8 Tips On How Much Money To Ask For From Investors

Startups ask me “How much money should I ask for?” The simple answer is the absolute minimum amount you need to make your plan work. Some entrepreneurs try to start with a huge number, hoping they can negotiate and close on a smaller one, while others understate their requirements, in hopes of getting their foot in the door with an investor.

Neither of these strategies is a good one, as both are likely to damage your credibility with potential investors, even before they look hard at your plan. Here are the parameters you should use in sizing your request, and be able to explain in justifying your request to investors:

1. Consider implied ownership cost. If your company is early stage and has a valuation under $1M, don’t ask for a $5M investment. The investor would be buying your company five times over, and he doesn’t want it. If your valuation is around $1M, you can validly ask for $200K-$300K, and offer 20%-30% of your company in exchange.

2. Type of investor. Angel investment groups usually won’t consider a request over $1M, while venture capitalists won’t look at anything under $2M. Amounts of $100K or less, are usually relegated to “friends and family.” Approaching any one of these groups with a funding request outside their range is a waste of your time and theirs.

3. Company stage. If your company is still in the “idea” stage, you have no valuation, so size your investment request on the basis of “goodwill” that you have with your rich uncle, and your business track record. Angels might be interested during “early stage” if you have a prototype, but VCs won’t bite until you have a product, customers, and revenue.

4. Calculate what you need, and add a buffer. Do your financial model first with the volume, cost, and pricing parameters you want. See where your cashflow bottoms out. If it bottoms out at minus $400K, add a 25% buffer, and ask for $500K funding. The request size must tie into your financials to be credible.

5. Investment terms. The most common case is an equity investment, but there are many terms that can impact what request size is credible. I’m talking about things like anti-dilution clauses, preferred versus common stock, valuation tied to later round, warrants, and bridge loan options. More restrictive terms reduce the credible investment amount.

6. Single or staged delivery. In many cases, a single investment request may be scheduled for delivery in stages, or tranches (often misspelled as traunchs or traunches), based on milestone achievement. Obviously, this reduces investor risk and allows a larger commitment, since they can limit their loss if you fail to meet key objectives.

7. Use of funds. Investors expect to see a “use of funds” list, and they expect the uses to apply only to your core mission. In other words, don’t tell investors that you intend to buy a fancy office building or executive cars with your funding. Even executive salaries should be minimal at this stage.

8. Projected return on investment. Most entrepreneurs skip this step, but it helps your credibility to include it. Estimate a return on investment (ROI) by projecting company valuation at exit, to show the investor who has 20% what he will get back for that initial investment. He’s looking for a 10x return, since he assumes only one in ten survive.

Obviously, determining the proper size of your investment request is a non-trivial exercise, but it’s one of the most critical factors for investors in making a decision to invest or not to invest in your company. You need to get it defensibly right the first time, because changing your request under pressure definitely will kill your credibility.

The days are gone, if they ever existed, when you could present an idea and a vision, and have investors throw money at you. Now you have to do your homework. Get busy, and have fun.

Marty Zwilling

Investors Look First At The Founder, Then The Idea

Investors are people too. They evaluate you like you should assess a possible co-founder or first employee. What are your credentials? What have you done that would convince me that my money is safe in your hands? Only after they see you as fundable, do they want to assess your plan for fundability, not the other way around.

Even with great credentials, it is all too possible for an entrepreneur to come across as a high risk investment. Here are some “rules of thumb” that indicate a marketable and experienced entrepreneur:

• Highlights team strengths, more than his own. Some entrepreneurs seem to never stop talking about themselves, and all their accomplishments. The best ones talk more about how they have assembled a well-rounded team, and will continue to fill in the gaps.

• Talks about the implementation plan, not the idea. Most entrepreneurs are great at envisioning their business idea, but the implementation is fuzzy. Experienced entrepreneurs talk about their implementation and rollout plan, with real milestones and quantifiable results.

