Putting other people’s money where your mouth is
By Andy Kenworthy,
The money that got you this far has either run out or is about to. You have borrowed from everyone you can with a relatively clean conscience and a straight face, plus a few others that were a bit borderline.
- It’s business time
- So far, so good—so what?
- Case study: Beyond organic growth
- Putting other people’s money where your mouth is
- Case study: Sporting chance
- A formula for secrets
- Let’s get personal
- Stand and deliver
- Case study: Shining light
- Growing without the pain
- Playing with the big boys
- Case study: Dutch courage
- Cashing in, selling out (& getting away with it)
- Case study: Cool charm
- Make change, not just money
But you know you will need more, much more, to achieve your goals. In your most wildly optimistic moments, you may even be starting to daydream about getting some money out of this yourself, if only to get your mortgage down to something less terrifying. And a watertight business plan is the best way to get investors onside.
The good news
No matter what watch they wear or car they drive, you are not the only entrepreneur with their financial arse hanging out of their trousers. Financing your first startup is like putting your bank balance into a nosedive then hoping you have the nerve to hold on long enough and pull up in time.
You will probably be more in debt than you have ever been; then, if you’re lucky, you might start to break even. Possibly, there might even be an opportunity to get filthy rich.
“There are three things you can do with profits when you get them,” says Mike Atkinson, business improvement senior manager at specialist accountants Hayes Knight. “One, reinvest to grow; two, reduce debt to stabilise; three, take it home. Businesses tend to pass through these stages in that order. The trick is to know what stage you’re in.”
So think of it like this: right now you are a lean and hungry leopard, not a fat cat. That might just get you through the long nervous nights and the red bills in the morning—and it could also be a good thing. Grenville Main from DNA reckons too much support can make you lose your edge. “We know companies that have had so much backing that it helped prevent them from making some tough calls early enough,” he says. “If you don’t have that big bucket of cash, you have to make every decision work for you.”
But even in a relatively small industrialised country like New Zealand, there is plenty of money around for a good idea. Specifically, there is a small contingent of angel investors ready to fund startups if there is real money to be made.
The way to prise open their wallets is to demonstrate you have a robust business plan to produce a successful product, which will scale up to something colossal. As these investors are looking to make around 10 percent a year on six or seven figure sums, scale is vital. And, crucially, you have to prove you have the ability to execute the plan.
“People buying intellectual property-loaded businesses are not your average buyer. It’s not like they’re buying a dairy. They are strategic investors”
It should come as no shock to know that these people want details. They don’t just dot the i’s and cross the t’s, they check the font size and the colour while they are at it, in several languages.
“People buying intellectual property-loaded businesses are not your average buyer,” says Wayne Hudson of intellectual property lawyers Hudson Gavin Martin. “It’s not like they are buying a dairy. They are strategic investors that want to add you to their portfolio.
“These people are going to be absolutely adamant that your intellectual property is watertight. Their due diligence is very, very thorough.”
This means that all the way through the process of building your business you need to think about what the investor is looking for, and make sure that they find it. Once again, you plan and prepare to perform. And if you haven’t started to think about this before you need the money, you’re almost certainly too late to get any.
Mark Robotham is general manager of New Zealand Trade and Enterprise’s Escalator Service, which gets businesses investor-ready and helps connect the good ideas with the money. “Not enough businesses are thinking about this from day one,” he says. “You should be thinking about raising money at least two years in advance. And don’t expect the money to come overnight. We say six to 12 months. This is because investors like to court people and familiarise themselves with them, to really get to know them.”
People don’t invest millions in strangers. To get on their spreadsheets, you need to get on their radar. This means things like pressing the flesh at the right awards ceremonies and conferences, all the time giving the distinct impression that you’re bound to be up at the podium next time, thanking your mum and your high school economics teacher.
Jonathan Kirkpatrick from AUT’s Business Innovation Centre says, “For those that will make it, we estimate about three years from first contact with us to becoming a company with a serious capital valuation that a venture capitalist will look at. It’s the point at which you have got real traction, and have taken it from a technical idea to a real product that has been prototyped and tested.”
