Every day, we talk with entrepreneurs who wish to grow or start a business, with the help of other people's money (whether the source is investors, banks, factoring firms, or grants). If you are among them, you HAVE to be able to answer the following five questions, briefly, clearly, and compellingly or you will not get past a first phone call with a legitimate source of funds and each subsequent call to someone else will be a waste of everyone's time. Too often, the entrepreneurs who call us are absolutely stymied by these questions. Don't be like them!
The Questions:
- How do you (or how will you)
make money?
- How much do you wish to raise
(or borrow)?
- What will you do with the
investment (or loan amount)?
- How will you pay it back (by
date) (or how and when will the investor earn a return on
investment)?
- What experience do you and
your management team have in this industry and with prior investors'
money (or loans)?
Why These Questions are Important:
Each question helps your potential lender or investor assess risk and potential reward. If you hem and haw on any of them, you are doomed, because it means that you don't appreciate the risk you are asking that person to take with money he/she has that you lack. A non-answer to any one of these is akin to asking someone to dive into a dark pool without being able to answer the obvious first question, “how deep is it?”
Components of Compelling Answers
- The answer to question 1 (How
do you make money?) is stronger with any of the following
components:
(a) Multiple revenue streams are better than “one trick ponies” because the variety allows the company to stay afloat even if some products or services fail or take longer to succeed or cost more to develop/deliver than anticipated;
(b) The revenue projections are not dependent on unlikely scenarios (like huge market share grabs right away or fuel prices lower than they are today or a a shorter sales cycle than is normal for your industry);
(c) Products and services that are correlated to a variety of economic assumptions are likely to weather the highs and lows of economic cycles better than those that depend only on a high or low. For example, a company might have some offerings attractive in periods of inflation AND recession or when client companies or target populations are growing AND maintaining, aging, and retracting.
(d) Demonstrate profitability, even if in a small market or by another company.
- Questions 2, 3, and 4 are
related, even if they are asked separately, so construct your
answers with each one in mind. This is because the amount you wish
to raise should be directly related to how you plan to use it and
that use should enable you to pay back your lender or investor on
time and at a profit. For example, if your reason for raising money
is “to rent larger office space and pay me a salary,” or “to
research the market potential” such answers do not translate into
repayment of the loan or investment and therefore do not encourage
much confidence. These are faith based answers, like “just trust
me.” Why? A compelling answer is one that directly leads to a
believable profit. Good answers might sound like this: “We wish
to raise $xx in order to increase our manufacturing speed to meet
current demand that exceeds our capacity” or “We wish to raise
$xx to buy a competitor we believe to be undervalued and that offers
a complementary fit with our firm in terms of customer base,
geography, and product lines.” Or “this business model has been
profitably test marketed (where) and we are now ready to launch it
on a larger scale, with $xx for experienced industry sales personnel
in the most lucrative markets.”
- Your answer to Question 5
indicates your ability to understand and respond to the the risks in
the business you propose to run with someone else's money. Managers
with a track record of relevant experience are obviously more
attractive than those without. Managers who have borrowed money or
taken investors' money and returned it, on time, at a profit to the
lender or investor are equally appealing. If you have not done the
exact thing before to great financial gain (because otherwise you
wouldn't need to borrow money, would you?) you can still construct a
compelling answer. For example, have a board of advisers experienced
in this industry, an excellent credit rating, or prior lines of
credit that were paid back on time after being used well. Have a
list of pertinent referrals from professionals in your current and
prior industries. If you are an expert in the pertinent field, who
knows it? Have you published papers, delivered speeches? If not,
write some and put them on your website or send out press releases.
Neither costs much. Become an expert in your field. Research other
public and private companies in this sector, join relevant
professional associations, subscribe to pertinent journals.
There is nothing more embarrassing than talking to an entrepreneur who knows less about his/her industry than we do, especially when we don't consider ourselves expert, but just educated business people. Compelling answers could include variants of: “I have x years of experience in this aspect of the industry, and have assembled a management team and advisory board that excels in the other areas we need to anticipate and respond to the market potential.” Or “I am a serial entrepreneur who has run xxx number of companies in other industries and sold them at a profit (or returned investors' money) in most cases and learned hard and lasting lessons when I didn't. I have succeeded by a set of priorities that has guided me in each of the prior companies and will do so in this one, too. Those priorities are xyz.” Or “I have several patented game changing innovations that will enable our targeted client companies to deliver results faster, cheaper and better than their competitors.”
Conclusion
If you can't answer these questions well, don't pick up the phone to ask for money. Put your time, instead, into learning more about your industry or surrounding yourself with others who know it better than you do. They can help you not only answer these questions, but build a profitable company. Who knows. You may never need to borrow a dime to make a dollar.
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