Having navigated through the funding ecosystem in Maryland, here are some challenges I faced.
I. If you approach an investor and they don’t know you, you likely won’t get far. You are more likely to get to that investor if someone they know referred you. Hence, if you are going to a round-table meeting expected to pitch one of the investors, good luck. The chances of that happening are slim, even though you are sitting or standing right in front of them.
II. There are a lot of groups that get together that charge entrepreneurs hundreds or thousands of dollars, give the entrepreneur the hope that they will meet someone there who will possibly fund their business. But, that will likely NOT happen and the entrepreneur will have just spent money they really can’t afford to spend, at a time when they need it most. I think the word I’m looking for is ‘predatory.’
III. One basic fact that is often not known by entrepreneurs and possibly the most important fact when looking for capital, investors invest in stages. Many entrepreneurs will start pitching everyone, not realizing that despite how good their presentation is or how compelling the investment opportunity, the investor may not be able to invest money because of the fund they represent. For example, a family office fund manager may have money that he can only invest in growth stage companies. Another fund manager may only have money to invest in technology start-ups. Another fund manager may have capital that he can only invest in education-related or artistic endeavors. Pitching any of those investors if you aren’t right for them, would be a waste over everyone’s time.
IV. Trying to determine if you are going to promise a percentage of the company, attempt to value the company or just go for debt. There are many types of agreements that float around but every entrepreneur should know that there has been some standardization in that area over the past decade. Now, instead of attempting to value a company,
V. Avoid people who think their reputation is too precious. What I mean by this is that if you are building a company and working through your ideas, you are going to have some failures. You are going to have some challenges. A lot of them in many cases. You will have to work through those to get past them and keep the company and your idea going. That might involve pivoting the company. That could involve raising more money. That could involve having to hold on to the investment capital for longer than you initially thought. All of this means that you will have to have an investor or investors on board who are willing to stand by you and are confident that you will make it happen. You may have confidence in yourself but if they don’t have the same confidence, you may be dead in the water.
VI. Have a back-up plan. While talking to many company owners who were successful in raising capital and many investors over the years, one thing is very difficult to accept. If you take money from an investor and don’t meet the goals/metrics the investor wants to see, they could try to pull that money back and by doing so could force you out of business. Having a note come due and not having follow-up investors could also have the same outcome. You should cultivate banking relationships that could potentially convert investors to standard debt over a period of time.
VII. Use debt first but keep cashflow in mind. Banks will provide capital based on cashflow and your ability to pay that debt. Promising an investor 10% of your company when you aren’t making much money may seem o.k. in the beginning but if you are looking at a company that is growing rapidly and you just need some cash to buy equipment, real estate or some other assets, you should consider going to a bank first. Always keep an eye on cashflow though and know that cashflows will increase. If cash is going down and you have large debt payments, that is going to mean your company is going to gradually go in a hole. Not good.
It is Wednesday morning here. I have to get to work. Maybe more on this later.