How to Prepare Your Mind and Your Venture for Investment Dollars
By Heather Wentler
Taking on investors is a very foreign concept for most business owners. We’re familiar with a business loan because the terms tend to be similar to the terms for a car loan or a home mortgage. We have an interest rate and a time limit for paying the loan back, and if we can’t make the payments, we’ll lose whatever we’ve put up as collateral.
Raising capital from angel and venture investors is a whole different ball game, with unfamiliar words, intimidating negotiation processes, and a lot of opportunities to get screwed over.
But it’s also a powerful way to accelerate growth and tap into a whole network of resources.
Some businesses will never need investor dollars to achieve their goals. These businesses can and should grow organically, reinvesting revenue back into the business and letting the founder maintain complete control over all decisions. Only 4% of all ventures ever take on any sort of investment dollars, and traditionally these are high growth, broadly defined as tech and biotech ventures. These types of ventures are also “best fit” for investor dollars because determining collateral within these ventures is hard. Maybe the product is still in development, it’s a kind of software, or there’s a predetermined buyer already in place. Traditional financial institutions have a harder time being able to approve a loan or line of credit in these scenarios.
But if your business has high startup costs, like a consumer product that needs cash upfront for manufacturing costs, or a website or mobile app that needs extensive custom development before customers can get any use out of it, then you’re probably going to need to seek outside investment at some point.
Before you ever schedule a meeting with a potential investor, there are three steps you need to take to get your mind and your business ready.
1) Get a lawyer with expertise in investment deals.
I know, I know, women entrepreneurs especially hate spending money on professional services. Do I really need a fancy lawyer? Can’t I learn about venture capital on my own?
Trust me on this one, if you’re going to take on equity investments, you’re going to need a lawyer by your side whom you trust and to whom you can bring all of your dumbest questions. Even if you love spending hours reading SEC regulations, it’s not a good use of your time as the founder, and you run a high risk of misunderstanding something and getting in legal trouble down the road.
A good lawyer will keep you out of trouble and will also help you understand what you’re giving up when you take on investment, because investor money isn’t free money. Far from it.
When you take on equity, you often need to give up a percentage of ownership of the company, which gives your investors rights to a percentage of your profits. Some investors will demand a seat on your board, which means you have to answer to them for your decisions. If enough board members don’t like your decisions, they might even be able to remove you from the company or hire a different CEO. Some investors will even ask for royalties or ownership of your intellectual property. In my opinion, those last two are never worth it for the entrepreneur.
But a good lawyer will help you understand the long-term implications of each kind of deal, both in the best case scenario where your business is wildly successful, and in the worst case scenario where you shut down before becoming profitable or valuable enough to get acquired.
2) Start thinking WAY bigger.
We’ve written about this before because it’s a common theme with women entrepreneurs. We know we can stretch a dollar, and a sum like $50,000 seems huge and intimidating. Well, unfortunately, lawyers charge by the hour, and negotiations for even a $25,000 check can take a long time. By the time you get the money and pay all of the fees associated with getting it, there might not be that much left to fuel your business’s growth. That’s why a lot of investors won’t give out checks unless you’re planning to raise an amount larger than $100,000.
At Doyenne, we only make investments of $20K–$50K if we’re confident that the venture will seek more funding from other investors soon, because otherwise we know the money will run out before the business can achieve the milestones necessary to make it a good investment.
Start asking yourself, what could I do with $250,000? Or Even $500,000? What could you build properly, the first time? What new audiences could you reach right away? What kind of staff could you hire that will in turn increase revenues?
We believe women are natural leaders, hard workers, and brilliant strategists, but one area that often holds us back is our risk aversion. But if you’re building a venture that needs to achieve a national scale in order to become profitable and valuable to customers, the bigger risk is thinking too small.
3) Make a plan for your exit.
One of the biggest differences between getting funding from a business loan and getting funding from investors is the way they get paid back. Unlike a bank, investors get paid back through an exit, also called a liquidity event.
There are a variety of different kinds of liquidity events. The most common are acquisition by a larger corporation or by a private equity firm. If you make it really big without getting acquired, your exit might be an initial public offering (IPOs). And in some cases, a venture becomes so profitable that the founder(s) can buy out the investors and take back 100 percent ownership of the company. But that is the riskiest exit strategy for investors because it depends on the business becoming extremely profitable within the timeline established for the investor’s payback.
This is another area where I’ve noticed women entrepreneurs struggle. Our businesses often mean so much to us that we think of them like our babies. We can’t imagine giving them up. Selling them would be literally as heartbreaking as selling a child. But if you’re going to take on investor dollars, you need to reframe your perspective and start planning for that exit. Start looking at the biggest players in your field, and ask yourself what you could do to become an attractive acquisition target for them. This will greatly increase your chances of getting outside investment in the first place, and it will also force you to begin building structure into your organization that allows it to function independently from you, which is absolutely necessary for achieving scale.
Start preparing for investor capital months or years before you need it
The worst time to take on outside investment is when you’re desperate for cash. For one, you’ll have a hard time convincing any investors to bet on you when you’re on the edge of shutting down because of lack of cash, and for two, you’ll be more apt to agree to unfair terms that could screw you over in the future.
If you start planning for investment from the beginning, it will transform the way you think about your business for the better and put you in a position to have a smoother process of raising funding.