“How much will you need to raise to get to profitability?” I asked the entrepreneur.
He said, “We can get to profitability on a million or less, but that’s not the plan. I plan to raise a million to a million and a half and build out the concept. Then I’ll raise an additional three million to scale the company and ultimately grow it to profitability.”
“You may want to rethink that fundraising plan. It’s not what sophisticated angel investors are looking for. Think about getting to profitability sooner rather than later. Sustainability first, then the big money raise for growth if needed,” I said.
The Missing Ingredient
“It is difficult to raise the initial funding for any company. You have a really good idea which is addressing a real market problem,” I said.
“Further, you have the maturity, experience, educational background, and passion to start and grow this company, but you don’t have the money to do it. To get the initial funds, you need to separate startup funding from scaling funding. From creating a business to building a business.”
Here’s how I advised this entrepreneur to get funding.
- Put a plan together which gets you to profitability on no more than one million dollars of funding. The plan should contain two big milestones which result in profitability from two funding rounds.
- Present the plan to qualified investors interested in your market space. They are qualified because they are willing to match their initial investment in a second round raise. Their goal is to get you to the planned milestones and profitability.
- Give them an incredible deal. Match the attractiveness of the business plan with an attractive equity stake. This could be from forty to sixty percent of the company over the two rounds depending on the relevance and quality of the investors. After all, these are your financial cofounders.
Creating the Business
When you achieve profitability, then (and only then) you can say you created a business. It will be small but sustainable. Even though the business is small, it is serving customers and generating cash.
You created value for you and your financial cofounders. Furthermore, you proved the idea to actually be a business.
Scaling the Business
Your next step is to think how you can scale or build the business. This will be different from the startup plan and will require new growth stage investors—individuals or, more likely, venture funds who specialize in scaling proven concepts into large companies.
So instead of trying to fund the whole vision in one fell swoop, break your funding into startup funding and growth funding. I guarantee you’ll be more successful in attracting the investors when you need them.