Skip navigation

Credit & Lending

5 Posts authored by: Carol Roth

Most business owners see the true “pay day” for their work when they sell their business. Other entrepreneurs decide to sell because of changes in circumstances. Regardless of the reason, one of your top goals is to maximize the value you receive in exchange for the years of hard work you have given your business.

 

Yet many entrepreneurs don’t plan for their exit, which can cause you to leave money or other assets on the table when you sell your business.

Below is the first part of this three-part series designed to help you prepare to sell your business and maximize the value you receive.

 

Check out part 2: How to Get Your Business Ready for a Sale—Before You Plan to Sell: Part 2

 

List and Prioritize Shareholder Objectives

Maximizing value in a sale is not always about getting the highest sale price –  there are often other drivers of value for entrepreneurs – including a variety of non-financial priorities. These can range from ensuring that long-term employees have a job post-sale to keeping brand names intact. To maximize value, it is critical for you and your other shareholders to establish and rank your priorities. This can be a tedious task, as purely financial investors may want to maximize dollars, where entrepreneurs with more of an emotional tie to the business may prioritize non-financial aspects of a deal.

 

While priorities may change as the company grows and evolves, this exercise will provide a roadmap for decision making about the business – while also positioning the company for sale and assisting in assessing potential offers.31019757_s.jpg

 

Create a Dream Team for Your Sale—and Do So Early

While some entrepreneurs try to sell their business themselves, doing so almost always is a penny-wise, pound-foolish endeavor. Strong service providers should help you prepare for the sale, as well as add substantial value during a sale process. In fact, if you pick the right providers, they should more than pay for themselves.

 

Your team should have at least the following three “players.”

  • First, hire an accountant that has substantial audit experience (most buyers will want to see audited financial statements, so your cousin who is an accountant won’t cut it).
  • Second, you should hire a lawyer that specializes in mergers and acquisitions (or “M&A”) transactions. Preferably, he or she will have experience representing both buyers and sellers (again, your uncle Ira the lawyer doesn’t cut it here).
  • Third, hire an investment banker that works with companies of a similar size and, potentially, one who has an industry specialization as well. The investment banker will help to prepare key materials, help run an orderly and competitive process and help to maximize those shareholder objectives that you laid out above.

 

Too many entrepreneurs wait until the day they are ready to sell the business to establish these relationships, but truly, they should be established early on, ideally years before a transaction is contemplated. This allows these providers not only to give you guidance on strategic decisions that can ultimately impact a sale, but also to get to know your business, which can add value during a sale.

 

You may also need to change service providers if you have outgrown your existing relationships, so don’t be shy to find new providers if the old ones are no longer a fit.

By building a strong advisory team, the company will be prepared with all of the tools and resources necessary to maximize the transaction value and structure, as well as prevent any deterioration in value during negotiations.

 

(Related: Bookkeeper or Accountant: Determining which is best for your small business)

 

Develop a Succession or Transition Plan

Selling a business at the time the owner wants to retire – especially when that owner also runs the business – creates one of the largest impacts on valuation. First, perception plays a meaningful role in valuing businesses and if a buyer perceives that a company needs to sell, the seller will be penalized through a lower valuation. Additionally, many buyers want the management to stay on for a transitional period. In the case of financial buyers, this could be upwards of three to five years.

 

Developing a succession or transition plan – whereby the business is sold at least one or two years before you want to retire and where there is capable management in place to take over your responsibilities – will create the most options and the most value when the business is sold.

 

(Related: The Importance of Succession Planning for Your Businesses)

 

Incentivize Non-Owner Management

For companies where key managers are not shareholders, there can be a major conflict of interest during a sale. Management plays a critical role during a sale and may even be desired by new owners to stay with the business. However, managers that don’t have a stake in the sale through equity ownership can be at odds with the shareholders during the process.

 

Whether your management team has concerns over losing their jobs or autonomy, or simply realizes that they have leverage to disrupt a process, non-incentivized management can cost the shareholders significantly –even completely derail a transaction.

