Elon Musk started with nothing more than his desire to be a world changing entrepreneur. Now in 2017 he has successfully built Zip2 and Paypal before selling out and starting all over building SpaceX, Tesla and Solar City into companies that rival Microsoft and Apple in terms of how they are changing the world, not to mention the wealth creation in the process for all involved.
Elon is a master at raising capital so why not learn from how he does it? Not every entrepreneur can expect to be an Elon Musk but the way he went about raising capital and building great businesses is well worth studying.
Having just finished reading Ashlee Vance’s best-selling book about Elon Musk I am inspired to write down the key factors that are required to successfully raise equity and debt capital for any start-up business. Be Inspired by the Best!
How to Raise Equity and Debt Capital Successfully for Your Start-up
Critical Factors When Raising Capital
Ok you have had a brilliant business idea and started on your journey to build a great business. I will assume you have made it this far because you have the passion and skills necessary to get the basics of your business either ready for trading or perhaps having achieved your first sales to real clients.
Most entrepreneurs get started by “bootstrapping” and tapping friends and family to help out. After a period of time doing “bootstrapping” comes the hard part, having made the decision that you would like to raise funds. The question is who do you approach and what will potential investors expect to get from you? Should you seek debt from a bank (assuming you have assets to mortgage) and/or cash from angel investors?
From our experience assisting start-up businesses to successfully raise capital over many years there are a number of critical factors that you need to consider before seeking outside funding for your start-up.
- Vision for the Start-Up Business
To get investors excited and willing to invest, you must clearly explain your vision, demonstrate passion and create excitement about your business idea. If the investor fails to understand what you are wanting to build the rest of your investor pitch will be wasted.
- Target market size, growth and market share
Being able to clearly explain your target market size, market growth and your forecasted market share is essential for your credibility at a personal level and with your businesses financial model. Ideally, you have already achieved sales or conducted market research identifying the market you are targeting is realistic. A warning here from our experience when looking for potential investors unless they have a background in your market sector it is unlikely they will invest in your start-up!
- Unique sales proposition (USP)
What is the unique sales proposition for your product or service with potential customers? This is where Elon Musk stands out with his start-up businesses. There were big risks associated with Musk’s businesses but he had unshakeable belief that he intimately understood the customer and the value proposition he was offering. The same goes with Steve Jobs when he introduced the iPad to the market. All businesses have an implied unique selling (sometimes called “value”) proposition that only your target customers can validate.
How do you get this validation as a start-up? You must have testimonials and case studies that demonstrate this value. Without this validation for most investors they will say NO THANKS and move onto the next opportunity.
- Why is your Product/Service different?
Too often entrepreneurs are so in love with their product or service they start over-promising on anticipated demand. Instead of being focussed they start telling the investors that their product or service will do everything for everybody. It is much better to focus on a specific market sector, preferably large enough to keep the investor’s interest.
Another warning, even if you can demonstrate that your business idea can be profitable, if the market is not large enough, investors will see your idea as a “lifestyle business.” The best way to deal with this issue is to break down your growth plans into Phases that are realistic. Experienced investors can tell immediately if you fail this test to say NO THANKS.
- Why you need “skin in the game”!
Investors will want to see that you have “skin in the game” or “sweat equity” both in terms of your time, and in terms of your money. Prospective investors will want to know that you are passionate about building your business and that you are willing to make big sacrifices to make your business successful. Ultimately investors are really investing in you and your ability to deliver the business plan and promised financial returns.
- Willingness to build a team bigger than yourself
When you make a decision to raise outside capital for your company, you are making a decision to relinquish partial control of your business. This is true even if you maintain a majority interest in the company. There are many examples around where the founder turns out to be the wrong person as CEO when it comes to growing the business. Even Musk and Jobs were forced to step down as CEO early in their start-up careers.
- Cash flow is critical for every Start-Up
What are your cash needs to develop your business? To answer this question you should have specific goals for your business and identify how much money (realistically) you need to deliver these goals? From an investors viewpoint they will want to see regular reporting against agreed milestones?
- Use experienced mentors to assist with capital raising
It is critical to get the right investors into your business at a realistic valuation vs. the wrong investors that add no value. Whilst it is tempting to take any investors money if it is on offer, particularly if they want to take control, avoid this temptation. It is far better to continue to “bootstrap” your business until the right strategic investors are found. This where the appointment of an experienced mentor, who can demonstrate a proven track record with capital raising will be of immense value to you and your business prospects.
Practical Tips for Entrepreneurs
To finish my blog I would like to add a few additional tips for you. Raising equity or debt capital is no different to any other part of your business. It can be hard and frustrating to have regular rejection from potential investors.
Too often when I get asked to assist in raising capital the entrepreneur is under prepared with often even the basic financial plan literally written on the back of a drink coaster. If you enter into investor discussions under prepared simply demonstrates to potential investors that you are not a credible risk for their funds.
Another important tip when dealing with potential investors is to know your own worth. Successful people negotiate to achieve a “win-win” outcome. Don’t come over as desperate to do a deal as there are just as many bad angel investors as there are weak entrepreneurs.
Finally forget about being perfect when raising capital. It is more important to get your business into the market. Even great companies will change course from time to time on a key project and the same goes with start-ups. Elon Musk changed course many times with each of his start-up businesses and you will do the same.
Want to find out more about how to raise equity and debt capital?
If this blog has inspired you to successfully raise debt and equity capital for your start-up business we would love to talk with you about the detailed plans.
Good luck with raising capital for your business venture.