Written by Mark Roberts, entrepreneur and co-founder of Beer Hawk
If you’re an entrepreneur who owns a start-up, you’re likely in one of the most exciting, frantic and utterly terrifying times of your life. You might feel desperate to prove to yourself (and to everyone else) that you can do this — which can make it difficult to get a clear view of all the strategic options available to you, including the very important element of how to fund your start-up until it reaches profitability.
What are those funding options? Unless you’re in the fortunate position to be able to self-fund, and most aren’t, then there are a few more contenders: the Bank, Business Angels, Crowdfunding or VCs. It’s important for entrepreneurs to realise that this decision is about more than the actual cash. Some options bring more than simply money. They might bring relevant experience, contacts, potential customers, new partnerships, or maybe someone to help hold the start-up team accountable.
Bank financing is one way to go, if you’re prepared to approach financial institutions with sensible projections and a business strategy the banks would view as credible. The challenge is that start-up metrics change so quickly, and often the long-term projections the banks seek comfort in have very little foundation in the fast-changing start-up world.
Venture capitalists might be a good route for some start-ups, but often only for the very few businesses that have huge ambition and drive to chase the required compound annual growth rates…whilst managing the strain this can put on the culture of a fledgling business.
Crowdfunding is yet another option that can be rich with an army of smaller investors ready to deposit cash into their favourite ventures; however, there now seems to be many examples of management teams who become distracted by glitzy marketing videos, many questions from the crowd, and the potential for vastly unrealistic valuations. Those who use crowdfunding well seem to be very focused on engaging with their investor base, using their input to fine-tune the business and as a source for new customer acquisition.
For many start-ups, angel investors (individuals or groups who will use their own capital to invest in you and your business) continue to be a very good option for early-stage funding.
Angel investors can live up to their name. They can help provide a financial lifeline or act as a supplement to bootstrapping from personal investment or loans. They can support you, encourage you, challenge you, help you make connections, and think of new opportunities that the management team may not have even considered. But, before you jump on the first offer of cash that comes your way, understand that not every angel investor is angelic.
Equity in exchange for cash alone is the most expensive money a business will ever receive. In order for an angel investor to be a business asset, they must be a good fit for you and your business. Their values must align with yours, and their skills and experience must complement yours. If an angel investor is interested only in financial return or tax incentives, distracts the management team with unhelpful questions, or simply isn’t interested in spending time working with your business, then they’re not the angel for you.
An arrangement that works for you and your angel investor
When you work with an angel, the relationship must be mutually beneficial. So, before you sign on the dotted line, consider asking these questions from both your viewpoint and the viewpoint of the investor:
Why is this investor the right one for me at this time?
Every start-up is unique, and therefore, what you need from an angel investor will be unique. What’s more, what you need right now is different than what you will need in the future. Know the difference and consider contracting with an investor who’s willing to grow with you. Likewise, when you speak with potential investors, find out what they have to give, and ask them why they believe that fulfils the needs your start-up has right now.
How will we ensure a mutual value trade?
The investor has to give you more than cash. After all, he or she is taking a priceless share of your blood, sweat and tears. You can’t put a worth on your passion, but you can expect benefits like connections, referrals and expertise to balance the trade. Talk with the investor. Does he or she understand the value equation they are signing up for by investing in your business?
What are the philosophies we will agree on and use as we work together?
It’s important that you both share similar corporate values, and that your vision and mission are things the investor believes in. Your purpose, or your why, also has to be something the investor subscribes to. Learn about the investor before you agree to accept their contribution. This will help you to avoid uncomfortable and costly break-ups later.
What are everyone’s intentions beyond the contractual items?
Obviously, it’s crucial that you keep your word regarding your contractual agreement, including important items such as profit-sharing, dividend payments, decision-making… that shouldn’t have to be mentioned. However, there’s always more. Most contractual agreements come with unspoken commitments and expectations attached. For instance, being transparent about any bad news instantly, involving the Angel Investor(s) in any areas of special interest, etc.
What is the plan for providing and responding to regular updates?
Most investors love data, and in most cases, more is more. It can be helpful to agree a regular schedule for sending out emails with financial updates. Provide as much detail as useful, along with some commentary about the “why” behind the numbers, and don’t mistake their lack of response for lack of interest.
Sometimes, even if there doesn’t appear to be any “news”, it’s still worth providing an update to exclude the possibility that “no news is bad news”. Include exciting updates and information about any upcoming events in your updates, too. Investors want to know that you’re going places (because when you go, they go too). On the flipside, the investor should show a noted interest in the numbers, as well as the more intangible aspects of your business.
Will advice be offered and considered?
Many investors are interested in involving themselves in your business because they want to be part of something successful. Let them know that you respect their expertise and that you value their opinions. Demonstrate how you’re putting that advice into action. Share victories with them. The more involved you make your investors feel, the more they’ll want to stay involved. And as you meet with potential investors, ask them lots of these types of questions to ensure they’re enthusiastic about offering guidance in their specific area(s) of expertise.
How will you share facts and discuss performance?
Avoid dumbing-down terminology (unless you’re asked to), and never omit facts and figures because you either believe the investor won’t understand or you intend to hide something from them. Investors not only want to know what’s going on, they want to know that you know what’s going on. Confirm that your investor’s skillset complements, rather than duplicates, yours—and that there will be a mutual respect for each other’s bank of knowledge.
How will the business’s vision be maintained?
Investors own a portion of your business; this doesn’t mean, however, they get to call the shots. Before you proceed with choosing an investor, make sure this is understood. As long as you are remaining true to the values you presented to them early on, you have the right to make the decisions you know are best for your business. Accept their input and put it to use when it’s needed. Always thank them for their opinions, but ultimately the decision is for the entrepreneur. Before advancing in an investment relationship, ensure that your investor understands your decision-making expectations.
Keeping the halo straight
When an angel investor takes interest in your start-up, you have an opportunity to build a life-long relationship. You can take each other places…them by investing in your success, and you by offering them increasingly lucrative investment opportunities, either through your own growth or through referrals.
Treat them right with a wealth of information, honesty and respect, expect the same from them, and you’ll both be floating on cloud nine.