5 Things To Do Before Bringing in Outside Investors
When you started your business, you probably did so with the intent of being the one in charge. You wanted to make all the crucial decisions, like what to sell and how to brand your company.
Now that you’re searching for financial capital to scale, it may be tempting to ask outside investors for help. Also called “venture capital,” this is a financial solution that reduces your personal stake in your startup.
As your company grows and expands, bringing in other investors in exchange for equity stakes can be a smart idea.
But is it the best idea for your business?
Is an Outside Investor a Good Choice for Your Business?
This decision is about more than finances. When you bring in outsiders, they aren’t always happy with their equity share.
In many cases, venture capitalists want to be in partial or complete control of how their money is used. They may want a role on the management team and to be involved in the company’s decision-making process.
It’s your livelihood, your baby, your dream. Yet, the more people you bring on board, the less it’s in your control.
Maybe you’re ready to give up full autonomy. An outside investor can help reduce your workload, which is great if you want to spend less time working and more time with friends and family.
If you want to maintain control of your business but still need money to build or grow, hold off on considering venture capital — you may have other options.
1. Check for Possible Alternatives First
There are several different types of investors, each with their own goals. Some may be looking to buy you out completely, while others just want a passive equity investment with a decent return.
Until you’re ready to give up some control, don’t cut a deal with a hands-on investor just yet.
Make sure you’ve considered these other options first:
We’ve been conditioned to turn to loans as our default option when we need money. But sometimes it doesn’t make sense to have a long-term monthly bill to fix a short-term problem.
Loans provide the working capital you need to fix cash flow struggles. However, if you saddle your small business with a hefty loan to repay, it could drag you down later.
A traditional loan has a few advantages, like fixed interest rates and monthly payments you can plan for. A loan helps your credit, and you can use the money for any work-related expenses you want.
However, the approval process can be lengthy, with a lot of paperwork. You need good credit to get the best rates, and you usually have to provide collateral.
Related: Should You Get an Inventory Loan?
Business Lines of Credit
A business line of credit is a way to gain access to funds without taking out a loan. This type of financing resembles a credit card in that you have an established credit limit. Instead of receiving a lump sum all at once, you can tap into your LOC whenever you need the funds.
During the revolving term period, you can pay back and reuse the funds. But unlike a credit card or loan, you can withdraw cash without a fee. The interest rates are more like a loan than a credit card, too.
When you want to avoid the bank altogether, peer-to-peer lending is a possibility. This financing alternative lets business owners obtain loans from private lenders.
An advantage of peer-to-peer lending is that there are fewer denials. In the online application, you’ll explain exactly what the investment involves, so your potential lenders know how you plan to use the funds. If they’re not interested, they won’t respond, saving both parties time and headaches.
However, this type of lending uses your personal credit, so it doesn’t help your business’s financial reputation.
Unless your business is straight retail, cash-for-product, you probably invoice some of your clients. It’s a wise financial strategy, and many of the most successful businesses use invoicing regularly.
But waiting on your clients to pay their invoices can create a backlog in your working capital. When you need cash on hand fast, accelerated invoicing can speed up your payment.
This kind of financing pays you cash for your outstanding invoices. Instead of taking out a loan, you get the money you’re already owed.
There are a lot of advantages to this, such as:
- No long-term loans to pay back
- Immediate access to working capital
- Clear and up-to-date accounts receivable
- No credit check (financing company looks at the clients’ creditworthiness instead of yours)
Unlike other financial alternatives, accelerated invoicing lets you grow and expand without going into debt.
See if you qualify for our accelerated invoicing services!
When the goal is to scale your business, you need resources. Expanding into wider markets takes money, too.
Crowdfunding is a modern, low-risk financing option that allows you to procure small amounts of capital from a lot of investors. Instead of turning to a large financial institution, you get funding from people online who believe in your business.
There’s a variety of crowdfunding platforms that make the process very easy. And there is no worry about whether or not you’ll qualify — if an investor doesn’t want to fund your mission, they’ll pass.
Once the outside investment is in place, though, it can get complicated. Every funder needs to have access to the books and receive their share of the profit.
Crowdfunding ideas are also subject to theft. Be aware of all the pros and cons before you choose this route.
If you’re just starting a new business, bootstrapping is always an option. A lot of founders work another job while growing their companies or use savings to fund their business.
