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A Twitter friend (Matt Riopelle) asked me to help his friend (call him Ralph) find investors for his business.
Offhand, even without knowing either of them, I’m sympathetic. After all, if you keep up with this blog, you’ll know it’s a topic I care about. And I’ve posted here about my recent experience as an angel investor (and if you’re wondering, no, I’m all tapped out at the moment), so I’m not surprised by the question.
I looked at Ralph’s website. It’s an interesting business, local to me, with new technology for an otherwise traditional and low technology business. New materials, a new take on old products. And they’re making a product I use.
So I’m interested in the problem.
(And if you wonder why I’m not being more specific, I don’t have anybody’s permission to mention the business, and seeking investment can be sensitive. Besides which, it’s also possibly illegal (depending on interpretations) to mention a business that’s looking for investment on a blog like this; could be taken as soliciting investment improperly. That’s why I’m not giving details.)
But first, some questions:
1. Are you really sure you want to go that way?
Sometimes I think we all (we entrepreneurs, that is) move too quickly to the investment alternative. Having investors is like having a spouse. No, it’s like having a spouse who is also a boss. Your business is not going to be yours ever again.
Oh? What? You want minority investors who give you a lot of money without attaching any strings? Fat chance. You mean you want somebody who has a lot of money (they have to have a lot of money, to make the transaction legal) and is also relatively naive? And really generous? Good luck with that.
Take a good look at your prospects. Do a business plan, not for outsiders, not formal and hard to do, just a business plan with realistic forecasts for sales and expenses. Then ask yourself whether you can get by without the investment. Can you borrow enough to make it work? Can you live with the burden of debt? Have you considered SBA-backed loans (they are moving again), which lessen the debt burden?
Don’t go down the investment path just because everybody says you should. Think about the rewards of making it work without the outside investors, so you own it all yourself. Food for thought: this post on Planning Startups Stories.
2. Do you have a business plan?
The good news is that you don’t have to have a plan you can show to investors tomorrow. You do, however, need to have a plan for yourself, covering strategy, markets, sales, profits, cash flow, all the key points. These factors are all related to each other and you can’t just wing it. You need to have real numbers.
And it’s not about showing the investors your plan. That may or may not come later. It’s about knowing what you need, and why, and what that’s going to produce.
3. Do you need enough money to interest investors?
Angel investors don’t usually want to deal with less than $100,000, and venture capitalists don’t want to deal with less than a couple of million dollars. Sure, there are exceptions, but those are general rules.
And you can’t just say you want it; you have to be able to show you can use that money to grow the business. You have to have a real plan, what you’re going to spend the money on, how it will increase your business.
If all you need is tens of thousands of dollars, then bootstrap. Maybe you have to get friends and family involved, but really, for less than six figures, it’s not worth it to professional investors.
4. Can you grow your business a lot, in a few years?
Investors who put money into small businesses are taking big risks and they deserve big returns. They don’t have to invest in entrepreneurs, they can lose their money just as easily in the stock market, and they can get safe interest with no risk. So you have to give them the hope of a big payoff.
That means big growth. Can you convince them your business can sell five times what it’s now selling in two years? Or ten or 20 times in five years? That’s what they need to make money worth the risk.
5. Do you have a convincing team?
Investors are going to want track records, people on your team who can run the production, marketing, sales, and administration of your business. They want people who have done that kind of thing before, sucessfully. If you don’t have them on your team, then the investors won’t be interested.
If you can answer yes to all of those questions, then you’ll likely be able to get investment (although not from me, but I can point you in the right direction).
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