 

Put incentives in place for these key managers prior to beginning a sale process. This could include stock options or a sale bonus that help align the interests of the managers and shareholders (i.e., they both get a payday from the sale) and, ultimately, ensures that there isn’t an eleventh-hour power play.

 

Start working on the above immediately and stay tuned for Part 2 of this series, coming soon.

 

(Related: Tips to Sell a Service Business; Be Like Goldilocks When Valuing the Sale of Your Business)

 

About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including

host

of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

This is the final post of a three-part series on capital raising mistakes you can easily avoid.  For the first post, click here and for the second part, click here.

 

Mistake #9:  Not Being Scrappy

 

Scrappiness is one of the hallmarks of being an entrepreneur.  It is the ability to take lemons and make lemonade, get the max for the minimum and generally beg and barter to make things happen.  It’s about trying to find a way to make things happen in alternate ways.  Think of it as being the MacGyver of entrepreneurship. How can you extend payment terms with vendors or get paid upfront for your goods and services?  Both of those efforts will decrease the amount of capital you require.

 

Perhaps you can trade your products or services for legal, accounting or other help? Can you get your website done for less money by using a company located in a less expensive area of the country?  Can you outsource any of your tasks to a virtual assistant, maybe even one overseas?

 

While you certainly can’t cut out all of the expenses of your business, if you can be scrappy in the early stages of your company, you may be able to achieve critical milestones with less capital, making it easier to do a formal capital raise down the line.

 

How to avoid this mistake:

 

  • Review your plans to see if there are ways to extend payment terms (without incurring penalties)
  • Review expenses to see if there is anything you can beg, borrow or barter for
  • Creatively think about ways you can get paid upfront (in part or whole) for your products and services
  • Continue to think outside of the box

 

 

Mistake #10: Not Understanding Debt

 

Someone along the way must have sent out a memo that was grossly misunderstood because there are lots of misconceptions about debt (loans) for businesses.  From the government giving away money for free (it doesn’t), to the government making loans through the SBA (it doesn’t - it provides “insurance” to lending institutions in the SBA program to lessen the institutions’ risk when making small business loans), there are lots of myths and misunderstandings on the subject.  42201048_s.jpg

 

Lenders take the business of making small business loans pretty seriously. Getting a loan requires one or more of: (I) a good personal credit history, (ii) personal assets/collateral, (iii) business history and/or (iv) business assets/collateral. If your new business doesn’t have major assets, most lenders will want you to personally guarantee the loan with your personal assets, like your house, which adds to your personal financial risk.

 

If you don’t have appropriate collateral, you may find it nearly impossible to get a loan for the business. Basically, you have to be somewhat successful and have proven your financial abilities to save towards your business in order to get a loan to start a business.

 

Plus, if you fall behind on payments for your debt or if your business is struggling in certain areas and if you aren’t complying with the specifics of your lending agreement (called covenants), the lender may step in and take all kinds of actions that will irritate you but are fully within its right as a lender.

 

Also, many businesses are financed by another type of debt: personal credit card debt.  Credit card debt is very costly and can contain double-digit lending rates. This makes credit card debt a very expensive option, one that may not be able to be made up by the rate of return you produce from your business.

 

How to avoid this mistake:

 

  • Connect with a business banker early to help guide you through the process

Related: Schedule an appointment with a Small Business Specialist

  • Make sure you ask a lot of questions about what is required of you if you take on debt
  • Don’t sign anything that you do not 100% understand
  • Make sure to keep bank covenants in the front of your mind – even if your business is not in trouble, breaking a covenant can wreak havoc on the business
  • Don’t take out any debt (including credit card debt) at a rate of interest higher (or even anywhere near) the potential rate of return you expect from your business
  • Don’t use debt to bet (or fully mortgage) the farm
  • Remember that your name (and perhaps your assets) is on the dotted line – you are accountable!
  • Look to peer-to-peer lending as a lending alternative

 

Mistake #11: Not Getting Help 

 

So, capital raising can be complicated.  You have to figure out how much money you need (which we have already established is usually more than you think) by putting together financial projections.  Then, you have to think through the pros and cons of each source of capital.  You may also have to put together and review various documents, whether they be loan documents from the bank or a term sheet from angel investors or even just an agreement amongst friends and family. Plus, you may have to set a valuation and potentially file paperwork with various governmental authorities.

