2015’s a hair’s breadth away. As you start next year’s planning, here are 5 things you can do to give yourself the best chance of securing new investors in your business – either debt or equity.
1. Have your financials in order
The first thing any investor is going to ask for is your historic financials, so you should have them ready and in a useable format. At Lighter Capital, we like to see 24 months of historic financials for both the P&L and the Balance Sheet. Some investors may require less, but at the minimum, I would suggest having the quarterly financials for the last 12 months ready. You should know that any institutional lending source is going to require that you produce monthly financials so this is something to think about as you head to market.
- The easiest way to determine if your financials are ready to be seen by an outside financing source is to have someone with an accounting background take a quick look at them. This can be as simple as asking your tax accountant to review, and now is a good time to ask them before they get slammed by year-end tax returns. They’ll let you know if you are doing anything blatantly wrong from an accounting prospective. I won’t sweat the small mistakes but if you have negative revenue or assets that could be a liability, they can help you make those changes easily. If you run into bigger issues, you might want to consider getting outside help from a CPA or controller, like our friends at Early Growth Financials.
- There are a few different types of accounting methodologies: cash, accrual, and modified accrual. It’s good to understand the pros and cons of accrual and cash accounting of each methodology before choosing one to implement. For example, a common error we see with accrual accounting is that many entrepreneurs only make adjustments at year-end, where this methodology actually requires monthly adjustments. This makes for a confusing P&L. For small business, it’s easier to just do cash accounting if you can understand it, and it helps you become very familiar with your company’s cash situation. Don’t feel that you have to use accrual accounting because that is GAAP standard. Lots of investors deal with different types of accounting methodologies, so they can read whatever statements you give them as long as they are accurate.
2. Projections – know where you’re headed
As we enter the New Year, it’s good to have a sense for where you’re going and projections help you get there. The most helpful projections are not the ones that just take a growth percentage and apply it on a monthly or quarterly basis, but the ones that are based on your pipeline and historic performance.
- Things to keep in mind include seasonality: are you a seasonal business, and if so, do your projections reflect it? Do you have some big customer wins projected over the next 12 months and when do you expect them? Do you have big payments to vendors or debt sources? Be sure to include them in the projections, including any adjustments needed to reach these goals and how they’ll be layered in over the next year (i.e. additional employees, larger commissions for sales, advertising and technology spend, and product development plans, etc.).
- As if that wasn’t enough to consider in your projections, you might want to think about having two sets — a tortoise and a hare. Your ‘hare’ scenario is a high growth shoot-to-the-moon scenario for equity investors and the ‘tortoise’ is a more stable, plodding scenario for debt investors.
- If this seems like a lot, a basic set using growth percentages and margins works well and at least gives your investors a place to start when evaluating the outlook for the next year.
3. Explain your customer base
Everyone will want to know something about your customers. If you put together a basic chart (like the one below) for your top 10 customers, you’ll help fend off 90% of potential questions.
If you have customers that represent more than 10% of your annual revenue, expect some type of follow-up questions from interested investors who might ask to see copies of the contract, request reference checks, and review historic churn in your customer base.
4. Service / Product Elevator Pitch
Now that you have the boring (or if you’re me, exciting) financials portion out of the way, you’ll need to explain what your company does. Try to make your product pitch concise and easy for people to understand. In Lighter Capital’s 10-minute online application, we call it the elevator pitch and we limit it to 500 words. After you have investors hooked, you can get into more details like the market (i.e. “the white space”) and the details of your service or product and why it is unique.
5. White Space – highlight your competitive difference
You have to present where you sit within the marketplace. How is your product or service different from the others out there and why? Telling someone that you are the next Facebook or Instragram isn’t really the best explanation of your positioning, and honestly, most people are just going to roll their eyes and say, “Sure you are.” Instead, present the lay of the land, demo your product, tell your customer stories, and focus on the problem your product is addressing or solving. Be truthful with your plan! At the end of the day, investors who want to invest in your business also want to invest in you. So demonstrating your inspiration and ability to execute the plan will help differentiate you from your competitors. Continue reading…