At some point during a company’s growth there may be an opportunity to improve its position and/or valuation with a cash injection. Examples of this could be:
- Selling more products or services
- Developing new products or services to sell
- Changing company ownership structure
- All or some of the above
There are three main ways to generate cash.
- Profit
- Debt
- Investment
This is what we will explore in this blog.
Profit results from successfully solving customer’s problems with your product or service for less money than they paid you to do it. Every time you successfully sell a product or service you add to your cash balance, which grows on your balance sheet as an asset.
Debt is money you get now to be paid back with future profits or investment. This works well as long as you can accurately project future profits. Inexperienced business owners often overestimate sales and underestimate the cost of those sales. This leads to decreased profit and a potential inability to pay back debt or attract investment.
Debt can also be in the form of sweat, which means people can contribute their time and effort anticipating being paid in the future when the company starts making a profit or attracts investment.
If the company succeeds, it may pay back people’s contributed effort with cash or it may convert that contribution into an investment into the company. This depends on what was agreed to by the two parties before the contribution was made.
Investment comes either from selling a slice of all your future profit and/or securing a grant. These things can be pursued together making each other more attractive. This works best when your business plan aligns the grant with cash investment.
To sell a slice of your business, you need to create a present day value for your future profits and then decide how much you are prepared to sell a fraction of it for. There are a bunch of ways to value your business and you should get advice from your accountant at a minimum on this.
If you are going to sell a slice of all your future profits you need to consider who is going get it and what will they do with it. I once sold a percentage of a business to its largest customer, which mostly worked out.
If your business hasn’t proved itself to gain a sufficient valuation, you may be able to get people you know — typically friends and family — to invest in your business. These investors are usually backing you because they know and trust you.
Don’t break the trust and be really straight with them about the probability of them losing their money.
Don’t ask anyone close to you to invest in your business if you haven’t put everything of your own in first. You are pitching for people to take a leap of faith in you. You may only get to do that once in a lifetime with some people.
Be aware that this can go horribly wrong and I have seen many families and friends fall out over ideas that didn’t work out. Then again, Jeff Bezos borrowed money from his parents and created Amazon, but nothing is certain.
If you can demonstrate in a clear plan how money can be made from investing in your business, you could be ready to pitch to real investors. No warm and fuzzies here. These people will like you as long as you are doing what you said you would and your company is delivering what you stated in your business plan.
It’s not likely they’re going to be the same type of person who will invest in your early stages.
Real fundraising is much harder than it looks. Well it’s easy to do badly and hard to do successfully.
I’ve done both and this is what I learnt.
Don’t do it too early.
It’s too hard to really know maybe even in the first year whether people should be investing in this company.
You’ve got to prove your idea at some level; you need some evidence enabling you with good conscience to ask people to put money into your company.
It’s not hard to get a bit of evidence like an anchor sale, which demonstrates if you think you’re going to be able to sell a hundred of them, show me how you can sell one.
Study your first sale, see what the real cost was and then show me how you can sell a second and a third. Hopefully by the time you’re at a hundredth sale you’re actually making more profit, which is usually what you promised was going to happen.
Create your investment pitch with a process in a defined time.
My advice is have an absolute clear business plan — clear, clear, clear, clear, clear. The narrative’s clear, the logic’s clear, and the numbers are accurate. It may be describing something out there! But at least it adds up.
Create the narrative, logic and model of numbers that join the dots to a path of a valuation.
Know all your multipliers driving the numbers supporting valuation and make certain anybody considering buying in understands what you are trying to do mathematically.
Investors
The difference between friends and family, angel and professional investors is huge. It moves on a spectrum of deep investment in people at one end and strictly business at the other.
The rigor required to move along the investor spectrum from family to professional increases significantly at each stage. The due diligence your plan will be subjected to is designed to stress test everything, including strategy, performance and people.
About this picture
When you visit the United Emirates you know you have landed in a cash creating region. Building a Ferrari theme park in the desert is a sign that there could be way too much cash around.
You know you have a good travel buddy when you inevitably start fighting with each other on a travel adventure and not let that interrupt your hectic schedule. This day was one of those days. An argument had been brewing and we were going to have it out and I am sure we became one of the attractions at the theme park.
We laughed about this later recalling the looks on peoples faces. I am grateful to have had such a great companion who could stop mid argument and say stand there, I think this would make a great pic.