 

If you have never done any of this before, it is complicated!  Yet, it is incredibly important and you need to make sure that it is done right and that you understand fully what you are signing up for.

 

The mistake here is not being willing to get help (which often costs money).  You need to hire advisors who have experience with capital raising (not just Uncle Ira, who happens to be a lawyer) to make sure that you are getting the best advice and so that they can educate you as well – ignorance is not bliss in business.  You may pay a little more up front, but you get what you pay for. Also, sometimes a bargain on very important items ends up being more costly in the end if the work takes more of your time or needs to be redone. 

 

How to avoid this mistake:

 

  • Be willing to ask for help
  • Again, use resources like your business banker to assist
  • Review credentials to make sure that the firm or people helping you have experience working with your size company and have capital raising experience too
  • Make sure that you clearly outline expectations and understand exactly what you receiving in terms of advice and help
  • Ask for explanations so you can become educated too – your name is on the dotted line, you will want to “sanity check” all work done for you by any advisors

 

 

Mistake #12: Raising Money to Replace Your Old Salary

 

Before you started your business, you may have had a good salary that helped you pay for nice things, like your home, car and annual trips to Disney World. Once you leave that job to start a business, you may figure (as so many aspiring entrepreneurs do) that you need to replace that salary to maintain your lifestyle.  You decide that since you could find another job that pays that much, you are obviously worth that much and that investors should be willing to pay you that kind of salary for working in your new business.  Plus, if you are raising equity, you also figure that you deserve the lion’s share of the equity stake. 

 

Yeah, that’s not how things work in the real world. 

 

Nobody wants to invest in your salary.  They want to invest in a business that will grow and make them a hefty return.  If you think the idea is so great and you want to keep all of the equity, you better be able to either support that with your own capital or be willing to put in “sweat," the hard work you get in exchange for the equity. That is your payment.

 

If you want a large salary, that makes you a hired gun, not an owner.

 

You can expect some small amount of money to live on, but start-ups usually pay below-market salaries to keep costs down.  Asking for a premium salary throws up all kinds of red flags for investors (and they may, in turn, throw-up on your business plan).  It says you care more about sustaining your lifestyle than doing everything possible to make the business work.

 

How to avoid this mistake:

 

  • If you want to make the business a success and have a meaningful stake in it, forget the big salary for a while
  • If you want a big salary, keep your day job

 

 

Mistake #13: Assuming Raising Capital is a One-time Event

 

So, you have written the plan, given your pitch, waited for months (longer than you expected) and finally, the checks have been written and you raised capital. Thank goodness, you never want to go through that again. Yet the capital raising process is rarely a one-time event. As your business evolves and growth prospects present themselves, you have to have funding to grow the business. The more growth you have, the more money is needed to cover working capital items like inventory and accounts receivable. If you have visions of growing, you are going to need to consider capital-raising, whether through equity or debt, on an ongoing basis. Having no capital needs often means you are not growing, which is not a great prospect either.

 

How to avoid this mistake:

 

  • Get comfortable with the notion that you will have to raise capital over the long-haul

 

Related Content

What is working capital – and why is it important?

Lending options for small business owners

Get answers and information about business financing

Find the right financing for your business

 

 

About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

This is the second article of a three-part series on  capital-raising mistakes you can easily avoid.  If you missed the first post, can check it out here.

 

Mistake #5: Underestimating How Much Time it Takes to Raise Capital

Almost everything in business, particularly those things outside of your control, takes more time than you expect.  Raising capital is one of those things.  This is especially the case when raising money from individual investors.  Even when people tell you they are going to invest in your business, it is difficult to get them to write the check.  Getting people to part with their money is like trying to get food away from me when I am hungry; a tough task!