There are certain key points in the commercialisation process where you are likely to need large injections of cash, including the moment you start hiring people, the first time you begin exporting, and when you launch a new product.
“You also need to think about the most appropriate time to raise money,” says Robotham. “It’s going to take at least 200 hours of your time, time you can’t spend selling or working with your staff, and it can slow the growth of your business.“
When doing the rounds, there’s a balance to be struck. You don’t want to get a reputation for constantly having your hand out. But if you estimate it will take several million to get you through the next five years, you might be wise to get one million now and then be in a better position to ask for the rest once you have some sales figures to wave around.
Pitches and players
Investors have been described as being like a business partner that you can never get rid of. Although your temptation, if not your habit, may be to take money from whoever is mad enough to offer it, many is the entrepreneur who has accepted investment in haste and rued the day at their leisure.
At the very least you will end up with someone else to whom you must justify everything you do. This can be a good thing, as it makes you think things through, but it can be suffocating if you never seem to be on the same page. The investor has their own strategy and goals to work to.
“Entrepreneurs are often surprised that investors are reluctant to sign non-disclosure agreements”
Fortunately, if you really aren’t meant for each other, the investment courtship process should show this up pretty rapidly, says Robotham. “The people are such a huge part. There are a lot of deals not done simply because the investor doesn’t like the people.”
This means you can’t afford to be unfriendly if you want to find the right partner. “To be an entrepreneur you have to be confident, but not goddamn arrogant,” says Robotham. “The investor community is very close and word gets around town. You don’t want to become one of the untouchables.”
Up until now you have probably been desperately trying to sell your product. This is different. Robotham has some simple advice: “The investors only want to know how it is going to make money, is it happening at the right time and when it gets 100 times bigger do you have the right structures in place?”
Given that the typical investor will see more than 300 businesses in a year and invest in only half a dozen, they simply don’t have time for 100-page documents and two-hour presentations. They are also acutely aware that if it takes that long for you to explain it to them, then it will take that long to convince the customers, which means there won’t be any.
“Entrepreneurs are often surprised that investors are reluctant to sign non-disclosure agreements,” says Robotham. “But what tends to happen if they do is that the entrepreneur then gets carried away explaining exactly how the product works, when all the investor wants to know is the impact it has on the customer and how they are going to make money out of it.”
The investor will only want all the details if the basic deal stacks up. Whether the investor is giving their time to you deliberately, or whether you have stolen it by following them to the toilets and striking up a conversation, your ‘elevator’ pitch is your best shot. It should take about three minutes to cover the whole business, and only one of those minutes should be about the product, which means you should be well into it by the time you are drying your hands.
You should have studied your prey at least as carefully as they will study you. For instance, some investors have a two-hour-drive rule; they won’t invest in a business that is more than two hours’ drive away. If so, you should know where they are based.
Many deals have been killed when an overenthusiastic innovator slags off the competition, unaware that the angel has already invested heavily in them. It’s worth checking the company register, and asking CEOs of companies that the angels have already invested in about their experiences.
No business is perfect. Don’t try to pretend yours is. Investors got rich by knowing that if something looks too good to be true, it is. You should be upfront about any weaknesses your business has. A decent investor will spot them anyway, may be able to help, and your level of awareness will impress.
And when it comes to talking turkey, you need to be ready and willing to do a sensible deal. For a big piece of cash, the investor is going to want a big chunk of your business, says Robotham. “Some people have a completely and utterly unrealistic view of the value of their business. They turn people away because the risk is so high. It is about balancing risk versus value, and it is risky.”
With all this emphasis on investment, its also important to remember that the number one way to raise capital is to make sales. If you are selling stuff, your business is worth a lot more. Ultimately, that changes it from a concept into a business and is the best way of proving you can make it work.
Meet an angel
Spend a day with an angel investor—for free. Idealog and Escalator are hosting a full day seminar on April 17 with Bill Payne, America’s leading angel investor. Included is one-on-one coaching with Kiwi angels. It’s free and it’s here: www.escalator.co.nz.