• Customer needs and benefits first, then product features. The best entrepreneurs show that their market domain knowledge is as strong as their product technology knowledge. They are able to weave their solution into the market, the opportunity, and customers, in a way that sounds like a natural fit, rather than a product sales pitch.

• Focus is clear, not all over the map. Success means the entrepreneur must be laser focused on driving the business, passionate about a product, and passionate about a specific set of customers. If the business plan reads like a smorgasbord of offerings, there are probably not enough resources to do any well, and customers will be confused.

• Rational business model, with prices and volumes. Unless the business is a non-profit, the entrepreneur needs to show how he will make money. The days are gone when investors want only to see a large market share or growth in eyeballs. Are revenues and costs reasonable and projected for five years?

As an entrepreneur, don’t let your ego get in the way, or believe you can take the world on by yourself. If you want to attract investors, you must be willing to listen and work with others, as well as share your ideas or your knowledge. Loner entrepreneurs won’t get their foot in the door with any investor I know.

If you are young or inexperienced, and don’t have business credentials yet, don’t hide this fact. I recommend a proactive approach, to highlight the accomplishments you have, the power of other team members, and show some humility in admitting a search for the rest of the team.

So you might ask, how do first-time entrepreneurs ever get the funding they need to prove that they can perform at the next level? The best answer is to team yourself with someone who has “been there and done that.” After a team success, you’ll find all members are “promoted” to the next level.

Another common approach is to bootstrap your first startup to success, possibly with some help from friends and family. As I said in the beginning, investors are people too, so get out there and make them your respected business friends before you try to sell your idea. Business networking is not the same as cold calling with a hard sell.

Every investor knows a few good entrepreneurs, like Marc Andreessen of Mosaic and Netscape fame, who could get millions of dollars of funding for just about any idea. He needed Jim Clark to help him get a first investment, yet now Marc is a major VC in his own right.

In fact, I don’t know one investor who has funded a “million dollar idea” without regard to the person and the plan behind it. Think about that the next time you pitch your idea, and never mention the people.

Marty Zwilling

Start Business Planning Now For The Holiday Season

In the US, the holiday season of Thanksgiving and Christmas is fast approaching. But no matter where you live in the world, you should use the holidays to give thanks for the positives in your life and your business. Yet you can never forget the seasonal business cash flow and activity demands that are approaching, so to be prepared – you need to start the planning now.

Even though these last few years have not been great financially for entrepreneurs, it always helps to look at the cup as half full, rather than half empty. We often forget that one person’s loss is a gain for others. Here are a few of the many things that entrepreneurs should be thankful for this holiday season, to keep the challenges in perspective:

1. The economy continues to rebound. The stock market reached a new all-time high in 2013, and is finally providing some liquidity relief to concerned investors and startups alike. Home prices are slowly coming back, and consumer spending reached a new high of almost $11 billion in May 2013.

2. Venture capital investments are returning to startups. Venture capital firms raised $4.1 billion for 35 funds during the first quarter of 2013, an increase of 22 percent compared to the level of dollar commitments during the fourth quarter of 2012, according to a report from Thomson Reuters and the National Venture Capital Association (NVCA).

3. New focus on a sustainable planet. The continuing rise in the price of fuel, combined with the ongoing evidence of global warming, has highlighted the need for alternative energy sources, and green products. Startups are springing up all over to capitalize on these opportunities.

4. Incentive to do something you love. Lots of people tell me they are sick of the corporate grind, and they long for the opportunity to take their favorite activity or hobby, and make a business of it. Now many of them are doing it. Some are finding something more exciting after being laid off dead-end jobs.

5. Holidays mean more time for the family. Keeping a sense of balance between work and family is always a challenge. With the workload reductions, some of you now have had the time to re-introduce yourself to your family and friends.

But remember, nothing happens in your business unless you make it happen. In all businesses, especially startups, cash-flow is king. Here are some key tips to optimize your cash flow in anticipation of these busy holiday periods:

• Start with re-sizing per-unit profitability. Margin is everything. Unless your volumes are in the millions or higher, the difference between manufacturing cost and customer price better be 50% or greater. That should be true even if your customer is really a distributor. Otherwise, sales, marketing, and operational costs will kill you.