 

People will wait as long as possible to part with their “Benjamins.”  Just ask the federal government what percentage of tax returns get sent in at the last possible moment (on or around April 15th) and how many taxpayers file for an extension.  You may have to pry that investment check out of your investors’ hands.

 

Even with loans, documents need to be put together, processed, reviewed, put through bureaucratic processes and ultimately signed.  This takes time and lots of it.

 

How to avoid this mistake:

 

  • Take whatever timeframe you think is needed to raise capital and increase it by 50 to 100 percent.  If you have budgeted six months, it will probably take nine to twelve months (and if you are thinking one month, wake up, because you are dreaming).

 

 

Mistake #6: Assuming Your Business is Fundable by Sophisticated Investors

Most business models aren’t big enough to attract the attention of sophisticated investors like angels or venture capitalists.  These investors want to invest in businesses that have the ability to give them a 30% – 50% return (or sometimes higher) on their capital, on average, for every year they hold the investment.  They use this benchmark because they know a large percentage of their investments are going to fail (as most new businesses do) or be limited in the scope of their success, so they need the one that really succeeds to make up for the nine others that flop.  These investors also need a way to get their investment out of the business, so they expect that in some realistic timeframe (usually five to seven years) the business will be big enough to sell or to take public in an IPO.  30504271_s.jpg

 

Based on the above, there are many more venture capital firms focused on industries like technology, rather than consumer or service businesses.

 

This set of criteria means your business may not be a fit for an angel or venture capital investment.  Venture capital firms only fund a fraction of one percent of all businesses in the U.S. each year.  Sophisticated angels also fund a tiny portion of all businesses.

 

If you are one of the few that do have a business that meets the potential criteria of venture capitalists, it will still be tough to get funded.  Every venture capital firm gets hundreds to thousands of business plans submitted for review each year.  They dismiss most plans that aren’t introduced by someone they know and can vouch for them.  So, if you are not in the inner circle of the venture capital community (and if you need the money, you often aren’t), your plan may not even get a glance, even if your business has merit.

 

How to avoid this mistake:

 

  • Be realistic on whether you have a business model likely to scale quickly and be of interest to venture capitalists or sophisticated angel groups – if not, don’t waste your time going to them for funding and look elsewhere.
  • If you do have a plan that meets the above criteria, try to get an introduction through someone who has a relationship – spend time with your network seeing “who knows who,” as a direct introduction will keep you from the bottom of the business plan (or pitch deck) pile.

 

     Learn more about investors and your business: Why Investors Avoid “Ground Floor” Opportunities

     You can read more articles from Carol Roth by clicking here

 

Mistake #7: Taking Investments from “FFFs,” “DDLs” or “the Crowd” Lightly

If you don’t qualify for an investment from a sophisticated investor group, you may turn to folks who you know—friends, family and acquaintances—who may consider investing in your business.  Two acronyms are usually used to describe these investors: “FFFs- friends, family and fools” or “DDLs- doctors, dentists and lawyers”. These are generally people in your network who may have some extra cash lying around.

 

With technology, and the passing of the JOBS Act, you can raise money in various forms from strangers via crowdfunding.  For the purposes of this mistake, I am going to focus on investments vis-à-vis crowdfunding (not the kind that gets you a perk).

 

Typically, FFFs, DDLs and the Crowd don’t truly understand your business, but they invest either because they believe in you, they have some infatuation with your business idea or because of peer pressure (someone else is investing and they invest alongside them).  As investors, these people can become co-owners or lenders to your business.

 

Going to FFFs or DDLs is challenging.  It is hard to ask people you care about or who are in your social circle to give you money.  Once you accept it, you make a deal with the devil of sorts, because now your relationship with this person has gone from its existing form to also being business partners.  Sometimes you will have to make decisions for the sake of the business that will not make your friends and family happy.  This makes for some seriously uncomfortable future interactions.

