Published By Janet Gershen-Siegel at October 6th, 2017
Fundability – or, not just the ability to be funded but how desirable an entity is for funding – means different things to banks, venture capitalists, angel investors, and informal investors. However, they all agree on a few basic principles.
Investors aren’t in the business of giving you gifts. Rather, they want to see a return on their investment. Therefore, if you are bleeding funds, they are not going to want to pay for a piece of what, to their minds, is a poor investment.
How do you turn it around? Do some financial triage. Maybe your company doesn’t need a second location. Maybe you don’t need a full-time assistant when part-time will do. Maybe you should be leaning harder on your customers with outstanding invoices.
Startups will get a different question – see #2.
For startups, the question is more like: do you have a killer product or service? An idea by itself is not going to be enough, so you also need to have a complete business system in place. Investors are going to need to see what you can do with your amazing idea, and how it can be effectively monetized.
If your answer is a vague, “general fund”, investors are not going to be interested. First of all, they want you to demonstrate you will be responsible with their money. In addition, they also want to know that your business is organized. You can be the most creative and least business-oriented person out there, so long as someone in your business is handling the financial heavy lifting. Someone has to be sure that the taxes are paid and the invoices go out to your customers.
Investors don’t really want to see you using the funds for day to day operations. If your business is operating at a profit (see #1), then investors will assume that you can handle those expenses. Instead, they want to see if you are going to use their funds for something new and different. In general, this means you need to be using their funds for growth – a new piece of vital equipment; a new factory; a second location; a new product line – these are only a few ideas which would fit the bill for growth. See #4 for the comparable question for startups.
For startups, a similar question is: how much funding will you need to get to positive cash flow and profitability? In this instance, your use for the money is still a specific one – it’s to bring your new business to profitability.
This question is the same whether you are already in business or you are trying to get a startup funded. This will separate the lifestyle businesses (designed to make their owners happy but not become bigger players) from the scalable businesses. A lifestyle business generally won’t get this sort of funding. Instead, it will be funded via secured debt or bootstrapping or unsecured debt.
A scalable business can still be small and not expect explosive growth, but still be fundable. Your new widget factory might start off small. Investors would expect it to have more modest funding needs.
Opening up new markets (or going for new customers or trying to market new products) will be seen as riskier, unless you have a proven track record of success via pioneering. See #7 for the semi-comparable question for startup ventures.
If you do not know your market, then you will not know how to market to those customers. If your customers are middle-aged women, they will probably respond to different strategies than if your customers are teenaged boys. Simply creating a product and flinging it out to the ether, hoping someone will buy it, is not going to sit well with investors. Instead, they want you to have scouted out your potential clientele before you coming knocking and asking for cash.
The remaining questions are just for startups.
Often these are your biggest investors, or they might be your only investors. Treat them well.
Investors want to know this number because it shows a commitment to the business. If you want to keep your nest egg, you’ll be a lot more careful with funds than if you’re just playing around with other people’s money.
Your team does not have to be employees of your business. It can also be advisors and mentors. Check with your alma mater. There might be a professor interested in your new business, even if you never took a class with that person. Not a college graduate? Try your local community college anyway. A professor might even want to use your business experience and story in a lecture.
Know the answers to these questions and get funded!