Famously bootstrapped companies include:
- Coca-Cola Co.
- Dell Computers
- Hewlett Packard
- Microsoft Corp.
It’s not impossible for a small business to bootstrap its way to the top, but it does take a lot of energy. Bootstrappers may very well be the definition of putting “blood, sweat, and tears” into their business!
2. Get Your Pitch Documents Ready
If none of the alternative options work for you and you decide to bring in outside help, you’ll need a pitch.
A pitch is a speech you use to convince investors to put their money into your business instead of elsewhere. Preparing your pitch is a crucial part of getting ready for your investor meeting.
But it’s more than what you say: you should prepare a “pitch deck,” or slideshow, to go along with your speech.
This article provides an easy breakdown of the twelve slides you should have in your presentation. It also has some helpful tips about what to avoid.
In general, your slideshow should highlight:
- Your business and why it’s essential
- Your products or services and the problems they solve
- Your market and competition
- Your plan for using the funding you obtain
Keep your pitch and slideshow presentation concise — this is an opportunity to summarize your business.
3. Update Your Financials
Before an investor gives you any money, they’ll want to see records of your earnings and expenses. So you’ll need to update your financial documents.
Investors want to see a holistic overview of your business. They don’t need every piece of financial information, but they do want the important bits.
Equity investors look for two things:
- That your business is ready to grow/not drowning in debt
- That you have strong accounting processes in place
This means that you have to do two things:
Get Rid of Your Debt
Before your meeting, try to reduce as much of your debt as possible. If you can’t eliminate it entirely, figure out how to restructure it so that it’s not skewed in one area.
For example, if a significant portion of your debt is related to credit cards, you may be able to refinance part of that debt into a term loan. That way, when an investor sees your overall debt, it’s not skewed in a particular section. Term loans have an end date; credit cards may stay in the active debt category for decades.
It’s a process that can take months before your business debt is paid off or restructured. Don’t wait until the week of your investor meeting to attempt to solve this problem. Evaluate your liquidity and rearrange your cash where it can be used best.
Strengthen Your Accounting Processes
Do you already have structures in place for managing your budget? Are the fixed costs all necessary?
Work with your accountant to review all your financial records. Get them up-to-date and ask for advice on how to improve your accounting process.
Look for anything that’s obsolete or outdated (like old equipment that has already depreciated) and remove it from your records. Make sure your financial ratios are ideal. Your gross profit ratio should be stable or growing, as well as your debt-to-equity ratio.
If you have any new products in your inventory, point that out in your business plan. Otherwise, it stands out as an outlier that can drag your formula results down.
4. Prepare Your Business Plan
You’ve already started this in your pitch deck. But while the pitch is basically a slideshow that gives the investor a taste of your business and strategy, a business plan is much more comprehensive.
If their interest is piqued from the slideshow, they can read the lengthy business plan next.
The business plan starts with an executive summary, then grows from there to include:
- A description of your company and products
- An analysis of your market
- Information on how your company is organized and managed
- Documents illustrating your company’s financial performance over time
- A breakdown of how much money you’re asking for and how you plan to use it
If you already have a business plan, update it to reflect your current products, market, and performance. If you don’t already have one, create one. There are plenty of templates available to help.
It’s important to note that a business plan is a legal document, and you can be held accountable if any of the information is inaccurate. So, it’s good to bring your lawyer into the process at this point to cover any legal bases.
5. Design Your Exit Strategy
You can still be a confident business owner with an exit strategy.
In fact, most successful entrepreneurs with years of experience always have an action place to prepare for contingencies. When you include this as an addendum to your business plan, investors know you’re serious.
An exit strategy is best designed with your attorney’s help.
In general, they’ll include one or more of the following scenarios:
- A merger and acquisition (M&A)
- Sale of stakes to a business partner or other stakeholder
- The succession of a role by another family member
- Buyouts from management or employees
Eventually, you’re going to leave your company. Whether you retire or move onto a new venture, it will happen someday.
How will your business continue to operate and remain successful when you’re not there?
If you’ve decided that you need an investor’s backing to take your business to the next level, you know it’s going to take some legwork.
To prepare for your meetings and put your best foot forward, be sure you’ve followed all these steps.
Don’t be afraid to bring in experts for help. The cost of advice from your accountant and lawyer will be more than recouped with a successful investment.