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You've worked on a business plan and it is written to perfection. You've had it reviewed and edited. Your idea looks not only good on paper but should be extremely successful once you begin operations. There's only one small problem. All of your savings will be put into the business along with all the cash you can raise from friends and family. You've gone to lender after lender and no one is ready to take the risk...the risk that you have no problem taking because of your drive and passion for your idea.
Outside Investors
Now is the time for you to make a move and approach outside investors if you're ever going to take your business from paper to actual operations. This becomes a necessity rather than a luxury. You've prepared all of the necessary financial projections...proforma income statement, balance sheet, and cash flow budget. Assuming you hit all projected revenue targets, expenses are estimated with a certain degree of accuracy, and there are no unforeseen events to throw you off target, then you should know your future funding needs. In addition to all the basic financial information that investors want to know, you should also be well versed on estimated gross and net profit margins, key ratios, competition, supply chain management functions, marketing strategy, cash "burn rate," and one other very important item – how you are going to use the outside investment and what can investors expect in return?
You, perhaps, take the final number you've calculated for your business needs, decide what percentage of the company you're willing to give up for this amount, and go to work trying to find investors. Alternately, you can separate the amount of money needed into incremental funding stages as operational milestones are met.
Time to Entice Investors
A new business proposal, inexperienced entrepreneur, and a large amount of requested equity can scare off many potential investors. Establishing predetermined milestones to be achieved before additional money is funded is one way to lessen an investor's apprehension about investing in a new project.
When financial needs for a startup are clearly stated in monetary stages that coincide with funding as objectives are achieved, investors are more likely to take an interest since the risk investment is decreased. If the startup meets or exceeds intended goals, then subsequent rounds of funding can be made. This keeps investors satisfied and the new business on course.
Milestone Achievements
Investors involved in a startup venture expect a rate of return that equals the degree of risk they are assuming. Equally, they must have confidence in the business idea and entrepreneur. When entrepreneurs request funding in incremental stages after certain milestones are achieved, a level of confidence is established.
Expected milestones should be detailed to eliminate possible future disagreements leading to an unsatisfactory relationship between the entrepreneur and investors. Examples of possible milestones might be expected achievements in the following areas:
Revenues
Returns
Expenses
Profit margins
Number of sales reps
Sales quotas per rep
Size of target market
Growth of target market
Quality controls
If predetermined goals are met, everyone is happy. When goals are not met, however, then additional funding stops until alternate courses of action are decided upon. This is the opportune time to discuss the "whys" of failure and if the project can get back on track.
Lowering Risk
Incremental funding in effect lowers the risk for Investors. Rather than receiving all funding at the start of operations that can lead to investors losing their entire investment if the company's actual results do not meet expected objectives, step-by-step funding can offer a level of assurance to investors that objectives will be met before additional funding takes place.
As long as objectives are met, the startup is assured that additional funding will be available when needed. On a more positive note, when actual results exceed expectations, there is also the possibility that additional funding above original amounts will be available if needed due to changes to the startup strategic plan as the business continues to evolve.
Achieving Results
When targeted goals are established prior to any funding, it forces the new business owner to be open and honest about expected results and establishes logical business goals. As milestones are achieved, it demonstrates the entrepreneur's ability to understand and efficiently manage all core functions of the business. Nothing is left to the imagination. Goals are established – goals are met. This helps "sell" you and your business to potential investors.