How do I get funding for my business?
How do I get funding for my business?
We’d all like to have someone believe in—and give us money for—our business ideas. In the heart of every entrepreneur is an undying optimist. Pessimists simply can’t survive the emotional roller-coaster ride of a start-up. Optimism and confidence in your business idea is a must, but it’s important to keep in mind that while your idea might be revolutionary, interesting and innovative, that doesn’t necessarily mean that it’s fundable.
Venture-style investing is a very rational business. Typically, professional investors don’t get caught up in the emotion of a market or business. They look for underlying team characteristics, market conditions and established criteria to judge early-stage companies on their chances of success.
At Community Equity Partners, we have developed specific criteria for consideration on our website, developed over years of experience in the market and benefitting from evaluating hundreds of businesses, successful entrepreneurs, subject matter experts and input from our investors.
Here’s what we’re looking for:
Unique and protectable products or services with large market opportunities and recurring revenue models.
A management team in place.
A beta version of the product with beta clients or testing.
Companies within six months of making meaningful revenue (excluding biotech and medical devices, who have longer processes).
Companies that should be cash flow positive within 2 years and break even in 3.
Seed, Series A or Series B offerings.
Clear and logical marketing, sales and exit plans.
$1.5M - $12M valuation.
Potential for return. We expect to see a 3-5x increase on our invested capital in 3-5 years; 10 if it goes longer.
When you’re asking for funding, remember that people invest in people in markets they like and understand. For the wrong investor, your business will never be fundable—make sure you find and carefully review the criteria for investment before applying or reaching out. It will save you a lot of time and effort, and help you feel more successful and maintain your confidence as you move forward.
There are other ways to tell if your business is investable, too.
Is your business a Lifestyle Business?
A lifestyle business is a business that can’t scale without you, the founder. For example, if you run a consulting-based business, your IP and ability to scale is directly related to the number of hours you can work. The only way to scale up this type of business is add more humans that mimic you—meaning that incremental revenue gains are directly tied to incremental costs in a linear way. Without economies of scale in place, the business does not generate long-term exit opportunities that justify an investment.
There is nothing wrong with a lifestyle business, but they are not fundable by professional investors. Lifestyle businesses should spend time seeking friends, family and partners that know and trust you and want to see your business grow while sharing the workload and success.
Many of these businesses may be lower risk, but they are also lower reward. As investors, we are looking for low risk and high reward opportunities—or higher risk to get higher rewards.
Is your business big enough for investment?
Early-stage investors like Angels expect to see businesses that can command a minimum of $15M - $30M in scalable, top-line revenue in 5 years. They should also have a clear, viable exit plan to qualify for funding. Angels and VCs only make money when you are acquired or go to IPO, and we want to see that happen within 5 years. We must believe you can reach a sufficient exit value to justify the risk we are taking and the understanding that early investment will be diluted 1-3 times by new rounds of capital before an exit.
This might be frustrating to you as an entrepreneur, but if your business is too small, there’s really no room for investors—and there are likely other types of funding better suited to your scale.
Additionally, we are not just looking at exits, but also exit multiples, or how exit value relates to your industry. For example, SaaS (Software as a Service) companies often see 5-7x revenue returns. This is because they have low overhead, can easily prove replicating sales, and have recurring revenue models. In these cases, investors can be more flexible with funding and valuation. When you’re in a purely service-oriented industry where multiples rarely break 1.5x on revenue. So, we must be more cautious when analyzing your venture and growth potential. It’s easier—and more attractive to an investor—to choose a model that gives bigger returns.
Is your business something people need?
Each business should serve the customer and address a pain point in the market. If your primary driver for sales is that your product or service is “nice to have but not necessary”—do not seek venture investment.
If you can demonstrate a clear pain point you are offering a novel solution for, if you can prove that you have eliminated barriers of entry for fast followers, then you can consider seeking investment. You want your customer to need your product, not just want it.
Is your business unique or revolutionary?
We want to identify companies that will set a new standards in a given industry and remain market leaders. If you have a revolutionary product or service, and you can clearly identify a market ready to adopt it, you should consider seeking investment.
Many businesses can be viable without being revolutionary, but investors do not want to invest in companies that have high competition or will be battling out price points within existing markets. It is not about building a better mouse trap—it is about changing the need for a mouse trap at all.
Don’t waste your precious time!
As a small business owner and entrepreneur, your time is valuable. Don’t spend it prepping all the documents and evaluating legal costs to approach investors unless you can answer YES to all of these questions:
Is this business a high-growth potential business?
Can I generate enough revenue to be attractive to an acquirer?
Does my industry have an exit multiple sufficient to make me attractive to investors?
Am I tackling a clear pain point and creating hurdles for my competition?
Is this a new standard, or just a “better mouse trap” solution?
How you position your company is critical to being selected in this highly competitive market (we invest in 1% – 2% of all companies that apply to us). If you feel you have what it takes to be a high-growth company, you will have to prove it with a very compelling business plan and financial projections. You will need to identify and convey a demonstrable, sustainable competitive advantage in your market. In other words, the companies that get investment have an unfair advantage in their respective markets. Make sure you know your competitive advantage and can articulate it before seeking investors! If it takes more than one sentence to convey, start over.
Isn’t my baby beautiful?
Entrepreneurs, we know that your project is your baby. You have been working hard on it, and you have gotten so much of it figured out, but you need help. We get it—you want everyone to look at your project and see the amazing thing you have created and celebrate how beautiful your idea is. The fact of the matter is—just like with children--nobody will see your “baby” through your eyes, especially not investors.
Do not be discouraged entirely if your business is not a fit for Angel or Venture investment. It is a very specific market, and nobody wants to sell in front of a less-than-receptive audience. Save yourself time, energy, and heartache by letting go of your emotional attachment and take the time to evaluate honestly. It will help you understand even better what you are doing and identify the right path to success and growth.