Do you feel like your company has grown as much as it can without outside investors? Before you start asking for money, Segue Partners founder Michelle Murray has some tips. The St. Louis-based certified public accountant works with both start ups and venture capitalists. Here are her six recommendations for start ups looking for cash.
1. Be practical
A lot of entrepreneurs are extremely passionate about their ideas, but they haven’t thought about bringing their product to market. She recommends entrepreneurs create a three-year cash flow statement. Murray understands the cash flow statements will be speculative, but she says that is okay.
“It doesn’t necessarily mean how profitable you will be,” she said. “It’s how much cash will you need.”
She encourages entrepreneurs to be thorough when creating cash-flow statements. For example, if you have to file a patent how much will it cost? But being thorough isn’t enough, she recommends entrepreneurs create a buffer in the budget because you can never predict every expense.
“You don’t want to run out of cash,” she said.
2. Be prepared for due diligence
Any assumption you have on your product’s viability, uniqueness and potential market will be questioned thoroughly, so be prepared to answer questions and spend time developing your ideas.
“You have to know it’s not just talking it up,” Murray said. “People take writing a check very seriously.”
Murray compares preparing for due diligence to cleaning one’s house before a party. When you are prepared for people to examine every aspect of your house you naturally tidy things up. She recommends companies do the same with their business plan before pitching outside investors.
3. Get help early
Murray said entrepreneurs are often self starters who want to do everything themselves, but sometimes it is good to know when you need help. For example, when making a deal with outside investors, entrepreneurs have to sign term sheets. A term sheet is a non-binding document that outlines conditions of a business agreement. It guides legal counsel in the final agreement. Term sheets have several clauses that can seem small, but have large consequences.
“Hire an appropriate set of service providers,” Murray said. “If you don’t bring in people early enough they can’t advocate for you.”
If you don’t get help early it can effect the long-term growth of your business.
4. Be patient
Murray said entrepreneurs often think they can raise money whenever they want. She said that’s not the case. She compares raising money to a football game: it has a definitive beginning and end. And starting too early can have negative consequences. First, the earlier you start the lower your valuation will be, Murray said. If your company has already made revenue or found a market, your valuation will be higher. A higher valuation means more capital.
Starting later can also give your company momentum. Murray said if you start pitching investors before you are ready and fail other investors will think your product is flawed.
“There is only one chance to make a first impression,” Murray said. “Do you really want them to hear your pitch if you’re six months too early?”
5. Don’t waste time and know your investors
Angels and venture capitalists have investment strategies. Both angels and venture capitalists will pay for equity in a company. The difference is angels invest less, move quicker and often don’t require a board seat.
Entrepreneurs should look at angels and ventures portfolios before investing and ask themselves: does my company fit their strategy? When was the last time they invested in a similar company?
“Entrepreneurs need to value their time,” Murray said. “Weed out the ones (investors) that don’t have interest in your company.”
6. Have a comprehensive exit strategy
Investors don’t give you money so you can pass your business onto your children, Murray said. They want to get their investment back plus a profit and there are two major ways to do that: going public or getting bought. Murray recommends entrepreneurs know who their potential acquirers are and why.
“If the company you are creating is only interesting to you and your employees then you won’t get outside capital,” she said. “(You should think about) Why would another company buy you? The exit plan is the crux of the investment thesis.”