• Next comes sales volume by channel. Here is where you need a “bottoms-up” estimate from the people in your organization who have to deliver. This forecast is really their commitment. It’s tempting here to simply calculate one percent market share, and assume anyone can do at least that much. It’s not credible and won’t happen.

• Don’t forget that pesky overhead. Even with a slow economy, it’s amazing how fast office space costs add up, in conjunction with insurance, utilities, and administrative help. Then there are computer costs, trade shows, inventory, and special holiday promotions. Check industry average statistics to make sure you are in the right range.

• Holiday sales fluctuations eat cash. Sales surges means more inventory is required to cover the ups-and-downs. Every dollar in inventory is a dollar less in cash available, maybe even two dollars less if your gross margin is 50%. If you try to vary the number of employees to match, that costs even more cash for hiring, and later resizing.

As I suggested in the beginning, the business year has been a good one so far, and the coming holiday season has the potential to make it even better. Don’t let the demands of seasonal fluctuations spoil the party. Do your planning now, and drive your business to new highs, rather than letting the demands drag you down. How prepared are you to make this season a success?

Marty Zwilling

Disclosure: This blog entry sponsored by Visa Business and I received compensation for my time from Visa for sharing my views in this post, but the views expressed here are solely mine, not Visa's. Visit http://facebook.com/visasmallbiz to take a look at the reinvented Facebook Page: Well Sourced by Visa Business.

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How and Why To Do Your Own Business Financial Model

Most entrepreneurs tend to avoid this area of the business, and as a result are badly surprised by cost realities, and investor expectations. They seem to think that financial projections are simply invented numbers for investors, and not useful. In reality, it’s like jumping in your car for a long hard drive with no destination in mind. Chances are, you won’t enjoy success from the trip.

What is a business financial model, really? In most cases, it is merely a Microsoft Excel spread sheet loaded with your cost and revenue projections for your startup, starting now in time and extending at five years into the future. For more value, a few variables can be added, like product volume growth rate, and number of salesmen, for “what if” analyses.

Why? For you to make decisions and manage the business - because we are all mere mortals and can’t possibly keep all these numbers and calculations in our head – to decide whether and when the business is going to be profitable given rational projections of costs and income (these assumptions are referred to as your business model). Secondarily, it will be required by potential investors to validate how much money you need to get started, and how much return they can expect on their investment.

When? The financial model should be running even before you incorporate the business and build prototype products (would you start driving your car on a long trip before you knew where you were going?). If you can’t make that objective, then at least don’t approach potential investors until your model is working – investors have little tolerance for startups with no financial plan.

How? Start with a “sample” business model, available in generic form or customized for specific industries, from many sources on the Internet. Another alternative is to download from my website a free sample model that I built for a specific startup, with elements suggested by Angel investors and venture capitalists, ready to be customized to your business.

If you are not computer literate in Microsoft Excel, your first task is to find someone who has the time and expertise to convert your base set of costs and revenues into projection formulas, cash flow summaries, and a profit and loss statement.

Do your own, if you can, because you know the numbers. In fact, this is the easy part. More challenging is ‘defining’ the business model (assembling all the real variables of your projected business, pricing assumptions, staffing requirements, marketing costs, sales costs, and revenue flows).

This business model can then be used for many purposes, such as risk and profit assessment, projecting the values of assumptions that are made based on existing market conditions, calculating the margins that are needed to avoid adverse situations, and various forms of sensitivity analysis. These are necessary to estimate capital investment requirements, plan capital allocation, and measure financial performance.

Creating financial projections allows you to see areas of strength and weakness in your proposed business model, enabling you to make critical changes that will allow your business to run more successfully.

While people start businesses for many reasons, making money is usually important. Even a non-profit can’t afford to lose money. You won't know if you can meet these expectations until you build a financial model with reasonable financial projections.

