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October

10 Steps to a Funding Strategy That Works

I had been dreading to make the call for almost a week.  I knew I needed to do it, but just didn’t have the courage.

For seven years I worked my ass off in my company, raised over $1MM and grew my green retail stores into probably the largest in the country at that time.

We had become an international sensation with media from all over the world picking us up: the New York Times, CBS Evening News, the Wall Street Journal and Bloomberg TV, to name a few.

And now we were going bankrupt.

Even worse than telling my staff of 15 that we were shutting down and having let down all our venders who believed in us, many of whom we owed money to, was making this call.

I dialed.  She answered.  “Mom, we’re going bankrupt and I’ve lost all the money you invested in the company.  You believed in me, and I let you down. I’m really, really sorry.”

The year was 1997 and that was a tough lesson.

Upon reflection, I had not really taken the time to plan out the details of raising money for the company, expanding carefully, or determining the necessary contingency plans if things did not go the way I expected.

Sure, I had a business plan and I thought I knew what I was doing.  I had a great board of directors, but still, was just wrong in some crucial funding strategy issues.

Now, 14 years later, after having worked with many, many entrepreneurs in raising capital for their businesses, I realize I am not the only one.

It’s a big mistake entrepreneurs make.

 

10 Steps to Creating a Successful Funding Strategy:

1)   Vision— Where are you taking the company?  Where’s your passion?  Passion is what is going to sell your concept to potential stakeholders, no matter who they are.  You must have this!

2)   Expenditures— What do you need to get to the next level.  NOT what do you want.  Big difference.  For example, I need a website vs. I want a new computer system to manage transactions faster.  Determine the minimum you need as well as the amount you’d like to have.

3)   Burn Rate– How are your expenses?  How quickly are you burning through your capital?  How long can you go without outside infusions?  What can you do to reduce this burn rate while looking for outside capital?  This determines how long you have to raise outside capital.

4)   Assumptions— What are the scenarios you’ve created for your financial projections?  How did you determine them?  Comparisons and history helps create these assumptions.  As does your experience.

5)   Crunch— What is the minimum amount of capital you need to get to the next level?  What will that do for the company?  How long will it take?  When will you start to see an ROI (Return On Investment) from this?  Forecast this out, in detail.

6)   Buffer— Have you added a financial cushion?  If not, consider adding at least 50%.  Your assumptions will most likely be off, so plan contingency capital.  It’s tough running out and then having to explain this to investors.

7)   Sources— Where are you going to get this capital?  Friends & Family?  Angel Investors, Venture Capitalists?  Loan?  Grant?  Depending on what stage your company is in, your personal experience in your industry and the investment climate, is which one(s) you’ll approach.

8)   Pitch Plan— your business plan, executive summary, financial analysis and slide deck (PowerPoint presentation) along with how you plan on approaching your leads in funding.  Depending on your audience is the approach and presentation you create.

9)   Juggle— How much effort do you put into raising capital?  How will you do this while running your company?  Finding that balance between the two plus having a life is crucial in not taking your eyes off the ball.

10)         Exit Strategy— Do you know at what point you will stop trying to raise your capital?  Create a minimum to raise and a by when to raise it.  What happens if you miss this deadline or if you get your minimum but not your maximum?  How do you know when to stop and move on?  Defined this up front to avoid the never ending “road show” syndrome.

The key for small business owners like you is in channeling your passion and conviction take the time to really plan out your funding strategy.

That way you’ll never dread having to make that phone call to Mom.

 

Action Steps for the Week:

It’s easy to say you need outside capital for your small business.  It is not easy to back that up in a way that makes sense to outside potential funders.

  • Get clear on your business and growth models.  Plan it out five years.  Three of them in detail.
  • Determine your true capital requirements.  The minimum and the desired.
  • Identify low hanging fruit funding sources.  Make sure you’re OK with doing business with them and they add value to your organization, beyond just money.
  • Build your presentation for them. Not too much info.  Leave them hungry for learning more.
  • Prioritize your leads A through D.  Start with the D’s.  Make your pitch mistakes on the D’s before approaching the others.
  • Be negotiable on the amount of equity you sell for amount of capital raised.  A big issue when you’re ready for this conversation.
  • Know when to stop!  A hard call for many entrepreneurs.  But it is the one thing that will help you keep your sanity along the way.

Got these together?  Then you’re ready for the road show.

Lastly, remember to keep your wits and humor, as you will need both!

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