Fund Your Business for Growth

Lesson 13 of 18

Raising $$$ From Individuals

 

Fund Your Business for Growth

Lesson 13 of 18

Raising $$$ From Individuals

 

Lesson Info

Raising $$$ From Individuals

Customers not every customer that you will see serve will be valued in the same way when you go to sell your business, what are those differences? Obviously in prior segments, I put a high value on customers that pay their bills getting that cash and taking the risk out of non payment because lenders care about that, but now we're talking about building the value of your business so other two attributes about your customer base will continue will add up in a different way write this down if you have a pencil at home if you serve obviously is easy more and more customers every year that's growing value we like that but that's too easy right? How about customer base that doesn't require coupons toe walk through your door or come to your website when you have to discount the value of your product or service. I'm going to discount the value of your customer base because they're shopping on price not because they love you or your brand aspire more and don't get them in the habit of coupon n...

g from day one especially start up entrepreneurs do it and you're teaching customers to value you in not a good way find another way to bring them in I much rather have a gift with purchase kind of bonus than discounting your prices all day long I love reorders bakery a bakery be if you have documentation about reorders that is a more valuable bakery you can have identical sales levels but proved to me that your customers are not random customers that they are coming back to you because they're repeat happy customers that is a more valuable business tone create promotion has been incentivize reorders and keep the data I also like tio highlight whenever you have metrics that show the number of years served I love software businesses where they incentivize people and have an ongoing relationship with those customers through maintenance contracts that is a more valuable company to own multi year contracts government contracts, contracts with corporations contracts for services help prove that the moment you sell your business that your customers are not likely or less likely to go away the's air metrics that we love to see in growing valuable businesses I also like companies that showed the potential that you can expand your product or service in into other products or services ways that you can sell existing customers mohr it's the upside of continuing to build that value of your business and lastly we talked about customers that pay up front or in less than sixty days are valuable customer base businesses your customers matter to how your company's value know who they are improved to may that they may stay engaged in your business even if you're not involved in your business. So why no part of our creative live audience are photographers very creative artists are they doing business with you or your company? I put a higher premium on customers that are doing business with your company and your company's brand rather than you individually it's not what we want to hear is founders but if you want to build the assailable value of your business it's all about brand and who they're doing business with the brand of the person come up with strategies have helped them do business with your company brands have value this my favorite example of this and then we're going to be diving in tow bringing in angel investors into your company brands have value and this is talked about in greater detail in your free coursework when you could sell a product at a premium price. The most extreme example of this is mascara the same tube and you could buy a tube of mascara for over forty dollars from an elite french brand where you can go to your drugstore and buy the identical amount of mascara and who knows it could come out of the same factory lines by the way for seven eight nine dollars that's where brands have value and this is what investors care about starbucks for example they sell coffee no, they sell their brand what makes me drive off the road to starbucks to get a cup of coffee when I see the green logo it's the starbucks brand and the starbucks experience when you build that brand value and I'm emphasizing this slide because most of the creative live audience provides services, one of the most overlooked thing is building the value of your brand, make it special, make it valuable, make us love it, and that has gone that will help you build the ultimate value of your business. And especially if you are seeking to raise money from angels or veces that invest in consumer space, we will ask you questions about how you will position your brand because we know our value. Our ability to get money back will be dependent on how well you execute building the value of your brand with customers. Okay, angels. What are angels, angels, air individuals? They're wealthy individuals that write checks two innovators just like you actually it's, an old broadway term for people who invested in broadway shows, they were called the angels of broadway. Now angels can mean anybody an individual who writes a check to own a piece of companies, consumer companies, tech companies, biotech companies and they are all across the united states here's something to appreciate as a distinction between vcs, venture capital funds and angels who makes the decision? Who do you need to convince to invest in your company? It is the individual, usually one decision maker. That decision can be as fast or as slow as the angel wants to make also know that most angels some may be retired from their primary line of work, but usually not so that means they're almost investing as a hobby. You may send them your executive summary, but they may not stop their golf game to read your executive summary. So in your mind set in appealing to investors, you have to make it convenient and you must understand the reality that the lead they lead busy lives and you are not first priority in their life if you exude frustration or annoyance that they are not paying