Twice a month, our panel of mentors answer your practical business questions. Send us your questions!
Dear BAM Mentor,
What would you say were the most important things to prepare or think about as I approach a BAM investor? What are some typical pitfalls or mistakes I could avoid?
~ Getting Prepared
Dear Getting Prepared,
Funding for your new business is obviously crucial – no cash, no business. So let’s think about this from an investor’s perspective. What is it that interests him or her? What does he or she want to see? What questions answered?
Here’s what I’d be asking: What exactly is the product or service that you intend to sell? Don’t assume that I understand it. Make it simple for me. What is the market demand for this? Do people really need/want your product or service? Who will your competitors be? How is your idea better than and different from theirs?
This first set of questions is about your viability in the market place. Is this a real business? The next set of questions is about you. Can I count on you? What is your background? Why are you particularly qualified to launch a business like this one? Do you have a specific knowledge base or experience that would give me confidence that you can actually pull this off? Who do you have around you? What is your track record? Who will vouch for your character? Your commitment to Christ?
Next we come to return on investment – ROI. After all, that’s why I’m interested. What kind of return can I expect? Specifically, what multiple of my investment should I count on? What is the timeline that you have in mind before I can expect a return? 3 years? 5 years?
I’m not just a financial investor. I am a kingdom investor and I want to see Kingdom Impact related to God’s unchanging purpose in the world. Where are you going to do this and how does it relate to God’s kingdom? What kingdom impact do you anticipate? How connected to the unreached is this? Closely? Will your business be domestic? International? In easy places or the 10/40 Window?
So, in preparing to approach me or any other investor, these are the questions you need to have answered in advance. The format in which you present may range from a highly polished business plan to a napkin in a coffee shop; that depends entirely on who you are contacting. The more you think on these things and the deeper and more thorough and compelling your answers, the better chance you have of obtaining funding.
Now, you did mention mistakes and pitfalls. Here are a few to avoid: […Read more]
Dear Getting Prepared,
The matter of raising money (aka “capital”) is always a bit confusing to the new business person. It is important to realize that every company goes through different stages of growth and there are different sources of capital that you should use at a particular stage of your growth. For all stages of raising capital you must show how you have done in the past few years, if possible, and also what the money will be used for. This gives the lender/investor confidence that you can use the funds wisely. Be able to defend this plan to a potential investor or lender. In other words don’t just pull numbers out of the air and put them on a spreadsheet. Think about them and be able to defend each number. The biggest mistake you can make is to not be prepared in this matter. Give them details as much as you can and have an overall company P&L (profit and loss) forecast for the next two years with and without the funds, to show how the funds will benefit the company.
When you are first starting out it is commonly understood that you should approach only those that have a relatively high appetite for risk. This is because it is a fact that even in Western contexts that 80% of all business start-ups fail within five years. The source of funds at this stage – due to this high risk – are almost always friends and family. You must still be prepared to show your potential “family and friends investors” that you have a plan. Also, for this stage of capital raising you will have to defend your business skills. Be ready to explain why you feel you will be able to succeed. A big mistake you can make at this stage is to state that you are placing everything “in the hands of God”. Of course you are, but my experience has shown that this response indicates a lack of accountability and planning. You have a brain – show the lender/investor that you can use it.
Another big mistake at this stage is downplay to potential risk. Tell your investors that you will do your best but that there are no guarantees. Also, these early financers may want a share of the company if they are giving you the money and therefore obtaining equity (ownership) in your company. It is normal in all rounds of financing to give the equity investors approximately 30% of the company.
Another point to remember is that most start-ups lose money for the first two years before becoming profitable. This is normal, so don’t worry about it as long as you are doing the best you can (being aware of margins, doing proper sales work, keep deadly accurate track of cash, etc.). This is why you need the funds at the beginning, to keep you going until you are profitable. An airplane just doesn’t leap into the air, it zooms down the runway until it can fly. The first few years of any company’s life is zooming down the runway and hoping you are airborne before you hit the end of the runway!
Once you have been in business a few years you will realize that it is very hard to grow (and therefore employ more local workers, buy more local supplies, etc.) by only using your own funds. This happens because you now are faced with opportunities that temporarily absorb a lot of cash (such as buying seeds for crops or buying handcrafts from artisans for sale during the year, etc.) At this stage of your company growth you will need something called Mezzanine financing. You’ve already left the ground floor and are on your way up the growth curve. The same principles apply to this round of financing. However, now you are a far less risky financing prospect that you were a few years ago. You now have a track record to prove how well you have done. Using the same methodology as before you can now approach Kingdom-minded organizations for either loans or equity financing.
Dear Getting Prepared,
Before you walk down the road of approaching an outside investor, why not consider the possibility of self-funding – also known as “bootstrapping” – your company? If you decide to bootstrap, you may be surprised at how differently you approach your business, as well as the funding process. Bootstrapping can create a healthy foundation from which to begin your business, and can provide invaluable lessons to entrepreneurs. Lessons learned from bootstrapping can include:
- Tests your business plan – A bootstrapped business that can bring a product or service to market, develop a customer base, and create a revenue flow will help you identify the strengths and weaknesses in your plan. You now have the solid proof you need to affirm your ideas and build on them. You will have determined if the market needs or wants your product, what the market is willing to pay for your product or service, and what will be required to put the business on a path to profitability. In addition, you will have a better sense of true costs, not just cost of goods, but hidden costs that are usually not considered or may not be known when a plan is developed. Bootstrapping will also force you to consider how the product or service is being developed, and it may cause you to re-consider aspects of product development as being unnecessary for product or service launch.
- Provides incentive for a low burn rate – Limited financial resources will greatly influence the decisions required to operate your business, while at the same time maximizing efficiencies. This may include hiring employees that can function in more than one role, outsourcing certain roles until you can afford to bring them in-house, minimizing overhead like office space (know anyone with a spare garage?), as well as using a creative approach to marketing.
- Skills and values development – Self-funding can be a useful mechanism in helping you gauge your true passion and commitment to your business. It will help you develop a higher level of accountability as well as resourcefulness, resilience and courage. It will most certainly test your risk aversion.
Once your product has been fully tested and proven in the marketplace, you may then want to revisit the idea of outside investment. But do a quick assessment for your reasons in seeking additional money.
So let’s say you have weighed the pros and cons and have decided to pursue partnering with an outside investor. As you prepare, consider that you must approach this process, as with anything, with excellence (Colossians 3:23). Your investor has been given assets which the Lord is requiring him to steward in a Godly manner, just as God is requiring you to steward all aspects of your business, including the fund raising, in a Godly manner. With that said, here are some ways in which you should prepare to address a potential investor.
Make sure you have a well-thought out pitch with a professional slide deck. Your pitch should be easy to understand, concise and clearly define the mission of the business. You should be able to articulate in the first few minutes of the pitch what the problem is you are trying to solve with your business, and your unique approach to address the problem. When you frame your pitch from the context of the story, both your story or those impacted by your business, that is when it becomes interesting – and demonstrates your passion. Make sure you are clearly conveying your passion for this project – why do you feel you are the one called to execute this plan? Why do you feel this endeavor is going to be successful? Make sure you leave time to answer questions at the end of your pitch – many investors won’t let you get through your pitch before they start asking the questions.
Within your pitch be prepared to answer the following questions, at a minimum. This is one time in your life when its not a bad thing to over-prepare. […Read more]
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