One of the most common challenges entrepreneurs face is financing their business. In fact, a 2013 Ernst & Young study suggests 73 per cent of entrepreneurs from Canada say it remains difficult to access funding. Here are ten tips for successfully securing funding:
1. Be an investor first, even if you don't have any money. The best way to learn about owning and operating companies is to invest in them. The process of picking companies to build a portfolio will give you practice as a shareholder and investor that can help better understand how to tailor your business objectives to attract funding.
2. Solve a problem disruptively. To attract investors, you need a disruptive solution that will transform the market by offering a new approach. Incremental solutions tend to attract incremental returns so try to go big.
3. Identify a shortlist of target purchasers and build for their needs. Most companies achieve reasonable revenues but can only secure the return of capital required through a sale or "exit'. While a small percentage of ventures will generate enough cash to retain ownership and reward investors through a long-term dividend strategy, the majority will start shopping for a buy-out. Have a short list from the outset of target purchasers to buy the company at year five: then build your company with their needs in mind.
4. Raise financing at the earliest possible moment. Some entrepreneurs resist raising capital – they don't want third-party shareholders. But businesses take about three years to reach profitability, so it's important to have a plan for financing losses during the start-up stages to share the risks and the rewards. The earlier you go to market with an idea, the less time you will spend investing in a company that can't attract financing.
5. Seek investors when you are flush, not broke. Periods of financial difficulty are the worst possible time to secure investor interest. High-potential companies (and those with lots of cash) are always in demand. Create an investor market for your company that you can leverage to drive favourable terms.
6. Learn the art of the pitch. Securing financing is all about the pitch – you must present an exciting and credible plan that demonstrates how an idea will become a high-performance company. If you can't pitch effectively, bring in a partner who can.
7. Know your audience and tailor your pitch accordingly. While a consistent set of metrics will form the foundation of any pitch, you must tailor your key messages to each investor. For example, pitching one of Canada's many public sector sources of business funding will require demonstrating a public benefit, such as job creation or regional development. Approach every pitch with both your "send" and "receive" antennae on high alert and be ready to adjust on the fly.
8. Treat every rejection as high-value market feedback. My first tech start-up attracted nearly 20 rejections before I landed an investor – which is not unusual – but each pitch provided an opportunity to refine my plan and grow my skills. By my third venture, I knew exactly what my target investors were looking for in advance. Use investor information and feedback to inform your financing plan.
9. Don't overlook government funding as an important part of your financing strategy. Canadian governments distribute almost $30-billion per year through more than 4,000 business support programs–the second highest level of financial support for business among OECD countries worldwide, as a percentage of GDP.
10. Remember–financing is a process, not a singular task. While some of the steps for growing a company run sequentially, financing must run on its own parallel track throughout the entire process. Divide your financing objectives into two to three rounds: money is very expensive in the first round when the business is no revenue and all risk. Once you have a working prototype and a committed customer, go back out with a higher share price and less dilution.
The role of an investor is to try to pick winners over losers. Think about financing from day one, build your business to meet your funding strategy, and don't forget to reflect and make changes along the way. Good luck!
Teri Kirk is an e-commerce entrepreneur and founder and CEO of The Funding Portal