The setting for this article begins with one of the most frequently asked questions in business, “How do I raise money?” I am sure many entrepreneurs have not started what was possibly a great business simply because they could not raise money and believed they had to when in reality there were a number of alternatives as outlined in this article.
Furthermore, many businesses that failed could have been operating today, delivering good, sustainable profits if they’d followed the advice and ideas as outlined below. The critical success factors we look at for raising money are applicable to all types of funding requirements: start-up, expansion, franchising, BEE & cash flow. There is no simple answer to raising money. However, by following the four-step formula as outlined below, as well as heeding the advice in the tables and the real-life case studies, the likelihood of success will be greatly increased.
1. Build a business plan based on the following eight components.
Clearly outline answers to these points
1. Does this product or service really (not maybe!) fill a market need?
Just because you’re fanatical about something does not mean there are enough customers willing to buy the idea at a price that allows you to make a profit. Answer these questions:
- Why do customers need this product?
- Is it a necessity (soap) or a luxury (chocolate)?
The answers to these questions lead to the second, critical question.
2. Is the idea unique?
This question has a number of straightforward yes/no answers. 1) Does this product/service exist in the market or if you’re already operating illustrate why it’s unique? 2) If it does exist can you deliver it to customers in a totally different way? A great example is DVD rentals positioned in convenience stores and at garage outlets. Many entrepreneurs fail because they believe they’ll do what’s already been done in a better way or by offering a better service. If that’s the case, let’s go to need number three.
3. How will your product service be different?
This question is critical because if it’s not 100% unique then the likelihood of success is much, much lower. Draw up a table of all the competitors in your market space and in tabulated format create the following headers: competitors, colour of logo, pay-off line, cost of product/s, marketing, sales methodology, key strengths, differentiators and invoicing. Take a long hard look at how your product/service is different.
4a. Budget: revenue
Work out sales, then re-work at 75% and again at 50%. The 75% and 50% rule is absolutely imperative. You have to know the cash flow factor of selling 50% of your projections because this will be the difference between success and failure. Here’s an example. If you need R100 000 a month to break even and you sell R50 000, in six months you’ll be R300 000 short of cash. NOTE: Include answers to ‘What if’ questions such as a competitor entering the market or a sudden, bad recession.
4b. Budget: costs
Work out your costs, re-work them and finally work them again! Divide the costs model into two stages: the development stage (how many months it will take to get to market – this includes all preparatory work such as registering the business, renting a post box/premises, designing the product (in our case it was layouts of how Entrepreneur magazine would look and its sections), the sales plan, recruitment of staff, furniture etc. (this alone could take 2-3 months depending on staff size and notice periods required) and then work out 12 months of operation. Break the expenses into cost of production (COS) and overhead costs (OH). Get quotes for everything you will need to buy and have them fixed for 6 months. Remember to build in an increase of at least 8% for the second six months.
4c. Budget: cash flow
Work out your cash flow. There are many cash flow models available and people to assist you. But here’s the golden rule. Your cash flow must indicate costs exactly as you’ll need to pay them (every 30 days – assuming you have negotiated 30-day terms) but with the total revenue reflecting collection in 33% batches at 30, 60 and 90 days. (NOTE: Any money collected ahead of this 33% spread schedule will result in an easing of cash flow.)
5. Operational plan
Set out a document of who has to do what by when for all key aspects of the business. Be very specific and pay attention to detail.
6. Sales plan
The sales plan must indicate who the driver is and their key duties. It must indicate the number of sales executives, their monthly targets (that must tie back to the budget), how they will be rewarded and, most importantly, how they will sell – from prospecting to closing the deal and to after sales service.
7. Marketing plan
The marketing plan must indicate the objectives and goals, how you’ll market (advertising, promotions, etc) the mediums (own website, radio, etc) period (which months) and the budgeted cost.
8. The people
Some say entrepreneurs are generalists. It does not matter what they say. What is important is that you have the following facets of the business 100% covered as a shortfall in any one will spell disaster; product/service delivery, sales, marketing and accounting.
2. Personal Resume.
Unpack answers to the points below
Investors are backing a person, the entrepreneur and more broadly, the full management team.
What is it that you’re really good at? Bring this out and use examples wherever possible to substantiate your claim. (Be sure that your document clearly illustrates how you’ve surrounded yourself with the right people as indicated in point 8 on the previous page).
Your passion and enthusiasm is vitally important. There are many average, tired people in the world, but equally important is the fact that the top 10% are very, very good. Make it clear how you’re prepared to die for the project and how you’ll not let it fail under any circumstance. In fact, it should be abundantly clear that failure is not an option.
Right from the outset, let’s be crystal clear on this point. If you’re not a resilient person and you have not had to illustrate resilience in your life to date the possibility that you’ll fail is high. Take a piece of paper and write down five great challenges you’ve faced (really tough challenges) and what you did to overcome them.
Be ruthlessly honest with yourself. Include these resilience examples in your resume.
3. Skin in the game.
Highlight your sacrifices and contribution
Illustrate you’re fully prepared to sacrifice. Demonstrate a willingness to put your money where your mouth is.
Have a spreadsheet that illustrates all that you’re committing or have committed to the business. Sell your house, max your credit cards and show how you’ve put every cent of yours on the line and that should the venture fail you’ll pay the price for years to come. It’s called skin in the game.
According to Jim Casparie, Entrepreneur’s “Raising Money” coach and the founder and CEO of The Venture Alliance, a national firm based in Irvine, California, he has been working with entrepreneurs for close to 25 years, and throughout that time one thing hasn’t changed: Only 5% of all entrepreneurs get funded. The question he asks is “Can it be that only 5% of the ideas generated are good enough to succeed? Why is it that this ‘magic’ number never seems to change?
One of his answers to the question is that he believes entrepreneurs don’t understand the difference between having a need for capital and being ready to ask for it. He believes entrepreneurs are motivated to seek capital based on need, not readiness. What does he mean by that? “When an entrepreneur is driven by a strong sense of need, the message they send to an investor is one or more of the following: I need you to bail me out of my bad management of the limited capital I had. I’m unwilling to invest any more of my money, so I need yours. I haven’t been able to raise money from anyone else, so I need you to save me. On the other hand, when an entrepreneur has ‘done their homework’ and truly understands what it takes to run a business, the message they send is: ‘I’m ready for a partner to help me take this to the next level. I have a handle on my product, my market and my customers and I’m ready to accept an investment that’ll help me grow. I’ve researched the various sources of capital available to me and I’m ready to work with you because you’re the best match.’”
4. Building the relationship.
Focus on building a relationship as early as possible with the key executive/s
Right from the outset build a relationship with the key players on the funding side. Trust and synergistic thinking are critical to potential funding. Impress upon the potential investor your passion along with a clear plan for how you are going to not only succeed but also grow a sustainable and profitable business. Developing a strong sense of trust early in the relationship will prove valuable later on. In many ways a business partnership is akin to a marriage; if you sense reticence, conflicting values or if you are unable to find common ground, don’t waste time – move onto your next contact.
Jim Casparie’s observations highlight why the 8-point business plan, personal notes to the resume, skin in the game and building the relationship points I’ve suggested are so important. They demonstrate to a potential funding partner all the key ingredients that make up a successful funding recipe and partnership.