It’s a great learning experience, and you can do it yourself, but don’t hesitate to ask for help from a professional if you need it. You will be amazed at how clear the relationship becomes between pricing, cost, and volume. When you lose money on every item, it’s hard to make it up in volume.

Marty Zwilling

Real Entrepreneurs Need to Accentuate The Positive

Entrepreneurs need to listen to constructive criticism, but ignore negative vibes and complainers at all costs. If you are a complainer, and you are thinking of becoming an entrepreneur, think again. The world of an entrepreneur is tough, unpredictable, and fraught with risk. Most importantly, the buck stops with you, so there is no room for excuses and negativity.

Even listening often to negative team members and partners will reinforce negative thinking and behavior, and turn your normally positive perspective toxic. I’ve seen it too often in real life, and it was reinforced to me a while back in a book by Trevor Blake, “Three Simple Steps: A Map to Success in Business and Life.”

Trevor is a highly successful serial entrepreneur and success coach who has studied this phenomenon for many years, including the latest findings in neuroscience. Reviewing dozens of autobiographies of great entrepreneurs, including Steve Jobs, Henry Ford, and Andrew Carnegie, it seems that all had an unshakable belief in their ability to control their lives, with no excuses.

Here he offers, with some startup adaptation from me, ways that every entrepreneur needs to defend themselves against negativity – yours and others – so you can rewire your brain and boost the occurrence of positive thoughts and behaviors:

1. Become self-aware. When you feel an excuse coming on, no matter how trivial, stop yourself. You can’t delete the thought, but you can revise it before saying it aloud. So instead of saying, “I’ll never get the funding I need in this economy,” you might say, “Let’s try this new crowdfunding approach, since our solution value is so easy to understand.”

2. Redirect the conversation. When you participate in negative dialog with a complainer, you’ll walk away feeling depleted. If he says, “I hate demanding customers,” counter his negative thoughts with a positive image: “At least we have customers – how many of our competitors wish they had the backlog that we do?”

3. Smother a negative thought with a positive image. If a negative thought pops into your mind, immediately input a different image. This is the process of “neurogenesis” – creating new pathways in your brain that lead to positive behaviors. So if you think “I’m working late again,” replace this with a pleasant image of the restful weekend ahead.

4. Don’t try too hard to convert others. When trapped in a blatant complaint session with members of your team, simply choose silence. Let their words bounce off you while you think of something pleasant. If you try to stop them, you may end up alienating yourself and becoming a target. Let your positive results do the work in time.

5. Distance yourself when possible. When you hear insiders criticizing your startup, excuse yourself and take a break somewhere quiet. Think of something pleasant before returning. You have to take this seriously, because negative people can and will pull you into the quicksand.

6. Wear an invisible “mentality shield.” Imagine that an invisible shield like a glass cloak made of positive energy lightly covers your whole body. You can see perfectly well through it but it protects you from others’ negative words and emotions. This technique is used by professional athletes to deflect the negative energy of a hostile crowd.

7. Create a private retreat. When you are stuck with a cohort who is spewing vitriol, you should mentally retreat to a private, special place where you plan to enjoy the successful fruits of your entrepreneurial labor. Concentrate on your vision of making the world a better place.

8. Transfer responsibility. On occasions when you’re pressed against a wall while someone rants about all the injustices in their role, throw the responsibility back at them by saying, “So what do you intend to do about it?” If they just want to vent rather than find a solution, this tactic will stop them in their tracks.

9. Forgive your lapses. Everyone complains sometimes. Your computer crashes. Deadlines pile up. It’s human to vent once in a while. Be kind to yourself and start afresh. The less frequently you complain, the more time will pass between lapses into negativity. This is how rewiring the brain works.

Trying to live with complainers in your startup is not only unpleasant, but it’s bad for your own well-being, and bad for everyone’s performance. New research shows that if they keep hearing negative messages, your team behavior will change to fit these new perceptions, and not in a good way. You can’t survive with that kind of help in today’s competitive environment.

Marty Zwilling