attention to you answering your e mails, answering your calls do they need that hassle? That drama from you that is the number one way you take yourself out of the lineup, so don't do it understand you're asking an individual an individual to spend part of their time and day learning about you and your opportunity you're on their time, not your time it's really hard to hold back that frustration because I know how much you want the cash, but trust me be the cool cab, it will go a long way angels don't want to spend time and certainly investing companies with people they don't like were come across as brash or too self involved mr individuals may get a little fun and interesting for them they have a very, very strong preference for investing locally if not regionally, would I want you to spend any time in some upcoming signs? I'm going to be mentioning some angel investment clubs groups of individuals that love investing in companies like you. If you live in florida, don't spend time trying to pitch or get your executive summary into a club in boston the earlier stage business that you are, the more likely individuals will want to invest locally. In general, my rule of thumb is no greater spend your focus and your time in pitching angels within three hundred miles of where you live outside of that, your return on your time is going to go down as your business advances and you may be pitching to venture capital funds. There are venture capital funds that invest all over the united states, but they're used to they make a living by investing angels don't like hassles they are not going to spent too much time and too much money to come to you to visit your business location. The real deal. Unfortunately, most angel investments fail, I'm going to make it a very important distinction here doesn't mean the company is out of business. Most angel investments fail, which means the cash value that they put into the business the business did not grow beyond that or became less in that or what they never put the company in a position where it could be sold to another company in order for the angels to get their money back. Most angel investments fail so if you're talking tio active angels that act you know, right a lot of checks to entrepreneurial companies they have this in their brain they have experienced the pain of losing all their money don't discount that in how they think about you and the value of investing in their business the term for a business that the value goes down where the investment value goes down is underwater that came up a lot during the real estate crisis right where people own homes that may be worth less than the mortgage on that home that's an underwater house underwater equity this is what individual investors worry about it's likely going to wipe out their cash and make them not want to pony up more cash to you how does this happen? How does this happen? And so fast usually within two years, maybe even a year of an angel investor writing a check shocking how does it happen this way you're afraid to ask for the right amount of cash that you know you need to complete your product if you want to open a new location in san diego and you know darn well it will take one hundred thousand dollars for example, but you settle you think I'm just going to go raise a little bit of money to just get going were you stopped raising capital because you've got fifty and then you could start spending fifty but you don't have the other fifty to get the job done what have you just done? You started out on a six day hike with three days of food you're in trouble investors and remorse trouble so you don't do that I hate this phrase all indian susan is just a little bit of money to just get going no I want you to be more purposeful in deciding how much cash you need to grow if you're going out on a seven day trip bring seven days worth of food that's the thinking that's the mentality don't shortchange yourself this's how failed investments happen this how failed these happen here's another way here's what's in your brains I know it for first time entrepreneurs you think that the time is start up you should get credit because you've been in business for a while because you've invested money and you think the value of your company is like a little rocket ship it could be little growth or high growth but in your brains it is a straight line upward doesn't that make sense to isn't known because you know I got money here and now six months later it's worth more why? Because I've been it's six months later because I've been doing stuff not at the early stage not at the seed stage here's how companies gain in value looks very different it's this step up never heard the expression it's very common in the venture community getting to the next level of growth I need to get to the next level it really originates from value so if for example venture um inc wants to develop a cool software platform and it costs five hundred thousand dollars to build and to fully test it and get it to its beta a launch a beta test site you on ly should get credit for that valuation boost when the side launches if you on ly get eighty percent of the code written why are you getting he really technically are still back here at the point of start it's an upward when you complete things when you complete a milestone when you get a patent when you file a patent when you start selling customers when you cut a deal with a great distributor it is not like this it is boom achievement achievement that's how companies air valued so if you think and are working with investors especially on big ideas you pick a dollar amount in order to reach a milestone of value you raise money to build a product not a half a product when you reach the milestone guess what and if you need more cash you are valued you're raising money at the next vile value point but here's, what it looks like if you don't somebody raises the wrong amount of money three hundred thousand when they know they really needed five thousand if they're lucky enough to raise an extra two hundred thousand or more, they're likely to be in the world of what are called down rounds what