So, you’ve come up with a great idea and you’re convinced the market exists. You’ve got the drive, motivation, and the guts to succeed. Now all you need is funding. Simple, right?
Wrong. Choosing an investor is a huge topic. And there’s no ‘one-size-fits-all’ model. The type of investment I needed when I was sitting in my back garden with an idea and a dream is very different to the type of investment we need to grow Elixirr as it stands now with 100 people and presence on three continents.
Regardless of the size and type of business you have, the most important thing you can understand is that your time and your equity are the two most valuable commodities you have. You must treat them like gold dust! Only understanding the value of equity and not understanding the value of time is one of the mistakes I see entrepreneurs make most often…
Treat your time like you treat your cash
You might have heard me say this before. I wrote about it in a previous blog and it’s so important to come back to it now: never do you need to understand the value of your time more than when you are looking for an investor.
Your time is your investment in your business. What are you worth in the marketplace for the period of time you plan for any funding to cover? This is the figure you are investing. To use a simple (albeit not very likely!) example: if you are putting in £60,000 in cash and £40,000 in time and you haven’t valued your time when you offer up equity, you give away £40,000 for nothing - NOT a good move.
What do you need the money for?
There are so many different types of money available, and so many different ways to get it, that we continuously see businesses failing or stalling because they picked the wrong one. Do not get distracted by terminology – in some ways, this is the problem.
You need to start by asking yourself these questions: what milestone are you reaching for? Do you need money to get you to it? Or do you actually and often, more importantly, need skills?
Money can buy you skills that you don’t have or that are better than yours. If you don’t have money, you can often buy the same skills for equity. This can be a great move as it aligns the execution inside your business with ultimate performance and valuation. So, before you start looking for investment, make sure you understand the balance in your business between what you need in skill and what you need in cash. Only then can you work out how to motivate the best investment outcome.
Should you pay yourself?
I actually think there’s a bit of a dichotomy to tackle here.
There’s quite a bit of money around in the investment community right now and I feel like entrepreneurs are focussed, sometimes entirely, on getting cash in the door to pay themselves. In some ways, this is understandable, particularly if you have been sweating for a while. But, this sweat can lead you to the wrong focus.
A simple example to make this point… Your business is valued at £1m and you own 100%. You need to raise £100,000, so you are selling 10%. If you are going to pay yourself £50,000 and you also have £50,000 of operating expenses, what happens to the value of your equity? If that £100,000 cash injection increases the value of the business to £2m, your position is better off. However, if the valuation sticks at £1m, you are worse off in the long-term. You need an investor that wants to see you maximise your own value by helping you to understand these trade-offs. And it’s in their interest to do this as they maximise their own value at the same time!
As an entrepreneur, of course, I want to be able to pay my mortgage and put food on the table. But should I be doing this with someone else’s money? And should I be doing this at the expense of my valuable equity? In some ways, I believe you should hold yourself to account and not pay yourself any money until you make the business successful. It’s a very fine balance to strike, but it will give you that extra push and focus you on what will make your business grow.
Less is more
Let’s say you’ve given up a significant chunk of your equity for £5m from a VC. You’ve committed to building your product in exactly a year, to plan. You decide to hire 20 developers who hit the ground running (or coding).
After a year, you’ve built a really slick, good-looking piece of technology ready to show off to potential customers. And then (unless you’re really lucky), the worst happens - they rip it apart! You’ve taken £5m, spent £5m and given away a whole year of precious time and equity. And all you’ve done is wasted it developing a whole bunch of technology, components and extra facets to your proposition that don’t have anything to do with helping your business grow sustainably.
If you are putting in £60,000 in cash and £40,000 in time and you haven’t valued your time when you offer up equity, you give away £40,000 for nothing.
What if you’d asked for a smaller amount of money to get you to a milestone three months out, rather than a year out? You would have realised it wasn’t working a lot earlier, that’s what! This would have given you the breathing space to (warning: Silicon Valley cliché coming) ‘pivot’, change direction and quickly get back on the right track. You wouldn’t have wasted so much time and equity on something that doesn’t work.
If you wish to launch a product, do it without the bells and whistles to prove its viability first. In my experience, customers only need to understand the minimum viable product (MVP) to be inclined to work with you to develop it. So, find just enough money to get you to an MVP, take it to market and evolve it over time. Unless you require a huge technology infrastructure, you don’t need £5m in exchange for a huge equity dilution to do this.
Your MVP may even generate some revenue. And revenue is empowering! It means you won’t need as much investment next time round and you can protect your precious equity.
Choose your investment, don’t let it choose you
The investment community is trying to sell you a product. Never forget that you are buying an investment, so you must make sure you’re buying the right thing.
Picture this (and you might remember this from Wolf of Wall Street...), you’re interviewing for a sales role. The interviewer picks up the pen on his desk and says “sell me this pen”. You rave about the pen; how it’s such a vivid blue, how it writes so fluidly and at such a bargain price etc. You think you’ve done a great job. Three days later you get a phone call – you didn’t get the job. Why? Because a good salesperson would ask “can you write me a letter?” The customer would respond “but I don’t have a pen”, leading perfectly into “well, would you like one?”
I know that’s a pretty cheesy and over-used example, but that’s because it teaches us an important lesson: a seller will almost always try to sell features, not fulfil needs. The investment community is no different.
I’m also only interested in founders who treat their time like they treat their cash.
Looking at the features of investment products means you will always look for ways to make them work for your business situation. This is absolutely the wrong thing to do! You need to start the other way around. Start with what your business needs; then, and only then, should you start looking at solutions that fulfil them.
Remember you’re buying a product. Don’t be tempted by the offer of ‘fast’ or ‘glamorous’ investments that you’ll have to try and retrofit into your business. If you do, you might just end up with a Mont Blanc when all you really needed was a Bic.
Little and often
As an investor, I’m much more interested in businesses that are asking for just enough money to get them to their next key milestone than those that are asking for all the money they’ll ever need - I want a founder and owner who is very protective of their own equity!
Most products change tack a lot in the beginning. So, take small, regular investments to get you there. Reaching a well-considered milestone without any spare capital means you have to make a very clear choice about your future direction. Too much money essentially buys you the freedom to cruise, it buys you a year or two of doing what you want because you’re not holding yourself to account.
I’m also only interested in founders who treat their time like they treat their cash. Only when you understand the value of your time do you start thinking strategically about what your business really requires. It’s important for founders not to sell out in the early days to maintain motivation in the long run.
Taking this approach will keep your two most precious assets protected: your time and your equity. Remember, they’re gold dust! Failing to protect them will more than likely mean the failure of your business.