How much capital do you really need to get your company up and running with money left over to operate? Answering that question is one reason a solid business plan is so important. If you raise too little, you risk running out of money before your business gets off the ground. Keep in mind that if your projections show that you’ll have positive cash flow in a year, that future cash could be available to fuel your growth, in addition to any start-up capital raised from investors.
When raising money, here are some rules I’ve learned from experience with my own companies:
1. Estimate what you need, then double it.
If you can avoid additional rounds of funding, you’ll avoid headaches and interruptions, and often will end up keeping more of your company.
2. Estimate revenue optimistically, but support your numbers.
Keep your projections optimistic but realistic. Provide research and data supporting your conclusions. Your potential investors know that entrepreneurs are always optimistic anyway and will discount your rate of growth, regardless of what you say. By starting out on the high end you can arrive at a better deal than if you started out low.
3. Retain a controlling stake.
If you don’t have majority ownership, then you are by definition a minority shareholder. That means you can be removed from your own company if the majority votes against you. Any decision or suggestion you make can be overturned or ignored.
While you should be a respectful partner with your investors, you don’t want to be their subordinate. An exception to this is if your company is an LLC whose operating agreement gives you special rights and decision-making authority allowing you to retain control even with a minority ownership stake.
4. Project confidence and passion.
When asking for money, never show weakness or desperation. Investors want to entrust their money to someone they believe in.
5. Bring investment documents to the meeting.
Have your standard terms worked out, and change them only if it’s in everyone’s best interest. No investor should get a better deal than anyone else just because they can negotiate a better arrangement. Be prepared to show how much skin you have in the game. Investors want to know that they’re not the only ones taking a risk, but you don’t necessarily have to put up capital. I didn’t when I started my oil company, mostly because I didn’t have any. You just need to demonstrate how committed and motivated you are to your endeavor.
It makes sense. The more you have to lose, the harder you’ll work to succeed. If you don’t have any money to invest upfront, then you have to convince investors with your confidence, your preparation and evidence of your commitment to the success of the business.