and where you think success will resonate when you start out quite often doesn’t.
A common trait in founders is that they are stubborn. It’s a great characteristic to have but can lead to a steadfast belief that your strategy and vision is right.
If there is only one thing you take from this, live by the following rule: if it doesn’t work, analyse why and fix it. If it still isn’t working, pivot. Quickly.
Pivoting doesn’t mean a complete re-think of business strategy, product and vision but it probably does mean changing the proposition and finding new ways of achieving success.
Focus on making the core business brilliant
I have made this mistake, plenty of times.
We are visionary, creative and ideas driven. It’s why we are founders. The danger is we sometimes (or if like me, frequently) start developing off-shoot products to help drive engagement and revenue. Meanwhile, the core product that you are building your business around sits unloved and un-iterated.
A focused product development plan is essential, just make sure it improves the existing product. Being brilliant in one thing is better than being good at five but not brilliant at any.
If you think your business will be turning over £10m in two years from a standing start, think again. The biggest failure of most first-time founders is unrealistic forecasting.
Inserting big revenue numbers into a P&L may look awesome but it could lead to burn out. Why?
Chances are you will work to the seed P&L and ramp up expecting to break even in month 12, when actually you are miles off covering costs. This will lead in one of three directions and none of them are pretty:
1. You’ll need to let staff go
2. You’ll desperately begin talking to investors, who will sense your desperation and your lack of business acumen and will likely not invest
3. You’ll go bust
Don’t waste time talking to investors before you are ready. Your business needs you in it, 24-7. Not out of the business, losing focus trying to raise money.
Build your business, reach all of the proof of principles you set yourself at the start of the journey, begin to get on the path to generating meaningful revenue, get great people on board and guess what? You’ll find that you won’t need to go knocking down doors, investors will come to you.
And guess what else? The value of your business and your negotiating power just sky-rocketed.
Knowing what to raise
When you are ready, don’t raise a ton of cash you don’t need.
Show investors you understand your business and marketplace. Have a plan that may see you raise more money in 12-18 months. This way, when you raise money in future, it will be at a higher valuation. Being able to raise £2m when you only need £500k to deliver your plan is dangerous, as you’ll have to give away a larger slice of your business and critically, you may start to lose your values of staying lean.
Serial entrepreneur Adam Baker is the founder of Blottr.com, a citizen journalism news service that enables anyone to capture, report, collaborate, break and make the news happening around them. You can follow Adam on Twitter: @adamblottr or connect with him on LinkedIn: www.linkedin.com/in/adamlbaker