do you think it down round means I call it death but anyway played catch up you are playing catch up have you lost your credibility? But should we trust that you really know how much it's going to cost for you to complete the product? So we're valued devaluing your company because we have concerns about the management? Do they have the maturity to pick the right number and to think about what they really need to get something done? How much cash do you need to get something done? You've already told us big checkmark, we can't trust you, we don't necessarily believe that you're going to tell us the truth or if you know what you need. So right then and there you are negotiating from a point of weakness, not strength and number two your valuation as a company has an advanced, if anything, it has dropped, so if you are lucky enough to find investors willing to stick with you and give you another chance to succeed, we are now building in more protections in case you do it to us again, we're going to give you tougher deal terms and we're going to value your company less it's a down round and it is most painful to the founders so all it took was you being very careful not saying I need to raise five hundred thousand I need a million million sounds good and not achieving anything for that cash makes us painful outcome so I think earlier on today when we were talking about all the horrible things investors khun d'oh let's set the stage for when investors erupt and are most likely to fire a ceo demoted ceo with this caused them to raise some concerns if and your various first thing you raise the wrong amount of cash or you lie to us on what you really need to succeed, we're going to force a smaller equity stake for you were upset we do, we want to protect our position or we're going to say we're gonna walk away you won't get more money from us you're gonna have to go find somebody else who is then going to say how much do you need? What have you accomplished so far? Let me see your cap table, which is a listing of everybody else who has ever invested and I made call them up and say, hey, what do you think of this guy who created the trauma here the investors air the founder do this one thing well it's being a great entrepreneur is picking and choosing and doing a few things supremely well I know you think it's important for you to do every job now but there's certain jobs I want you to approach with precision and purpose raising the right amount of money it doesn't scare us when you're honest and say it will cost a million dollars to accomplish this so maybe the approaches if we want to break it up in a small around let's agree on the milestones of what you're going to accomplish let's be candid about it but if you start by line or misrepresenting the truth of what you know better it will end in disaster stop it you are not a magician you know your business better than we do if you say it takes five hundred thousand dollars to do one thing we're going pretty believe we may ask you questions and challenge you a bit but we are giving you the freedom to succeed or fail that should have lit up everybody I'd rather you know now because you are power to do it right can everybody picked the right number? Are you going to spend more time picking the right number? Good okay where can you find angel investors here's the good news? Last year over seventy about seventy thousand companies in the united states got angel investment capital and that's all the ones that we've been able to track and I'm sure is so much more and that doesn't include when friends and family members and local neighbors put money into deals. There are lots of us out there where I put there are lots of different places to go for angels I want you guys thinking of yourselves and developing a solicitation strategy that favors going first to people who are most likely going to write checks and love doing that doesn't make sense you know the deal shoppers what's in my top priority list, angel investment clubs and what are they? And we've got some listed in our course materials for you angel investment clubs are groups of wealthy individuals who come together, maybe monthly, maybe quarterly and hear pitches just like we heard earlier today and we're going to ask you questions we may have lunch at the same time and then we decide individually or is a club to contact you and talk more about your business here's what doesn't happen it angel investment clubs with the exception of business plan competitions and I'm frequently a judge it a lot of business point competitions usually we make a decision at the end of the day of a business plan competition if you pitch us at a club meeting don't expect to walk out with a check that day it is this start I don't think it is unsuccessful if we're not running after you at that moment to talk to you more and usually I go and cheer up everybody because I see their faces or, you know, come on, it's it's good, but usually what we have to do with the end of the club meeting let's, go backto work somewhere, right, it's not all about you, but I want you to start the engagement process with us. Successful entrepreneurs are great targets to invest in your business semi retired executives. If people left a big, big corporate job but still want to be engaged, they are prime targets to invest in your business, especially if they have expertise in your industry. Search the mouth they offered double firepower shared purpose angels what do I mean by this and it's my term? Uh, if you were starting a medical technology company that might be used by dennis, dentists may appreciate the value of that technology. Let's say you were starting an educational company or tools for kids with asperger's as an example who might be great candidates who want to see more, more educational tools out there, um, wealthy individuals with kids with special needs. So whatever your business think about where in the industry, how can I connect and add an extra motivation for you to succeed? Incubators there's some regions of the united states that have specific technology incubators that one, people like you and sometimes those incubators