 

Because they don’t work with you on a daily basis and yet, you are using their money, your FFFs/DDLs may now:

 

  • Want to get updates on a regular basis
  • Want to put in their two cents worth of ideas (e.g. telling you, “don’t you think the store would look so much better with a singing plastic fish on the wall”?)
  • Want to come and hang out at your office or place of business
  • Demand free or discounted products and services
  • Ask you to employ their lazy cousin Nick, or
  • Ask you for a million favors in return

 

You will have to answer to these people, who are now your co-owners or lenders and therefore, people you can’t ignore.  These people, based on their lack of business sophistication, can take up a lot of your time at best, and at worst, will make demands from you and the business.

 

How to avoid this mistake:

 

  • Think about both the pros and cons of taking an investment from a friend, family member or acquaintance.
  • Make sure you don’t take any money from someone you have a relationship with that cannot afford to lose 100% of the investment.
  • Make sure that you discuss the implications on your relationship with the other party if the investment is lost in whole or in part and decide if the relationship can endure if a problem occurs.
  • Think once again if you can handle an awkward birthday party or family dinner if things don’t pan out as planned.

 

 

Mistake #8: Not Achieving Milestones First

Everyone thinks they have a great idea for a business and many try to raise money for their business idea.  However, a serious letdown about businesses is that the ideas behind them aren’t worth anything (see my previous article on this subject here).

 

Ideas may have had some value back in the day when there were very few businesses in any given sector.  Now that almost everything has already been thought of, not only is it hard to be innovative, but extracting value comes from executing your thoughts into reality.

 

You have to invest time, money and effort to achieve key milestones, such as developing a technology or securing purchase orders, before you raise capital.

 

The more you do, the more value and credibility you create.  Investors really don’t like to take risks.  The more milestones you have achieved, the less risk for the investor. Plus, you will have more confidence in the success of your business.

 

How to avoid this mistake:

 

  • Focus on achieving milestones – get past the idea stage by building a working prototype, landing paying customers or filing defensible patents, to create value.

 

Be sure to check back soon for my final post on capital raising mistakes to avoid.

 

Related Content:

 

About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

Raising capital for businesses is hard and often misunderstood.  As a “recovering” investment banker, I have helped my clients raise 10-figures in capital over the past 15 years, and have witnessed many individuals who failed to present a compelling, fundable story about their businesses (and themselves).

 

In my unscientific but thorough poll of entrepreneurs, 99% rank raising capital amongst their five least favorite business activities. Hopefully, I can help make sense of the capital-raising process to make it more tolerable – and valuable – for you.

 

To start this three-part series on raising capital, I’ll focus on the key mistakes you must avoid to save time, money and energy while increasing your chances of success when raising money for your business.

 

Mistake #1: Putting all Your Eggs in One Basket

 

The very first capital raising mistake relates to not raising outside capital at all.  Statistics show that the typical start-up business in the U.S. is self-funded from the entrepreneur’s own savings and supplemented with some personal credit card debt.  However, part of balancing risks and rewards is using diversification.

 

It is important for you as an entrepreneur to show your commitment to your business by investing some of your own capital.  This is a safeguard to ensure that you are incentivized to do everything you can to make the business successful.  However, if you are putting every last dime into your business, all of your eggs will be in that one darn basket.

 

How to avoid this mistake:

 

  • Don’t bet the farm on your business.
  • If you don’t have enough money to live on and invest in your business, then: (I) wait until you have more money saved, (II) see if you can revise your budget or (III) consider taking outside capital.

 

Mistake #2: Undercapitalizing Your Business40556715_s.jpg

 

A large percentage of businesses close because they don’t have enough money to survive the rocky first couple of years of business.

 

I have found that early-stage and new business owners underestimate the cost of starting and running the business virtually every time (usually by a factor of 3).

