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[Podcast] 4 Steps to Finding a Strategic Financing Partner

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This article is taken from the Build Your Queue podcast below, Season 2 Episode 20 with Santosh Sankar, Forbes 30 under 30 honoree and Partner with Dynamo Ventures.

Your business needs more capital to execute an opportunity, but where can you get that extra capital from, and how do you know if you even need outside funding to reach your goals?

Before you can make a strategic funding decision, you’ll need to consider:

  • What are different funding sources your business can utilize?
  • How do you know which option is best for you?
  • What are some common mistakes you need to look out for when searching for funding?
  • How do you get the most value out of your fundraise?

We’ll help you answer these questions so you get the most value out of every dollar raised for your business.

1. What are different funding sources your business can utilize?

Revenue is the best source of capital, and you should focus on generating it first.

Why?

When you have stable revenue, other capital sources are more likely to see your business as a valuable partner to invest in. Steady cash flow is a sign that your customers are happy and your business can succeed without funding (which are two goals you should have anyways).

You may not even need outside capital when you’re a customer funded business. But there are three main sources of funding if you do.

They are banks, venture capital funds (VCs), and angel investors (wealthy individuals looking for investment opportunities). Here are what each of them would be looking to get from you:

Banks: Can you pay off your loan, and do you have collateral you can offer?

Venture capital (VC): Can you carry the fund, and does your team fit their target market?

Angels: Do you offer something that will fulfill the investor or help the community?

Depending on if you’re interested in venture return vs. a fixed income return, different funding sources will want to work with you. For example, big market technology will appeal to VC, while fixed income will appeal more to supporting locals with their own cash flow.

There's not a one size fits all option, so let's talk about how to find your best fit.

2. How do you know which option is best for you?

A lot of people become entrepreneurs because they want to work for themselves. But you’re never really working for yourself if you have investors checking in on a monthly or quarterly basis. And even if you don’t have debt or equity, you’re still working to please your customers.

Ask yourself these questions before you consider getting outside capital:

  • How do you feel about reporting to investors, or a board of directors?
  • What's your time horizon for returning your investment dollars?
  • What's your time horizon for returning a profit on this investment?
  • What kind of return are you expecting (e.g. 1.5x or 10x)?
  • Do you need cash to save your business or to fuel tactical growth?
  • How much capital do you need (e.g. $100K vs $10M)?

Always consider the additional obligations you’ll take on before you start working with an investor. You’ll have to report to them regularly, so make sure you have someone on your team who can take on that role and have the capacity for face-to-face updates.

If you want to own your block and aren’t interested in reporting to someone else, outside capital sources may not be a good fit for you.

Why shouldn’t you jump to venture capital first?

VC gets most of the headlines, but oftentimes isn’t the best capital source for a business. It’s expensive, and you need to make sure you’re not giving up equity when your business may not grow.

VC also tends to want to own and control the majority of your business so they can dictate things like:

  • Who’s running the business
  • When you’re going to sell
  • When you’re going to buy

You may not want their hands in all that, especially if you don’t have the desire to grow your business aggressively.

You can be a solid, profitable business, but if you don’t think the returns will justify the equity you give up, you don’t need venture capital.

3. What are some common mistakes you need to look out for when searching for funding sources?

What mindset and questions do you need to have going into your search to find the best fitting funding source? The two big ones are:

1. What are you willing to give up in exchange for capital?

2. What are you trying to get in return (dollars, connections, infrastructure)?

Start by identifying whether you’re in a winner-takes-all market. Your market can feel like it’s going to give your business a large share—but if it matures into something else with a slow growth rate, you’ll regret giving up your equity or taking on a loan. Don’t look into funding if you’re not going to grow.

Look at your industry and see if there’s a power law distribution (for example, if 20% of the market accounts for 80% of the total market spend if 20% of the industry accounts for 80% of profit). That can be a good indicator of the kind of growth you’ll potentially see if you're able to tap into that specific 20% of the market.

PC: Medium

You’ll also want to consider whether you’re the first to market your product or service, and if the timing of your funding needs to follow that fast pace. For example, if you have the first mover advantage to help a solution grow, by the time you’re ready to take it to market, you have a 12 month advantage on your competitors.

How much capital do you need to accelerate your project and when do you need it done by?

Get your technological investments ahead of time so you can out pace competitors. Some sales cycles need nine to ten months to really take off (especially in B2B), so have all your marketing ready ahead of time. Don’t miss out on those opportunities!

4. How do you get the most value out of your fundraise?

You need to be equal parts rational and optimistic when raising money for your business. It’s not entirely about where the money comes from, but the amount of customers you’re acquiring. You have to return whatever you raise, and ensuring you’re consistently bringing in enough customers will do that.

Ask yourself:

  • Is the amount of revenue you’re generating stable?
  • Are the margins you’re building sustainable?
  • Are you solving customers’ problems? 
  • Are you growing with your customers?
  • How many new customers are you adding?

The dollars you raise through debt or equity are not what will make you successful, it’s how you serve your customers. The top reason businesses fail is not because they ran out of capital, but because they had no market need. Lean on your customers to know if you’re making the most out of the fund.

PC: CB Insights

Focus on generating revenue first.

You can build a great business without outside capital, but it will take time depending on the market you’re in.

The key is to pair your optimism to succeed alongside a strong sense of patience.

Always do what you think is right based on your customers and the data you collect before you make a decision on funding. Break it back down to the customer and note how they think about purchasing or contracting.

Is what you’re offering going to provide them with a positive experience, and is it something that will bring them back for more? Get your house right first before asking anyone to join you.

Related: [Podcast] 4 Steps to Creating a Profitable Demand Generation Strategy