I was speaking to a well-connected angel investor a few weeks ago and I asked him what the biggest warning sign he saw among companies hitting him up for cash.
With credit so tight and lenders as wary as they’ve been in years, he said, the red flag du jour is any business plan that requires a later round of funding to reach break even. It’s too difficult in this atmosphere to operate with any optimism if you have to get an extra round of funding because banks and VCs have tightened so much.
The advice from our angel: “Even if you need to increase the size of the current round, you have to show me how it gets you to break even, because the chances of getting another round are so long.”
Pam Newman at entrepreneur.com did a nice piece outlining how to figure out your break even point.
Once you figure that number out, though, the tougher part is showing that you have a clear path to get to it.
The issues you have to consider:
- Are costs stable? Or are you subject to fluctuating value of raw materials or supplies?
- Do you have enough staffing in place? Or will you need to add heads to produce enough to make your revenue goal?
- Can competitors start a price war if you see some early success? What will be the impact of that kind of action on your pricing power?
- Are your facilities up to snuff?