CBInsights, a technology-driven company that provides research, data, and information for deal sourcing, due diligence, and market and competitive intelligence, analyzed 101 startup failure post-mortems since 2014 and found that the second most frequently cited reason for failure was that the company ran out of cash. Having access to sources of capital, raising capital and allocating it wisely is critical for business success.
I have spent years financing and investing in a wide range of entrepreneurial businesses – from angel investments as small as $10,000 to large financings as big as half a billion dollars – and based on that experience, I’ve seen recurring patterns and behaviours amongst successful entrepreneurs. The following advice is universal for anyone looking for business capital.
Meet people before you need to meet them
This is true about a lot of different situations and couldn’t be truer for financing. Even the most experienced and seasoned entrepreneurs turn to people in their existing network, that they know well, with whom there exists a great deal of mutual trust, and with whom they have great relationships. To get to the point of having aligned investors in your network already, you need to meet them before you need to meet them.
Women entrepreneurs take note though: the Diana Project reported in 2014 that women are excluded from networks of growth capital finance and appeared to have insufficient contacts with investors and financiers. Women entrepreneurs need to take extra steps, and take them early, to develop the networks of funding that they need presently or in the future.
Save money and save early
Build your own startup capital. You need your own resources to start your ventures without the need for external capital. Starting early requires some planning. For example, start saving before you take the leap from full-time employment. Budgeting wisely paves the way towards good financial management while you’re building your business.
Think like an investor
As examined in The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, written by William N. Thorndike, savvy business owners think like investors and pay close attention to how they must raise and allocate capital over the lifetime of their business.
For example, smart investors know that they may need to write more than one cheque to properly fund a successful business. Build up your own capital, invest a little, then reserve some for follow-on investment in your own venture. Having capital set aside means you can continue to invest in your venture and leverage your own capital into additional financing from external sources later on, if your business needs it. Being able to approach investors and financiers with the opportunity to co-invest alongside you, the founder, is a far more compelling and attractive story. In Integrated Investing: Impact Investing with Head, Heart, Body, and Soul, I devoted a chapter to the mindsets that help people think like investors.
Learn the language of finance
Get comfortable with numbers, accounting, and financial terms. From return on investment and internal rate of return to dilution and cap tables, learn what these terms mean and why they are important. Know the difference between burn rate and run rate. Know your debits from your credits and understand the different information that is told by your balance sheet, income statement, and cashflow.
There was a saying (when I was an investment banker): she who owns the financial model, owns the deal. This was to say, understanding the numbers was paramount.
It doesn’t hurt to understand a bit of legalese
In addition to understanding numbers, I have always found understanding the legal documents associated with funding to be an advantage in negotiations. Whereas financial models tell the story of an investment opportunity in numbers, legal documents tell the story in legalese. I’m able to give anyone an overview of the legal documents they are about to enter into. I add a caveat that I’m not a lawyer and encourage people to get legal advice. I encourage people to have legal documents independently reviewed by a lawyer, but that doesn’t absolve me from understanding, in general terms, what is in the documents. The number of times I’ve encountered entrepreneurs who have no idea what’s in their documents is too frequent to count and it’s scary.
Understand what “exit” means and have a strategy
Exit is most frequently talked about from the perspective of investors and it is the time and way we can realize our return on investment. Exit is when an investment opportunity is ready to be passed on to another investor. Entrepreneurs may or may not exit at the same time as investors. Research how other ventures and investors have realized exits. Get versed on mergers and acquisitions activity in your sector and develop a credible exit strategy.
Be your best, most informed self and trust that there are aligned investors out there
Be informed and be yourself. Seek out investors who are aligned with your vision, who will champion you, mentor you, and be a partner in your venture. The need to conform to a particular pattern familiar to some investors is becoming less and less prevalent. The investor community is becoming more diverse and therefore the goal of attracting funding is becoming about fit, complement, and alignment.
It’s an exciting time to be an entrepreneur. Build your network, find your community, and be informed, so that you can continue to build exciting, impactful businesses. Be the best investor in your own business and be a magnet for success.
Bonnie is the founder of Pique Ventures, and the founding investor in Pique Fund. She’s also the author of Integrated Investing, an amazing (and interesting! we promise!) book on impact investing, which Admin Slayer was thrilled to support at its launch. Bonnie has been mobilizing capital for entrepreneurial businesses for 20 years, having financed over $1 billion of alternative investments in Europe and North America. She’s an accountant, a former real estate investment banker and former corporate finance advisor, and a complete math nerd. Bonnie is smart, funny, has great taste in shoes, and knows what the heck she’s talking about.