have cash to invest in you. What was I put as secondary priorities and I'm going to get to the issues related to equity crown flooding in an upcoming segment their problems with us. I like these areas to go to first their new regulations coming down associated with turning to crowd plant crowdfunding platforms to get equity investors, which is different than donation investors. A lot of these platforms serve abroad regional audience if your seat or start up, what did I say? There is a strong preference from early stage companies to invest locally, so start there your success rate will be higher where some angel clubs across the united states it's not just in silicon valley and because a map I want have listed couple names, but they are really in major metropolitan areas all across the united states. Atlanta technology tech coast angels, puget sound venture club some angel clubs invest just in women entrepreneurs sarah of capital in the pacific northwest, their women who on ly investing women companies there's great diversity in a lot of these clubs, someone high tech, some don't care could be low tech over high tech they're out there research them, industry specific what about a club that only invests in films for entrepreneurial filmmakers, how cool is that? There is a club that on ly invest in entrepreneurs who are recovering addicts there is a club that only investing kind of sustainable food businesses how cool is that I mentioned before sarah capital there's also asked hia great organization on the west coast and the east coast that specializes in mentoring entrepreneurial women run businesses golden seeds is another one sometimes your college that you went two and may have graduated from ten years twenty years thirty years ago is developing their own incubators and angel investment clubs all from your own alumni explore it it may be there I said in a prior segment of the workshop ten fifteen years ago there weren't the number or the breath or the diversity of both angel and death sources in america and it is really true don't say to yourself there not there they are there it's a matter of you finding them what's your prep steps how do you gear up for presenting yourself to angels? You're going to need an executive summary which is an easy description of simply how much money you want what are you going to use it for? Tell me and convince me that customers are going to want to buy what you are making or delivering emphasis again on customers customers are the route to your success cash flow but the growing value of your business the more attention you place on customers writing checks to your company and why and how they will do that is more important to may then the product description aa lot of times people make the mistake of spending two pages describing all the cool features of the product cool, but is that the best use of your executive summary time now what builds value products stoneville value customers build value brands build value gross profit margins build huge value how about putting some numbers on the first page of your executive somewhere? Put all the firepower in the first page of your executive summary if I don't see especially if I am reading through dozens of business plans for a business plan competition oh my gosh I I know had a scan really fast and there is a point of brain dead where I may not read to the second page because I have so much to read put it in the first page mainly want to read the second page I know some investors that will give you the first paragraph next next make it easy for us put the points of value in there if you've got a software design that can deliver gross profit margins and long term contracts right for your you know customers and your company cash put it in the first page we love investing in stuff like that we love recurring revenue we love high gross profit margins we love technology that's patentable put it up there, start there, wet our appetite for the stuff we love. Now do I need to know day one the inner workings of your product? No, plus, I want you to hold back if it's potentially patentable, especially if you're posting some of this stuff to crowdfunding sites. I don't want you to lose patent rights by publishing before you file that patton remember first to file first to file. All right, so that's the starting point executive summary and being able if you meet me and I have five minutes, what are you going to talk about? Think about the high points, then I'll meet for coffee. Some people call it the elevator pitch. I'd like you to practice it all right like you before you present your executive summary or asked to appear in a local angel investment club, find another entrepreneur who has been down this path find a business person to sit and listen and think about and ask you questions first go to our creative life course materials get a sense of what we're about to ask you have your answers ready to go pure and simple be your best you only get one shot I want we already know why it's so important for you to know how much money you want to raise we're not going to talk to you too much about that day one we're gonna want the broad strokes why there's a market growing market demand and by the way, all the same things I'm saying for angels dido for veces at the seed in early stage eventually we'll get back to that smart amount to raise but you're going to have to put that or a very tight range in your executive summary I want you to adopt a price to move strategy if you're out to sell a used car and you seven are you going to put a ferrari price on it now that's going to sit on the shop lot for a long time? We want to deal the earlier you are in the venture finance stages offer a deal if you I don't have a product don't have customers you have an idea and I will sit and debate this all day long with entrepreneurs I have a billion dollar idea and it is not worth at this start up any less than five million dollars valuation it will be worth billions to investors everybody is going to make money uh but only if he gets some cash in the door we ever get there it's with our cash plus the idea plus your execution that builds