BIZTALK: Getting an investor on board is like marriage
Naomi Simson joins Northern Star as a guest columnist for our latest series, Business Class.
I THOUGHT it was time to reflect on an important topic. We hear a lot these days about 'raising capital'. But I want to caution that this stage in the business cycle is far from the end game. Because once an investor is on board, it becomes about more than just your money at stake.
That's why sometimes the most pragmatic thing to do is what you've already been doing - without the help of outside funds.
The 2018 'Household financial comfort report' by MEBank stated, "People who are 'self-employed' feel more financially secure than salary earners".
The report confirms that 'flexibility' and 'control' are the real benefits of being your own boss, yet there are risks in that more than 60 per cent of business start-ups fail in the first three years. But on balance, most prefer the life on an entrepreneur - at least on the surface.
But the moment a self-employed individual takes investment, they are by definition no longer 'self employed'. They now have responsibilities not just to their customers, but to their investors as well. There is also significant compliance, governance and fiscal responsibilities that come with the investment. Not to mention the budgets, performance indicators and regular reporting.
What can be a 'great little earner' for a self-employed person is not necessarily a great deal for an investor. When a deal is made there is pressure to build, grow and develop - and a new focus on scaling the enterprise. And quite frankly, this is just simply not for everyone.
Life is forever changed for the business owner when an investor comes on board. The investor will want their funds to work solely for creating growth opportunities for the business, not for reducing the debt on the balance sheet, which may be the priority of the business owner.
Business owners know they need to prepare before approaching the bank for an overdraft or loan, and it must be the same approach with investors. Being a really nice person is not usually enough to secure finance. But if you do get the pitch right, what next?
Raising capital and securing finance is a lot like a marriage - the wedding is important, but it is the life you create together after that initial ceremony where the real value lives. Many pitches I see are often vague on how they intent use the invested capital to grow their business. Many also create a valuation based on 'what sounds fair and reasonable', rather than a true valuation model based on track record and industry standards. These are important things to get right when seeking a investment.
If you cannot answer the question, "How will you return my investment?" quickly and succinctly, I would suggest that you or your business are not ready to seek investment. An investor is looking to create a return of funds because you have demonstrated you know how to make money (with their money).
Capital is not a donation or a lottery windfall, it's in investment, and it must be treated as such via recognised returns. No one would ask for a bank loan without the expectation of paying it back - it's no different with an investment.
Entrepreneurs often need to be careful what they wish for - I often recommended the book Small Giants by Bo Burlingham for this reason. Being self-employed can be a great way of life if you have a good recurring income or regular clients. But when you grow an enterprise it can begin to own you - you have responsibilities to your customers, employees and suppliers. And taking on investors takes that commitment one step further.
An entrepreneur and business leader; Naomi Simson co-founded the Big Red Group in 2017. BRG is all about serving experiences to different audiences through its various brands: RedBalloon, Adrenaline, Redii.com. BRG serves an experience every minute as the third largest experience marketplace of its type in the world. In this series we present some of her key learnings on how she grew her businesses.