Why I Needed Financing for My Business
Shortly after my college graduation, a few friends and I started a new media company. Within a few weeks we fleshed out the concept, wrote a business plan and set out to seek financing. Looking back, the company didn't stand a chance of raising a dime -- but this is the reality for most start ups. No one invests in ideas or pre-revenue start ups anymore, and it important that entrepreneurs understand this harsh reality.
What Choices I Evaluated, What I Chose to Do, and Why
I assumed the best route to start up capital was venture capital. I couldn't have been more wrong -- or more insane.
I remember thinking, “How hard could it be to raise $15 million?” My friends and I were obviously naïve, foolish and delusional.
With a little hustle, I managed to get us a meeting with a well-known investment firm to discuss the opportunity. Even though our business had yet to bring in a single dollar, and none of us had ever been the CEO of coffee shop let alone a multi-million dollar enterprise, we were all confident that we had a sure thing on our hands. After all, our financial projections forecasted gross revenues of $200 million. What investor could say no to that?
There was one small problem with our plan. None of us had any idea how to pitch an investor. So I did what any clueless entrepreneurial upstart would do: Google searched “how to pitch an investor”.
Nothing that I read online could have prepared me for what was to come. We would quickly find out that our presentation was doomed before we ever set foot into the meeting. In reality, it was doomed before we started writing the business plan. At the beginning of the meeting one of the investors asked me to hand him a one-page executive summary review. I hadn’t prepared a summary, so I handed him the first 11 pages out of the binder encasing my 95-page business plan. Strike one.
Less than four slides into my 32-slide presentation, the second investor interrupted me and said, “OK. Stop. I get it. You definitely don’t need $15 million.”
Defending our business plan, I overconfidently replied: “It can’t be done for less.”
“Really? It can’t be done, huh?” he responded with a smirk masking a hint of laughter. Strike two.
Both of the investors then proceeded to hit us with a barrage of questions:
“How much money have you personally put into your business? Anywhere near $15 million?"
“Why should I pay a bunch of twenty-somethings with no track record $100,000 executive salaries?”
“How much revenue has the business produced to date?”
“Why should I give you $15 million when the company hasn’t even made $15?"
“How can you possibly substantiate gross revenues of $200 million in year three?”
The questions went on and on. None of our answers were favorable. Strike three.
As you might have guessed, I didn't walk out of that meeting with a $15 million check. I later realized, however, that this was one of the greatest educational experiences of my career.
Lessons Learned
- No One Will Give You Money - If you need large sums of capital to launch your venture, go back to the drawing board. Scale down pricey plans and grandiose expenditures. Simplify the idea until it's manageable as an early stage venture.
- Prove Your Business - Never hypothesize. Bootstrap and execute. A company with cash flow and a track record has a better chance of getting investors than a business plan forecasting large returns.
- Leave the hockey sticks on the ice - Respectable investors will not take you seriously if you claim your revenues will grow from $100,000 to $50 million in three years.