Is your business ready to grow?
Some ideas just don’t scale. Some businesses, though profitable are just not suited to expanding.
This could be for several reasons, including:
- being dependent on a founder with a highly technical skill
- being dependent on a founder with personal connections
- having a small overall target market
- lacking a unique position in the market
Under these conditions you may have a business which is able to survive even thrive. But even though it may provide a good income for the owners of the business it may not excite an investor. You may see these conditions in a small business which has been started by its founder with or without a core team and has grown because of their skill, persistence, and tenacity. But with the addition of a few employees, it has stagnated. To clarify, this kind of business can be profitable but still not right for an outside investor.
Take as an example a builder who buys properties to renovate then sell. His business may be excellent, but unless he has the ability to systemise and leverage his skills, the profits are limited to what he is capable of doing himself. Thus, not scalable. So while this builder may make a good profit, an investor is unlikely to back this as a business.
An investor wants to see growth opportunities – by several multiples, not steady improvements. They want their money (and potentially their skill) to be the catalyst that propels the business, exponentially.
If your business is not one that fits the ideal profile for an investor, the options are to raising capital may be:
- seek it from friends and family, who have different criteria as an investor
- raise money through debt through a bank (usually secured against personal assets)
- grow organically
Another option is to isolate the constraint you have and design a strategy to minimise the effect on growth. For example if you, as the business owner, are the biggest asset and the biggest liability then the following may work:
- recognise that you are the bottleneck in the business, and due to which factors (sales ability, technical knowledge for example)
- hire/organise to duplicate these skills (not replace them) thus spreading the risk
- hire/organise to remove your non-core duties. If you are the best sales person for your product, and also do the accounts, cease to perform accounting duties yourself. It is unlikely you are the best at everything.
Every business has constraints. If the constraint is YOU, then it is unlikely that your business will attract an investor. If you rearrange your business in the right way you may still become an attractive investor target.
In your search for venture capital don’t expect fairness.
If you’ve ever been looking for a job and eagerly sent your resume off (only to have it ignored), or if you’ve ever been an employer and looked at an in-tray of hopeful candidates (only to flip through them seeking the one that jumps out), you’ll know that evaluation methods are often less rigourous than they should be. It may be a scan for just twenty seconds that has your resume placed back on the desk, and another picked up.
Seeking investment capital is similar. As a business owner, you are often one of dozens, or even hundreds of proposals which are submitted to an investor. The future of your business it seems is dependent upon something as fickle as getting your business plan actually picked up and read.
The truth is that you will often be judged by factors that you don’t even know about. And if your business plan is passed over then you don’t even get to be judged on its merits.
So, what can you do?
1) work on presentation as much as content. If your proposal doesn’t get picked up, then it doesn’t matter how excellent your idea is.
2) acknowledge you will need to get it to a lot of people.
3) follow up. You are selling an idea. You’d follow up a sales call (I hope).
4) ask for feedback. If you get a “no” for your proposal, ask why. This can help you learn for the next one (and the one after that, and the one after that).
5) forget about what YOU want, except to the extent that it helps an investor get what he wants.
6) consider how you are delivering it. Just as in job hunting, there is more than one way to find the ideal position. If you are sending your resume off in response to job ads, the best you can hope for is to considered equally with other candidates. As they say, the best jobs are never advertised. In raising capital, there are various ways of finding and contacting investors including referrals, networking, and recognised channels such as corporate advisors. Corporate advisors such as us (so yes, I am disclosing my interest!) have the ear of many investors and our opinion is valued.
And remember, there are many stages to your pitch. I am talking here about your initial written submission. When it comes to the next stages, there is even more to consider…more that can go right, and more that can go wrong.
Is money the answer?
Every business could do with more funds it seems. The typical life of a business owner is one of juggling funds and prioritising who to pay.
This is true for business at almost any stage from startup to mature, and the issue tends to exist in times of growth as well as slumps.
It is often this need for cash that causes a business owner to see an investor as the answer to all their problems. However, cash may or may not be the answer. To be precise, additional cash will be the answer only when (lack of cash) is the cause of the problem, rather than a symptom.
In many cases, there are other underlying problems such as:
- wrong product
- wrong market
- wrong marketing
- wrong margins
- poor accounting and financial management
What will happen if you introduce cash into a company that has these problems is that the cash will simply accelerate whatever is happening. If the business is making money it will make more money. If the business is losing money, it will lose even more money. Cash simply becomes fuel on the fire. It can create fast growth, or it can create fast failure.
It is quite likely that if you seek capital, you will learn several things:
- The process of preparing your business for raising capital will highlight its flaws, and prompt you to fix them. For example if you lack KPIs in regards to your marketing you will be unlikely to present your offering succesfully to an investor.
- If you are unsuccessful in gaining capital, the reasons why not (if you are lucky enough to learn them) will help you improve your business as well as your next pitch.
- If you successfully secure capital, you can be sure that an investor will demand systems to allow them to see how things are running at any given time. Very few investors (other than family, friends, and fools) are likely to simply run things however you like.
So, don’t assume that capital will fix all your business problems (or take advantage of opportunities). If it is in trouble, decide if your business is worth fixing (not all are) and then decide if and how it is attractive to an outside investor.
