I used to think investor readiness meant having a business plan.
But that’s just the start
I’ll walk you through 9 items that are overlooked.
- Cash runway to complete the fundraiser
- Bus factor of 2 or more
- Operational processes documented
- Organized documents
- Storytelling and presentations
- Coaching (and maybe therapy)
- Accent, voice and culture coaching
- Sales skills
- Realistic company valuation
Most people don’t know what investor readiness truly is because many of these topics are politically incorrect or uncomfortable.
As much as entrepreneurs complain (justifiably) about investors, they usually lack the necessary skills to attract investors effectively.
You must have 6 months of runway to raise capital. Or better yet, be profitable. This is because it takes 6 months MINIMUM to raise capital. When someone told me this as an entrepreneur, I thought they were joking. No, this is real. 6-24 months, with numbers closer to 24 months being more common. If you don’t have 6 months of cash you won’t be able to raise money. No one gets on a sinking ship.
If you don’t have 6 months of runway, defined as cash in the bank divided by monthly burn rate, then fixing this is the first order of business. And it can be painful.
- Cut any pet R&D projects.
- Do a layoff. Cut anyone not working on revenue-creating projects in the next 6 months. If someone is working on a rebrand, cut that function. If they are upgrading the infrastructure, cut that function. Better to cut deep the first time than have to cut several times. (I speak from experience.)
- Reduce pay to your management.
- Ask senior leadership to take deferred payment. Or move them to part-time.
- Anyone getting comp in equity, like a chairman/co-founder, shouldn’t get paid cash.
- Former founders not doing any work shouldn’t be paid at all. (Yes, I’ve seen this.)
- Renegotiate your lease (the landlord would rather make a little less than have to find a new tenant).
- Renegotiate your payment terms. Ask for longer payment terms to your suppliers and shorter payment terms with your buyers. If some buyers want long payment terms, cut them even if they are willing to pay more.
- Ask your current investors for a bridge loan. Better to do this earlier than later. And then keep asking them. No reason to be shy. There’s no downside to them saying no. The only cost is to your ego.
- Have the founders put in a loan. This can have interest and be at the top of the preference stack. But adding cash will make the company more attractive.
- If a shareholder wants to be bought out, now is the time to do it when the expected share price is low.
- Factor your invoices, if possible.
- Sell any assets that are not producing revenue.
- Look for alternate ways to generate revenue, like leasing out the half of your warehouse/office you aren’t using. Take on a part-time consulting gig.
- Cut product lines that aren’t generating cash flow (different from profitability).
This may sound harsh but, as they say, a crisis is a terrible thing to waste. Now is a great time to clean house.
If you got hit by a bus what would happen to your business? Do you have systems in place that would keep on humming? The bus factor is how many people would need to be hit by a bus to kill your business. To raise money, your Bus Factor should be 2 or more.
Develop processes for every key activity. Investors will often want to see a handbook of how you run your operations. Then they’ll want to see that it’s implemented. Typically, a central part of having systems is to have ERP software (Enterprise Resource Planning).
Save all your docs in an organized place. Do your docs look like the wardrobe on the left or the right?
Which would make a better impression on your guests visiting for the weekend?
You should have a Data Room folder locally on your computer or in an online drive (for easy sharing to an investor) which is organized by:
- Investment Teaser
- Tax registration certificate
- Tax compliance certificate
- Social impact summary (If the investor is interested in social impact)
- Pitch dec
- Financial reports
- Financial models
- Business registration certificate
- Business plan
- Business licenses
“300,000 young girls are left with their mean stepmothers and are prevented from having any fun. Every year. This is contrary to SDG7.”
Imagine that’s how Cinderella started. It wouldn’t work. No one would read it.
And yet, that’s how most entrepreneurs talk about their businesses.
1 death is a tragedy; 1 million is a statistic. Stop talking in numbers and start talking about people. Once people are emotionally invested, then you can start talking about the big picture.
If you haven’t already, sign up for Toastmasters to learn how to present. It’s in nearly every major city in the world, including Africa. (In fact, the best Toastmasters I ever attended was in Nairobi.) Many decent entrepreneurs are bad at presentations and storytelling. Imagine how great they could be…
If Michael Jordan needed a coach (he had several) and Lionel Messi had a coach, then probably you and I could also benefit from a coach. There are a lot of tricky decisions about who to hire and fire. Having someone to bounce ideas off of will keep you sane. If you make $1m-$10m worth of decisions in the next year, it’s worth paying $3000 for a coach. For me I got the right coach through incubation and acceleration programs. This might work well for you.
If you think there might be something within yourself holding you back, consider reaching out to a therapist to help rewire disempowered ways of thinking, bad habits such as procrastination, or other deep-rooted issues that may be infiltrating your business.
If the investor can’t understand an entrepreneur’s accent–if they can’t communicate–they can’t invest. It isn’t only about language but also tone and nonverbal communication. There are many books on understanding people from different cultures. Before going to South Africa for business I read a book on South Africans business culture to learn customs I didn’t even know that I didn’t know.
For example, an entrepreneur that shows up on African time shouldn’t expect to raise funds from an American investor who expects meetings to start on time. You’d think I’m stating the obvious here, but showing up late and unprepared is common. If the meeting is on Microsoft Teams and you haven’t used Teams before, then showing up “on time” is too late to solve any technical challenges. You need to try a test run on Teams the day before.
Raising money is sales, and like any other skill, it takes lots and lots of practice.
I set up a meeting for an entrepreneur with an investor who was genuinely excited about this particular industry and had over $100k to invest. I thought, “This is going to be perfect. What could go wrong?”
- First, the entrepreneur never let the investor introduce himself but launched straight into the pitch.
- When the investor tried to ask questions the entrepreneur kept interrupting.
- The entrepreneur never asked the investor a single question about the investor’s interests and needs.
- Even though I prepped the entrepreneur that the investor was only interested in one of his two business lines, the entrepreneur only pitched the other one.
After the meeting, when I gave the entrepreneur feedback on how we could improve future meetings, he responded, “Well, if that investor wants me to lick his boots, I don’t want him anyways.” There’s a big difference between licking boots and letting an investor ask questions. We don’t work with that entrepreneur anymore.
Not everyone has EQ (emotional intelligence). But the good thing about EQ compared to IQ is that EQ can be learned and improved upon. A program course like Landmark or Authentic Relating could be beneficial.
A beauty company raising capital shared an ambitious pitch. Despite generating $150,000 in annual revenue and remaining unprofitable after seven years, they sought to raise $3 million for 25% equity, implying a $9 million pre-money valuation. The valuation didn’t align with the company’s financial reality. When asked during a call if someone was ready to assist in raising the $3 million, the response was a polite, “You know, I think it’s not a fit for me, but let me know how it goes.”
This serves as a reminder that realistic valuations are crucial when seeking investment, as overly ambitious figures can deter potential backers.
As you run through this checklist on investment readiness, what’s one thing you can focus on this week?