 

In each early stage business I have seen, entrepreneurs say their financial projections are conservative in terms of revenue and expenses (and then I roll my eyes).  They also tend to claim they are raising more money than they need so they have a cushion. When I tell them that their projections, as with all entrepreneurs’ financial projections, are too aggressive, they lecture me about why they are the “exception to the rule.”  Then, a year later, after revenue estimates fall short and expenses were greater than expected, they give me the reasons why they missed their projections.

 

There has yet to be an exception to this in my personal experience.  Note: seasoned investors know this and it is why they always take a “haircut” to the projections; they assume that they are overstated on the revenue line and/or understated on the expense line when they evaluate investments.

 

Another issue arises when you don’t raise enough capital upfront and you start to run out of money.  It is much more difficult—often impossible—to secure capital to stay afloat when things aren’t going so well.

 

How to avoid this mistake:

 

  • Do yourself a favor when you do your projections: Revise them so the amount of money you actually need is three times the amount you originally planned.  If you think you need $10,000, you really need $30,000.  If you think you need $1 million, you probably need around $3 million.

 

Mistake #3: Not Understanding Valuation

 

When you raise money for your business, you are usually dealing with one of two types of capital: equity, where you give up an ownership stake in your business, or debt, where you can take on an obligation for your business that you agree to pay back instead of giving up ownership.

 

There are hybrid scenarios that incorporate both equity and debt (as well as options and warrants), but at a basic level, you need to at least understand equity and debt.  If you raise equity, you end up setting a value for your business, which is based on the stage of your business, the milestones you have reached and the ultimate potential of your business.

 

However, many entrepreneurs don’t understand valuation.  Imagine that your business is symbolized initially by a small pie. You have 100% of the pie and then you give up a slice (or percentage) of that pie in exchange for equity capital.  The hope is that in the future, your business becomes a huge pie, so that even though other people have pieces of the pie, your piece is bigger than when you owned 100% of the small pie (i.e. your stake is worth more in terms of absolute dollars).

 

Often, entrepreneurs don’t understand how the pie works.  They will say that they have a business idea and that they need to raise $200,000.  Then arbitrarily, they will decide that they only want to give up 10% of the equity. However, that establishes a value for the business (and a big one!).  If 10% of the pie is worth $200,000, then 100% of the pie (the whole pie) is worth $2 million!  That $2 million number includes the $200,000 in cash the investor is giving you, so that means before you raise any money, you value your company at $1.8 million ($2 million minus $200,000).

 

Most established small businesses aren’t worth $1.8 million dollars, let alone a brand-new business.

 

Setting unrealistic valuations can increase the amount of time it takes for you to raise capital, prevent you from raising money altogether and create credibility issues for you as an entrepreneur.  Even if you can find a fool to invest at your crazy valuation, beware: You may have to raise capital again in the future and having a silly upfront valuation can impede your ability to raise capital in the future (again, credibility issues). It can also damage the relationship with your investor who is now, in effect, your business partner.

 

How to avoid this mistake:

 

  • Make sure you understand what you are implying in terms of valuation – if you need help, ask a professional.
  • Think carefully about the pros and cons of a high valuation, even if you can get one.
  • Consider an investment structure using debt that either doesn’t require you to set a business valuation or sets one in the future based on achieved metrics and benchmarks.

 

Mistake #4: Being Greedy

 

Let’s say there is a treasure chest of gold located several hundred miles away from your house. If you are the first to get to the treasure chest, you can claim it as yours.  The problem is that you don’t have a car.  You could walk or ride your bike, but by the time you got there, someone else may have claimed the gold.   So, you ask a good friend if they can drive you to the gold and you will share some of it with them if you get there first.

 

In this analogy, the gold stands for the potential upside rewards of your business, and your friend with the car is the investor and investment capital, respectively, that you need to build your business  and reach the treasure chest.

