Your Business Isn’t WhatsApp
I’ve lost count of the number of crazy valuations that founders apply to their businesses. Many of these are early stage, having hardly turned a wheel, yet they expect people to be willing to stump up a serious amount of dosh in return for a pretty meagre stake.
Reality check time. Most businesses are not going to achieve hockey stick growth. Relatively few businesses ever exceed £1m turnover let alone £1m net profit. Most angel investors would get a better return on investment (ROI) – and almost infinitely less risk – by investing in managed funds on the stock market. So why on earth would someone who’s financially astute enough to have built enough assets to do so, invest money in your business?
And is that what you want or need anyway? The moment you’ve got an external investor, you’ve lost at least some part of the freedom you’ve gained by running your own business compared to working for someone else. You’re now answerable to that investor, you’ve got to involve them in strategic business decisions, you’ve got to at least take account of their views and opinions. So if you do need external funding, the choice of who you invite to invest involves much more than finding someone who’s willing to part with their money.
What do investors want? Tricky one that, as it’s easy to plum for the obvious answer – ROI. And yes, not many people will want to invest in your business and receive an ROI of less than, say, 20% pa over the lifetime of their investment. But there are also individual investors who are looking for involvement and a challenge, an opportunity to add value through using their own business skills and experience. For many business owners, the latter group may offer considerably more benefit than the simple financial investor.
What do you need? Cash? Advice? Bandwidth? Expertise? Contacts & Relationships? Perhaps a combination of these? It’s worth taking a few minutes to think about this and define what your priorities are. The answer to this question will determine the route you take to find your investor. It might be for example that the financial investment is the least important aspect, in which case whether or not someone’s got the money or is willing to invest is not the criteria to be using. Or if it’s just the cash and little involvement that you’d like, then your route will be completely different.
The worst thing to do is looking for investment by advertising a non-executive director role with a requirement for the individual to invest. Do you want a great non-exec who will contribute in such a way that will add significant value, or do you want their money? These two objectives are rarely synonymous, and the risk is you’ll end up with an average non-exec (and who wants average?), who is fairly easily parted with their money (which by definition makes them a fool).
Consider organic growth. It’s so easy to think that you must have external investment to grow a business. OK, for some businesses that is the case, but for many it isn’t. Clever cash management, smart marketing, astute cost control, great sales forecasting, and tight owner belts can enable you to grow a business successfully without external investment. There’s lots of ways of doing this – start by assuming that’s what you’re going to do, then work out how.
Realistic valuation. If you’re seeking external investment, base your value on ‘now’ plus an element of potential, not on a ‘pie in the sky’ future dream. Have a realistically achievable business plan, and consider the real ROI that an investor is most likely to obtain. Is that ROI appropriate considering the business risk?
If however, you’re looking for someone to personally contribute to the business’s future success by investing an ongoing proportion of their time, effort and expertise, then consider a shareholding based on the value they will contribute to the business, priced (if they are investing money) at a sensible and fair current business figure.
And if you are the next WhatsApp, sorry, but I guess I’ve missed out.
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