“I won’t ever forget the agony of waiting for the first sale—it was excruciating,” says Founding Director of redballoon.com.au and Shark on Network TEN’s business reality program, Shark Tank Australia, Naomi Simson.
It took two months and four days for RedBalloons' first order to finally arrive. Today the company boasts sales of over two and a half million experiences. While Simson still wonders why she didn't give up, the truth is that it never occurred to her, and she says it should never occur to you. Often, to start or grow a business, we need to find money, skills and contacts—and finding the right investor is vital. Naomi reveals the nine truths about asking for money.
1. If you want someone's money, research who you're pitching to
Every potential investor has a different reason for investing. Do the work and find out as much as you can about the people behind the 'investor' label. What do they believe in? What is their background? What is their expertise? People do business with people, and investors invest in people.
2. Understand your customers
An idea is only an idea until someone is prepared to pay money for it—then it has the potential to be a commercial product. Asking friends and family is not research (although it's a good start). In the tech world, we have what is called minimum viable product—we ship 'beta' product to get customer feedback.
3. Discover everything possible about the industry
It is unlikely an investor will know as much as you about the industry and market you're in (putting a Facebook page together to 'test' the industry is not what I mean here). How big is the industry? How many competitors are there? Is it a new market or existing? Know your market and know its potential.
4. Deeply understand your numbers and cash flow
If you're not a numbers person, practise and work out tools to remember them. There is no room for rounding! Key numbers to know are the cost of acquisition of a customer, the cost to serve a customer, the number of unique customers, conversion rates, and of course the obvious ones— cash burn and time to profit at current run rates pre and post investment.
5. Deal with the details
If necessary, get trademarks, patents, registrations, licences and approvals. No investor will be interested in taking on a business that has any potential litigation; so make sure you have tied up every loose end before seeking investment. Never underestimate prospective customers—they will do their due diligence too. It is about building trust.
6. Understand different valuation models
If you are pitching an equity deal based on future potential sales, then you need to be clear on why this is so and have a demonstrable track record. If you're valuing your business based on current top-line revenue, know and show similar valuations in your industry. Too many times we saw people pitch with a valuation that was all about 'hope'—investors don't buy hope as a sustainable strategy.
7. Take your customers and potential investors on a journey
I've been known to say, "It's just business", but what I'm really saying is, "It's not just my money: it is my time, my reputation and my commitment that you are asking for." Make sure your pitch is filled with facts and numbers. More than anything, you should be someone they can believe in.
8. Tell us about the team
I have seen investments made, dependent on a founder finding a co-founder. Often we can see that a founder brings certain skills but might well need some others to be able to scale the business. The reality is that without a team around them, and a proven record of his or her ability to attract, lead and inspire a team, the investment can be vulnerable. I like to know how they recruit, how they reward, and how engaged the team is. I look at the tools that they are using (so many are cloud-based) such as redii.com.
9. Don't give up!
Some of the best advice I was given was simply, "Don't give up; if it was easy everyone would do it." However, it is important to know the difference between persistence and pig headedness.