value so if your piggish at the start there are some angel clubs that will say don't come to us we don't actively consider deals with more than a starting valuation of one point five million dollars or less they've even put a cap on say that's for somebody else to go into so prices to move be reasonable not your first round should not be the pig round right? Okay you are solicitation strategy for getting angels I don't want you to approach one angel at a time or one target at a time well, I started them I think they liked what I was doing and nodding and so forth no, I want you to develop a campaign strategy I want you to go through the list of clubs in your area write them down I want you to brain storm with some of your friends are there any shared purpose angels or types of angels that maybe candidates are good partners for what I'm trying to dio educators for example, people who have invested in education businesses before regional accountants and lawyers often or resource is for introductions to angels. But I want to say beware beware of this. Yes securities counsel are very important and great collaborators for you, but sometimes is there going to expect they will be the attorney on your deal? Is that a reasonable expectation? Yes, so if you go too far and hit up too many attorneys and make sort of implied commitments that they're the attorney you know, beware always be candid with people don't mislead people, you'll know who you want a partner with, but don't over promise things that you can't necessarily deliver. You don't need five attorneys to work with, right same thing with the regional accounts they don't promise which can't deliver you don't need too many professional service providers, all on staff for your company, the other thing, and we're going to talk about this in a later segment. I like it best before developing too many legal documents that you already have some experience and feel comfortable that you've got your pitch, your business model down the right amount of money to raise. Unfortunately, I run across too many entrepreneurs who will meet an attorney who will then charge up to twenty thousand dollars to create a massive, big, thick offering memorandum to help sell this deal. And then you find out after talking to a few people know you really want to focus on this business first, so this big document is worthless. You all know owen, attorney, a big amount of money for document you will never use hold back on that stuff, make sure, because if you end up raising money from vcs, you never needed that document to begin with, we're going to talk a little bit further better, but it's cautionary about relationships with attorneys don't get into a situation where a number of entrepreneurs say I owe this attorney tons of money did all this work and I don't know what I got for and I can't even use it you're the boss next wave shared purpose individuals regional and executives retire professional there may be in certain states are now developing state run accelerators is more more states are recognizing that entrepreneurial companies are the biggest source of future employment and they want to motivate people to start within their states check him out in your own state usually they're under the department of economic development they may know right off the bat relationships toe active angels or help present get you pitch ready so that you get funding companies that get funding get to employ more people states are getting smart about this and then regional investment clubs all of these potential I want you to come up with a long list now why it's a better use of the time but also if you go one and get a no it's frustrating and you may start to lose confidence you are better to take a wider net approach you can emotionally deal with a few nose and you're more empowered to say to that no gee what can I do to improve my presentation my pitch what are some of those risk issues that you are most concerned about that maybe I need to improve my business plan for who should I turn to next? This is how you create, turn nose into more targets, and you continue to improve your pitch in your presentation and take the risk the perceived risk out of investing in your business. Every meeting with any a potential investor, you shouldn't be talking all the time. You are selling a piece of your company, and as my grandfather used to tell me, susan, you can't learn anything. If you're the only one talking there's, a real don't always listen to him, but that's, what he's saying it's wise advice in every meeting asked for feedback, asked for guides. What are you concerned about? Learn from it and then make your plan better, and in that process you might end up with a higher valuation by the time you get the deal done. So there's gold in all of those meetings, even if there's a now brainstorm on purpose the right way as I was starting to him, too, is asking for questions, asking purposeful questions, a respectful attitude. A lot of these people have been around the block before, especially if they built a company up to successful sale. You're the beginner year, the rookie let them help you minimize beginners mistakes when you should exude confidence without arrogance, maturity, respect when that the start of a wonderful relationship for one person to come out and be the lead investor and say I want I'm going to bring some of my friends into this I trust this guy this woman has her together I want to work and see them succeed that's how angel deals get done one lead investor brings in their posse and there they have to believe in you and your come any mission because you are the execute er you are the one you're the captain of the plane we only win when you win there's a huge amount of trust so present that persona don't say I'm not good at this I'm not going you know don't start unfortunately too many women don't make that right first impression we don't exude success and confidence and collaboration and in little ways we devalue our own that our own worth as a business owner do you want to invest in that no not at all here's the wrong way susan tell me all your friends who write checks