 

So, how much do you give your “friend” for driving you there?  Now, many entrepreneurs take the stance, “well I came up with the idea,” and offer to give their friends a token amount, say 10%.  However, the reality is that you can’t get to the gold in enough time to claim it without your friend and his car.  So, what if you gave him 30%, 40% or even split it? There will still be enough value for it to be worth both of your whiles. True, the friend wouldn’t have known about the gold without you, but you can’t get there without the car.

 

Valuing a business is an art, not an exact science, and splitting hairs over percentage points is often missing the entire point!

 

How to avoid this mistake:

 

  • Other than understanding valuation implications (from Mistake #3), don’t get too caught up in the percentages that you give up for raising equity capital.  Capital is a necessary component of growing a business which is also a great deal of risk for the investor.
  • Be fair and realize that if the opportunity is large enough, there will be enough to go around for everyone – if not, then you should probably rethink the opportunity

 

Be sure to check back for my next post on capital-raising mistakes to avoid.

You can read more articles from Carol Roth by clicking here

 

Related Articles & Pages:

What is working capital – and why is it important?

 

Infographic: Building Credit for Your Small Business

Bank of America Small Business Financing, Loans & Funding

Tips on How to Finance Your New Business Venture

 

 

About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including

host

of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2017 Bank of America Corporation

One of the biggest issues facing entrepreneurs is how to fund their businesses, particularly in the early stages of growth. This leads many to consider venture capital. However, the process is not easy.

 

Here are five things your business should do before talking with a VC.

 

34977526_s copy.jpg

1.     Make sure your business is VC-fundable

 

While venture capital gets a lot of space in the press, it only funds a fraction of a percent of businesses each year. Venture capitalists (and the “angel investors” that precede them) are looking for big, scalable opportunities. So, depending on the industry, if your business isn’t going to get to at least $50-$100 million or more in the next 3-5 years, don’t be surprised if the venture capitalist doesn’t want to talk to you.

 

This is also why VCs tend to disproportionately fund industries like tech and biotech. For industries focused on the consumer, they tend to come into the funding cycle later in the process.

 

2.     Refine your business plan and deck

 

While your business plan or pitch deck won’t alone get you funded, it acts much like a resume does in a job interview – it helps get you to the next level. Make sure you can clearly explain what problem your business is solving and why your team is the best suited to solve the problem. Clearly communicate your business model and why your approach is better than the competition (whether direct competition, indirect competition or competition that may come down the road). Address and overcome the key objections an investor is likely to have. Explain the milestones you have achieved, what you will achieve with your capital infusion and the scope of the ultimate opportunity. 

 

Doing this slickly and concisely, with graphs, charts and bullets is the current trend for frequently approached investors with short attention spans.

Carol Roth Headshot.png

3.     Get an introduction

 

If you want to ensure your business plan is never seen, send it in over-the-transom without any introduction. Seriously speaking, having an introduction from someone connected to your targeted VCs who can vouch for your team exponentially increases your chance of being seriously evaluated. 

 

Try your business banker, lawyer, accountant, circle of friends and other VCs to make those key connections. It will make a world of difference.

 

Click here to read more from small business expert Carol Roth.

 

4.     Enhance your team

 

At the end of the day, most venture capitalists are betting on the entrepreneurs. Using a racing analogy, if you are going to put money on a race, you bet on the driver first, then the car they are driving. If you are missing key experience or credentials that make you a credible team to pull off your plan and grow the company at warp-speed, fill in the team first so a VC will be willing to make a bet you can execute on your plan.

 

5.     Take the risk out

 

While venture capital is often referred to as risk capital, the reality is that those investors don’t like to take risk. So, the more you can do to eliminate execution risk, the better chance you have of finding funding.

 

This means you should advance your intellectual property, sign up customers and build out your business as much as you possibly can before asking for a big chunk of cash.

 

Frankly, if you go out and are really killing it early on, the venture capitalists will come to you.

 

About Carol Roth: Carol Roth is the creator of the Future File™ legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness. 

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

Bank of America, N.A. Member FDIC.  ©2016 Bank of America Corporation

Filter Article

By tag: