You have the idea, you have the co-founders and now you face perhaps the biggest obstacle for any aspiring entrepreneur – you need to raise the money which will turn your idea into a really good business. Here’s my top tips.
If you can fund your business from early revenues, do it part-time, pay suppliers later than you earn money from customers, or raise unsecured bank debt, then all those are much better options than sourcing finance from banks, angel investment or venture capitalists.
Professional investors are very expensive – they will either charge high interest rates, request equity dilution, control, or all of the above.
Most companies don’t raise lots of money from sophisticated investors – they raise smaller amounts from people their founders know personally. Then, sometimes, they eventually borrow money from banks to finance specific projects.
Are you and your founding team really ready for the big time? Are you prepared for the punishing expectations of your investor? The get-big-or-go-home philosophy? The possibility you could get fired as CEO of your own business if you’re not delivering? If so, then go for it. But remember, there are benefits (control, lifestyle, flexibility) to taking a less extreme path up the mountain.
Raising money from professional investors is very painful indeed. Even people who know their way around the industry and have a great business find it stressful, hugely distracting, and extremely time-consuming.
Set your expectations accordingly.
Like dating, the best prospects come through introductions. Think about who you know. Then ask them who they know.
Bear in mind that early on it’s as much about you as it is about your business idea, so your personal credibility (what people really say about you behind your back) is tremendously important. The best way that credibility is conveyed is through your network, and just how far those people are willing to go for you.
Even though it comes with the territory, venture capitalists don't actually like taking risks. They just hate them slightly less than banks.
So, the more evidence you can muster that your business is already wildly successful, the more likely you are to be able to raise the finance you need. If you get a few no’s early on, kick the ball along, prove more, then return to the investors and try again.
The people who know you well are almost always the best source of very early stage finance (when you've exhausted your credit card).
However, encourage each of them only to invest what they can truly afford to lose. That way, even if you fail, you will still get invited to family weddings.
Money – especially in the early stages of business – can often come from unexpected places. Your former boss. That early customer who loves what you're doing. Auntie Ethel.
Whenever you talk about your business, you're a salesperson. Never, ever let down your guard. Know every question. And every answer. Rehearse them (the short version and the long version).
You must be your company’s best salesperson. And if you can’t sell? Partner with someone who can, and make them CEO.
Literally losing your shirt, or the roof over your head, just isn't worth it. If a bank insists that you put these on the line, don’t do the deal.
If an equity investor ever asks you to make a personal guarantee, then run – don't walk – for the door.
This may feel counter-intuitive, but early in a company's life, angels and venture capital firms are really investing in you – your insight into your business, and your ability to run it.
Advisors like bankers tend to cloud the water (not to mention the expensive fees they charge). It’s much better to climb the learning curve yourself – however tough that seems at the start. It's just another wall to run through. But you should be used to that – you are an entrepreneur, after all.
You sometimes hear of entrepreneurs that plugged away for a decade before succeeding. That’s probably not a good idea, unless you have a private income.
Sell like your life depends on it, but if you hear ‘no’ from sophisticated investors more than a few dozen times (despite giving it your all) then take a break, re-think and re-tool. Sometimes the best way past a wall is to walk around it. Other times, there really is just no way through that wall.
Greg Marsh is co-founder and CEO of onefinestay
, a new concept in accommodation, which allows visitors to London to stay in a distinctive home while the owner is out of town, with all the comforts and conveniences of a hotel. Prior to founding onefinestay in 2009, Greg worked at leading investment firm Index Ventures, which backed business success stories like Skype and Lovefilm. In March 2011 onefinestay raised a $3.7m Series A funding round from Index Ventures, as well as some key players in the travel and hospitality industries, including Brent Hoberman, co-founder of Lastminute.com.