Hello again r/entrepreneur! Welcome to part 5 of building a multimillion dollar business.
I’ve gone through my intro a few times, so if you haven’t read any of my past posts, I would suggest starting from the beginning to get caught up. Thank you all for the great engagement so far! I just did some quick math and the first 4 parts have a combined 1,521 upvotes, 270 comments, and dozens of DMs.
So far we’ve talked about:
Getting started (the right way)
Pricing (Don’t be afraid to price high)
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Today is going to be a fun one. It’ll be a little shorter than other posts, but definitely a fun one.
Let’s talk about raising money. When you raise money, you’ve made it! You’re an instant millionaire, you can buy your Lamborghini, you’ll be Techcrunch, etc, etc. Unfortunately, raising money isn’t as glamorous as you’d think. Let’s run off Shark Tank for a few minutes.
I’ll start by saying my company is mostly bootstrapped. We raised a small amount early on because of some close relationships, but now we invest nearly all of our profits back into the business through hiring. Before we even raised a penny, our annual recurring revenue (ARR) was well over $100k. Smart investors won’t take you seriously if you haven’t generated any revenue unless you’ve sold a company in the past, have a reputation in a certain industry, or have a crystal clear plan on how you’ll make things work. I’m happy to say that our current investors have gotten at least a 10x return on their initial investments and based on our roadmap, could be more than a 100x return when we do have a liquidation event. Fortunately they remain close relationships, they act as silent investors, and we retained all of our board seats and control of our company.
We have VCs that we communicate with every month in case we’d like to raise a round. No need right now though.
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Raising money doesn’t solve your problems. READ THAT AGAIN. Raising money doesn’t solve your problems. Too many young entrepreneurs think they need to raise money in order to execute on an idea. All you need to do is spend $10,000 on Facebook ads and you’ll generate $100,000 in revenue. Wrong… If you don’t have processes built out, you’ll burn through an investor’s money so fast. Without processes in place, you’re literally gambling.
Raising capital should be used as a tool to “pour fuel on the fire”. When you have a scalable and repeatable process figured out, how does capital help you get to your projections faster than expected?
Like I said this one was going to be shorter than some other posts. I’ll leave you with some important questions that investors will ask, and how you need to answer them.
How much of this investment is going to be spent on product? Your answer to this question should be as close to 0 as possible! It’s important to always invest and iterate on your product(s), but investors want to invest in something that is already proven. If you say the investment will be used to build the product, you won’t be getting a penny unless it’s from friends and family.
How is this money going to be spent? You need to have clear projections laid out and how you plan on achieving your goals. What key hires will you make? How much is spent on marketing? How much will be spent on sales? How much will be spent on support? How much are you paying yourself? (Investors want you to pay yourself a respectable salary by the way. They don’t want you to lose motivation.) They also might ask if you’d like to use a portion of the money to liquidate a little bit. Have a clear plan with every dollar. If they say, “why do you need $1,000,000?”, you better have a plan laid out.
What is the end goal? Are you looking to sell the company, IPO, raise funding later with potential liquidation events, etc? You don’t need an exact answer on this, but you better have an answer and be confident with it.
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Here are a few question to ask yourself.
Is this a strategic investor or is their value just in the capital? Maybe they bring big relationships to the table, maybe they’re experienced on the marketing side and can help deploy a strategy you haven’t thought of.
Are you ready to be married to your investor? Most investors want constant updates. Even our “silent” investors ask how things are going every 1 or 2 months. They gave you their money, you owe them constant updates and communication.
Are you willing to give up 1 or 2 board seats and potentially lose control on big decisions to be made? Some people are willing to do this, it’s not something my partners and I have been willing to do.
Is the investor aligned with your mission? Know your mission and communicate that with them.
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There are a lot of people who have much more experience raising money than me. Would love to hear any experiences in the comments. The good, the bad, and the ugly! Thanks everyone! See you next Monday!
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