Before you take your next big idea to Shark Tank, you will want to weigh your options. While the idea of having your company on TV being in the glitz and glamour of the “big stage”, Mark Cuban and Daymond John have both said, it is smart to wait as long as possible before you bring in an investor. Don’t use credit cards or borrow money if you don’t have to; you want to bootstrap your business as long as you can and grow it organically. Small businesses are a huge risk for small investors and venture capitalists. If you feel finding an investor is your play, you will want to show them you are transparent to increase your chances of success.
Companies that look promising with billion-dollar valuations have tanked, leaving investors high and dry. It is no surprise why investors see small businesses as a risk. On the show Shark Tank, you see deal after deal being made, but what isn’t shown is the number of deals that actually fall through when the cameras are off. Only when the investor starts doing their homework about your company is when a deal is truly made.
Before we dive into how to prep your company for an investor, let’s dig deep into the ways you can grow your business organically. What does “organic growth” mean? Growing your business in an organic way allows owners to stay in control of their business and grow it from the ground up. Organic business growth is the process of growing a business by increasing your sales and reducing your costs. You do this by finding more customers or increasing your product line to sell to current clients to bring in more money.
Entrepreneurs understand that venture capital isn’t the best path to success. The key is to create a business that can be funded by your customers. One way to do this is to ask for the money upfront in the form of subscriptions or pre-sales. When you grow your business this way, and look to find an investor down the road, it is highly looked upon to be a business that has been customer funded. Cash is king. Customer funding is not “bootstrapping”, which refers to lean budgeting, and cost-cutting initiatives. Customer funding is about collecting the money up front for an item before a service has been provided. If you are able to find something a customer wants, they will pay for it ahead of time. Amazon Prime collects its annual membership fees in advance. So does Costco. You can demand this only if you offer something of value in return. How can you match a client need to a service of yours that they want?
The subscription model is a business strategy that has fueled companies for years. The recurring revenue helps the owner know exactly what is coming in to help them budget and plan. It can be set up to run weekly, monthly, quarterly, or annually. It isn’t the right strategy for every business overall, but it can be added in any business as an additional product of some kind.
A way to grow your business in an “inorganic way” is by finding investors. This, of course, has many positives but also is weighed down by its disadvantages. The money from an investor sometimes comes with their knowledge and expertise, but it also requires you to give up some or a majority of the control in your business. When you are ready to find an investor, nothing is more important than the transparency of your business. Almost anyone can find out almost everything about a company these days. Small businesses generally are not public so investors know a business doesn’t have to disclose all at the start, but they should. This is a risk investors know of, so they want to do business with a company that knows their numbers, has the data to show growth, and how the business has impacted the market place. The thing about small investors; they are usually people who are looking to support a business that they care about and it is making money. Venture Capitalists are investment firms using the money of other people. While they also invest in a business that has consistent growth and transparency, they take on more risk by buying into the future of that business rather than where it is right now. Venture Capitalists will invest in 10 businesses, knowing 9 will fail, in the hopes that just one will succeed and overcome any loss from the other 9. Their due diligence is the process of researching, analyzing, assessing, questioning, and scrutinizing anything and everything in your business. While they do take on more risk than a small investor, Venture Capitalists are very smart with how they allocate their funds. An investor is looking to make a return of at least 25%. It isn’t just about having a good product; sure, they are interested in any unique advantage you may have in the market, but they also look at your team. Do you have a great management team?
An investor is much like a partnership; everyone is different, they may be a silent partner or they may be very much engaged. Keep your eye on the process. Even if they have majority stake in the equity of the business, continue to be engaged. Make suggestions, raise questions, and stay alert.
Just know, it is very possible to grow a business without any outside investors. Yes, it takes a little longer, but there are some clever ways to grow a business without giving up any equity or control in the business that you started from scratch. Entrepreneurs know small businesses have a large failure rate, so the appetite to grow fast is appealing. It isn’t about growing fast, it is about growing smart. Keep that in mind. Remember it wasn’t the rabbit that won in the race, it was the tortoise. Keep making the moves that are the best and smartest for your business, and you’ll never lose.