Access to capital is the thorn in the side of most growing businesses. “If only I had more money I could…” is a phrase that starts so many conversations with business owners that it could be considered the “entrepreneur’s mantra." This is not whining on the part of business owners; it really is difficult to raise money in this economic environment.
Investors in general have become more risk averse and the very low levels of return they are generating on safe investments haven’t convinced them -- yet -- to start taking risks again. Angel investors used to dive into pre-revenue, seed-stage companies. How things have changed. Many prominent angels now expect companies to have a product developed, a partial or complete management team in place, six figures in revenues, and marginal profitability before considering an investment.
According to AngelSoft, a leading provider of deal management software for angel investors, only 51 companies out of 20,395 that were processed through their system over the last 12 months received funding. The odds of writing a New York Times Best Seller are greater than the odds of getting funded by an angel!
According to the National Venture Capital Association, only 3,277 funding deals took place in all of 2010, with only one third of the estimated $21 billion deployed going to seed and early-stage companies. Even more troubling is the fact that the dollar value of first-time financings by venture capitalists decreased by 32 percent last quarter.
So if your company is looking for capital, what can you do to make yourself as attractive as possible in this difficult environment?
Have Skin in the Game
Investors are putting their money at risk and they expect the owners to do the same. While sweat equity, accepting a below market salary, and sacrificing employment opportunities are important ways to show that you have skin in the game, having your cash invested in your company must be part of the equation.
I was recently presented with an opportunity to invest in an early-stage retail franchise. It was very interesting and I wanted to learn more. When I asked the founder how much he had personally invested, his eyes almost popped out of his head in shock. “I’m putting in my time. I want you to put in the money,” was his response. Knowing full well that he had significant savings I simply replied “If you’re not willing to put your savings into this company, why should I?” You must have skin in the game.
Perform Without the Money
Investors at any stage want to put their money to work at companies lead by exceptional managers. Performance is the benchmark. While insufficient capital is a constraint for growth, it isn’t an excuse to lay dormant. Many business owners, after being rejected by investors, go into a type of hibernation where their company doesn’t grow or achieve any remarkable milestones. This really turns investors off. It sends the message that you are not resourceful, not creative, and are reactive instead of proactive. If you can show progress -- even if it’s limited -- without the investors’ funding then this will send the message that you are the kind of owner that can maximize every opportunity. That makes for a compelling incentive to invest.
Make Your Customers Your Investors
Sales are the best source of capital. You don’t have to give up an ownership stake in the company nor do you have to pay interest. Re-double your effort to close sales contracts -- even if you have to sacrifice price and margin - and use the proceeds to expand. This will also strengthen your position in the eyes of investors and satisfies the “perform without their money” recommendation.
Make an Offer They Can't Refuse
If your company is truly at a point where a capital infusion will make the difference between closing your doors or achieving wild growth, then as an owner you may have to make the difficult decision to offer terms that are on the generous side to investors. Pre-money valuations for venture capital deals are down for most sectors so this is a trade-off that many owners are already making.
Mike Periu is the founder of EcoFin Media, LLC which develops financial training, financial education, entrepreneurship training and more to small business owners on television, radio, print and the internet. Over the past ten years he has started three companies and advised over 50 companies on financial strategies including fundraising. Post your questions in the comments of this article.