countries can you give me a list of the phone numbers and email addresses of the people who invest ah sure sure let me get back to you no but too many people asset will you invest? Don't ask that question don't ask a yes or no when I was just introduced to you give us time till love you let us fall in love with what you're doing explain why you're excited about the opportunity playoff that don't jump to this it's like asking me going out on a first date in st susan will you marry me that's what too many entrepreneurs do wrong you're what do you mean are you crazy now it's a slow cell build trust and respect give me confidence that you're not going to blow it in six months some other things make it convenient for them don't have them come to you go to their office is her coffee shop now the area if they have time before work after work what is convenient for you don't assume they have a half hour get to the point early in fact when you sit down with him for coffee or wherever they are how much time do you have right now if they say ten minutes keep beginning part of ten and then lead into the next opportunity to me with them they're individuals busy individuals show you respect them because we're thinking as I've said in prior segments how you treat us is how we think you will treat customers because you're selling something I think it's a great advantage to maybe pick up some great sells books and just look for tips on how you improve without hype no hype innis because we want a different level of trust when somebody buys a toy from you that's a fifty dollar investment I don't know what but you're asking people to part with their hard earned money in big chunks and there's, no way for them to get it back for a long, long time vc bound here key thing on dh we're going to be going over some of these deal terms in future segments as well as you'll find great resource is in our special tools that are available for subscribers. One possible way to speed check writing among angels, especially if they know this is a big idea, big opportunity and it's likely that you were going to raise another round of capital. One of the ways without getting too technical now is to say, let me structure an instrument in which you were essentially buying a security. We're not going to value the company today for you to price your deal, but I'll take your check for five hundred thousand dollars today. And what angels worry about is the down round that ultimately, when you go to the vcs, they may negotiate a value that is less than what the angels paid here. It happens too often, so they recognize the value of getting going. They want to see you succeed. So what do you d'oh let's write a check and that check will be valued at whatever the next round is valued at plus we'll give you a little sweetener because you wrote, we'll give you a little extra. In interest or principal or a stock option or warrant some other sweetener for writing the check earlier and for that out of risk. So that's one way to take the risk out of writing a check when we know more money's coming in and it could be big money and they may negotiate in a different way that's called a convertible deal a bridge deal um, great way to give investors confidence it also says to us, you get it and you are thinking bigger about what you want to accomplish in business we hated when we invest in around and then you can't raise more money because then we're all out of business. We've lost our money remember, angels lose most of the value of their investments, but when they hit it, it paid help pays for the losses. Okay, um, actually, I thought I corrected this on a credit investor is a deal term to know what isn't accredited after the securities exchange commission has created this term, it has implications for crowd funding sites as well as angel investment clubs. What initially, without getting in a securities laws too much is we are more comfortable, especially in start up in early stage businesses when you solicit people who can afford to lose all their money, our our sophisticated about the perils and opportunities of investing and privately held businesses this number should actually be two hundred thousand that's, those type o we how do we set this up? What qualifies as an accredited investor? It's somebody with a primary networth household net worth of a million dollars that no longer new rules includes primary real estate, so they cannot include their house as part of their net worth. They need a million dollars, plus an annual income of two hundred thousand it's higher for married couples, and that income is likely to continue in the future if they've just lost their job. That should be a warning signal that, gee, this financial situation may go downward and they're financially six sophisticated. These investors are fair game, actually, the types of investors I want you to specifically target it's going to come up again in crowdfunding, the regulatory requirements are much, much less when you are pitching the's kinds of investors versus the person down the street who may have twenty thousand dollars in savings and that's. It has a fifty thousand dollars job and can't afford to lose that twenty thousand.

Class Description

Ready to master the principles of business funding without frustration? Join financial expert Susan Schreter for a deep dive into debt and equity.

Susan covers everything you need to know to fund a business from inception onward. You’ll learn about how to safely borrow start-up funds from friends and family, and how to research and apply for loans, including micro-loans and SBA loans. You’ll also learn about a wide variety of funding types and the requirements or restrictions attached to each of them. From angel investments to venture capital to crowdsourcing, Susan demystifies potentially confusing funding concepts, giving you the skills you need to confidently grow your business.

Whether you’re just setting out as an entrepreneur or you’re a long-time business owner, this course will help you ensure the long-term financial health and profitability of your business.

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