Preparation To Get Funding To Start A Business

I received an interesting proposal today. Nope, it is not a cv of an executive sharing his interest to work with me. It is a short proposal asking for business funding. Frankly, I have mixed feelings about this. I am happy for the young entrepreneur for his guts. But, to me, get funding to start a business is not exactly an easy way to make money as my blog suggests. Anyway, without giving names, this is a summary of the content.

A young entrepreneur formed a marketing company that specializes in hunting marketing leads for clients. In the first year, the young Jedi Knight made about $ 7000 to $ 8000 in sales. The following year, the revenue leaped to $ 30,000. The founder reported about two major clients currently in his arsenal contributing to these revenues. According to him, one of them is a major bank in the country.

Here is the catch. The startup owner was asking for a fund of $ 150,000 for a 15% stake in his company. He sent me an email (a Linkedin mail) asking me to spread the word to my network. I read the presentation slide and to be frank, I’m quite reluctant to support his plea though. Putting myself in the shoes of a potential investor, here are my questions. I will call this young entrepreneur a fictional name…Lawrence:

business funding

small business funding

find funding

Frankly, the material could not come at a better time when I was wondering the best way to talk about investing in a startup. This may not be the best case study, but it definitely provides a platform.By the way, you could read more about business funding in the link before proceeding to this case study.

1. How Do You Justify Your Asking Price?
Lawrence asks for an investment of $ 150,000 for a 15 % stake in his enterprise. Investors could opt for $ 5000 for a minimum stake. I would like to ask Lawrence, how do you justify this? Your calculation states that this marketing company is worth $ 1 Million (100/15 x 150,000).

a. Are you bringing in other assets to support your asking price? An office space?
b. Do you have any Intellectual Property (IP) such as a state of art software that simulates customers behavior?
c. Or are you merely relying on your credential as a “marketing expert” as the goodwill in the asking price of the 15 % stake?
d. How much do you value your customers’ database?

2. How Much Salary Do YOU Intend To Pay Yourself?
From the pdf presentation, I only see one person currently working in the company…Lawrence himself. Maybe there is more but it is not mentioned in the pdf file. The total revenue of $ 38,000 for two years is definitely insufficient to maintain the lifestyle of Lawrence alone, not to mention another staff in the payroll.

Lawrence mentioned of getting additional marketing staffs to expand market penetration nationwide. Maybe, the owner intends to invest a major portion of the $ 150 K into acquiring new staffs, and for himself, a small token to cover his daily expenses. If this is the case, it is indeed commendable. However, he could be planning to get a lush office space upon getting the funds. And he could give some reasons like presentation. But really, we don’t know. I am not here to judge. I am just speculating the possibilities. Lawrence needs to list down in details on how he is planning to use the money.

If his intention is to pay himself a large chunk after the fund is in, we need to know.

3. How Much Is My Return?
We call this the proforma sales. It doesn’t matter if you are asking for $ 1,500 or $ 150,000. As long as it’s public funds, Lawrence needs to take full accountability in returning back to investors.

Please show in detail the sales forecast for the next year, 3 years and 5 years. How much should the investor expect to get in the first accounting year? 10 %? Or 20 %? As an experienced business person, I will be very concern on the way Lawrence gonna achieve my ROI. Do not simply pluck a figure from the sky, please. Lawrence might retort that getting a dividend in the first year is unrealistic, but if not the first year, when? As a minority stakeholder of 15% or less, I am helpless in case Lawrence choose not to honor his words.

4. Is This Business Model Scalable?
I wonder if the business model scalable after looking at Lawrence’s presentation. For one, after 2 years, one person has only made $ 40,000 in revenue.

Let us assume Lawrence to go into beast mode in hiring 6 more sales executives on a commission basis. If one person manages to garner $ 25, 000 in the first year, 6 people will bring in $ 150,000. How much should Lawrence pay his sales team? We assume $ 2000 per person, 6 person will be $ 12,000 x 12 = $ 144,000 in a year. Again, is it even realistic to assume a good salesperson to accept $ 2000 as his/her compensation? I doubt it!

Unless Lawrence can show us that each salesperson can make in excess of $ 80,000 per year (6 x 80,000 = $ 480,000). Even if each sales rep is paid an average of $ 48,000, the business can still cover the sales expenses ($ 480,000 – $ 288,000 = $ 192,000). At this juncture, I am just making my own assumptions. Lawrence should be in a better position to answer this.

5. The Burn Rate
Two years into the industry, I suppose Lawrence is familiar with the burn rate of his startup. Looking at the business model at a glance, there is nothing disruptive about the idea. Therefore, calculating the monthly burnt rate should be pretty straight forward.

I assume Lawrence is wearing many hats at the moment. As we progress, did Lawrence incur any debt while running this new startup of his? I don’t think calculating a simple break-even analysis is complicated. Why can’t Lawrence reach break-even point at this stage? As a matter of fact, it would make a world of difference if Lawrence alone could bring his small business into positive cash flow. Investors will add more points if the existing cash flow can support an additional sales personnel (that does his own clerical work, of course).

6. Is There An Exit Strategy?
What is your plan for a lucrative exit Lawrence? Bringing us who are investing in your dream, how are you going to reward us? Are you going to sell the business or are you planning to inject it into a bigger entity for an IPO? Hey, who knows right.

Consequently, Lawrence or any other entrepreneur need to incorporate an exit strategy the moment they plan for funding. A good exit strategy can increase the investment manifold. Consequently, it can also decrease the hard impact of a failed enterprise if done properly.

Anyway, above are just my point of view when I came across the proposal. As I do not have the full business plan, I can’t really speak for Lawrence. However, I believe that the questions that I posted here carry the concerns of most potential investors. Do your business plan to pacify the concerns raised in this post. As a result, put yourself in the shoes of a venture capitalist, and I believe you have got yourself a potential fundraising winner.

God bless you!

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