3 Critical Steps You Should Take Before Talking to Investors

Too many entrepreneurs jump right into raising money before taking the three critical steps outlined in this article. This is the main reason you hear horror stories about entrepreneurs whose investors are making them miserable. Do these things BEFORE speaking with investors, and you will save yourself a lot of time and greatly minimize the risk of potential future headaches.

1.   Get clear on your goals, values, and non-negotiables.

Goals include:

• How many hours per week you want to work
• How much vacation you want to take
• What salary you want to pay yourself
• How big you want your company to grow
• How quickly you want your company to grow
• How long you want to run your company
• What you want to happen with your company when you’re ready to leave it
• How you want your company to impact the world
• How much control you want over major decisions

Values include:

• How you want your employees to be treated
• How you want your suppliers to be treated
• Quality standards for your product or service
• Standards related to your contractors (e.g., would you contract with a manufacturer that has been fined by the EPA for polluting?)
• What effect you want your business to have on the environment (e.g., air quality, production of waste, carbon footprint)
• What effect you want to have on the communities where your business operates
• Your view of the importance of transparency (e.g., whether you want to share detailed information about your company with your employees, investors, and maybe even the general public)

Which of these are so important to you that they are non-negotiable? Picture an investor walking up to you and offering a check for a million dollars. What conditions would make you refuse the check? Of course, your goals and values can change over time as your company evolves. But the clearer you are now about what is important to you, the easier it will be for you to make sure that the way you raise money is in service to those goals and values.

2.   Get clear on the exit strategy for your investors. Which of the following best describes your goals?

• I want my investors to make money when I sell the company in 5-7 years. Before the sale, I will invest everything I have into making the company an attractive target for acquisition by a bigger company.
• I want my investors to make money when I sell the company in ____ years. I will look for a values-aligned buyer or maybe sell the business to my employees. My investors will have to be patient because this could take some time.
• I would be open to considering the sale of my business, but I don’t want to be pressured to sell to the wrong buyer. I would like my investors to get paid out of profits/cash flow on a regular basis so that they are not in such a rush to have me sell the company.
• I want my investors to get paid when I take the company public.
• I want my investors to get paid by selling their investment to someone else.
• I want my investors to stay with me forever and only exit if they really need their original investment back.
• I want my investors to get paid an amount over time that equals a certain multiple of their original investment and then exit once they’ve reached that multiple.

There is no right answer! Choose what fits best for you and your highest vision for your business. Then design your investment offering around the exit strategy you choose.

3.   Get clear on how much to raise.

Method 1: Financial Projections

Financial projections help you see gaps in your cash flow which might require you to bring on outside investment to prevent running out of cash. Many businesses raise capital when they are first starting out because it takes time to reach breakeven (when revenues meet or exceed expenses). If you can calculate how much of a shortfall you have before you reach breakeven, you know that you probably need to raise about that amount to be able to keep the doors open and not run out of cash. If you do not yet have financial projections, you can use our simple template.

Method 2: What Do You Need?

Another approach for determining how much you should raise is to think about what you need to purchase to take your business where you want it to go and how much that will cost. Here is an exercise to help you do that:

• Make a detailed list of the things you need to buy over the next year or two that you cannot buy with current cash flow (or other resources such as barter).
• Put dollar amounts next to the items you listed in Step 1. Add a 10-20% contingency line.
• How will having that money affect your business? For example, if you hire two new sales reps, will that lead to more expenses (e.g., will you have to hire a COO)? If so, add those expenses to the list.
• Consider creating more than one scenario. For example, if you focus on one line of business versus another, your needs will be different. Create multiple scenarios for each possibility. It is often best to choose the scenario that allows you to achieve breakeven while raising the lowest possible amount of money. You can also create scenarios for different amounts – you may want to raise a minimum of $300,000, but you should also consider what a larger amount could make possible and consider setting a “stretch goal.”

The time you spend up front determining these critical components will set you on the path to success and allow you to avoid a situation where your investors dictate the future of your company.

If you are interested in learning more about raising the right money from the right investors, join me March 8 - 10 at Fund and Fuel Your Dreams, a live three-day event for women entrepreneurs being held at Preservation Park in Oakland.

To your success!

Jenny