In Patrick’s August Buffalo Spree column, he shares ten things he learned while raising money for his business. It’s a helpful, user-friendly breakdown of some important things to consider in the process. Look for Patrick’s monthly business column in Spree magazine.
Buffalonians may know City Dining Cards from the colorful decks of restaurant and bar discount cards that appear on store shelves during the holidays. But the company that I founded more than three years ago has taken its model and expanded to nearly 20 markets throughout the United States and Europe. Now we’re focused on building engaging customer loyalty experiences for people, businesses and non-profits around the world. All this growth requires a lot of capital. And after three years of bootstrapping the business, it was time to raise our first round of funding.
This process has been one of the most interesting, frustrating, exciting and fulfilling learning experiences of my life, and the timing was right. Buffalo’s appetite for startups is growing. Believe it or not, the world’s largest business idea competition, 43North, takes places in Buffalo and organizations and programs like Z80 Labs, Dig, CoWork Buffalo, Startup NY, Launch NY and The Buffalo Angels are encouraging more entrepreneurs to start and grow their businesses in Western New York.
The competitions, plans, ideas and organizations are working. Buffalo’s startup community is growing and the startup community is taking note. Recent stories is the Financial Times, The Globe and Mail and Huffington Post all tout Buffalo as the next great place to start your business. With all of this energy and with the exciting conclusion of 43 North’s inaugural year right around the corner, I though it was time to share what I’ve learned raising money for one of my businesses.
It all starts with basics and vision. Before you start raising money, it’s critical that you can succinctly describe your business and communicate where you want to take it, all with just a few sentences. Your elevator pitch has to be perfect and it has to make sense to people unfamiliar with you, your business and your industry. Practice makes perfect, so practice in front of a mirror, in the car, with your dog and most importantly, with your team.
You have to clearly demonstrate the opportunity. Investors want to know that there’s a market for what you’re selling, and they want to know how big it is. You really need to understand the space you’re playing in and how much market share you think you can take.Investors also want to make sure that your model is scalable. Sure, you have a good contract or two and you’ve demonstrated feasibility in a few markets, but how will you continue to scale and grow the business?
What’s your worth? Setting your valuation is one of the most difficult parts of the process because there are dozens of ways to set this number. And once you set your valuation, will your investors agree? You have to consider how much of your business you’re willing to give away and understanding “pre-money” value and “post-money” value is important too. Here’s an easy-numbers example to put this into context: Say you own 100% of your business and you have a pre-money valuation (the value of your business before raising money) of $2 million. If you raise $1 million, your post-money valuation (the sum of your pre-money valuation and total dollars raised) is now $3 million. When the deal closes you will own roughly two-thirds of the company, or $2 million of value in a company now worth $3 million.
Practicality rules. At the end of the day, investors are interested in making a return on their investment. Pie-in-the-sky ideas are great but strong net profits are even better. Having a good understand of financials, including pro-formas and cash-flow statements, is important as discussions with investors move from general interest to the due diligence process.
Show me the sizzle. I know that I just told you that practicality rules but everyone loves sizzle. Investors are people too and if your company demonstrates their understanding of the newest technology, app or market segment, your potential investors will be as excited as a kid in a candy store. Novelty and excitement are key components in engaging investors and captivating their attention from day one.
Play to your strengths and know your weaknesses. At the end of the day, Angel and early-stage investors are investing in people, not the business. They want to know that you have what it takes to navigate the choppy waters that inevitably face you. So why do you deserve their money? How are you going to get them a big return on their investment? Finding the right amount of confidence balanced with some humility is key
Start sharing. You have to share your story with everyone you know. Your family, friends and business associates may be able to help with small, early-stage investment. Locally, the Bufalo Angels, Z80 Labs, Dig, CoWork Buffalo and Launch NY can provide the guidance and connections you’ll need to turn your idea into a funded business.
Great partners are key. Raising money is a struggle and you’ll need help and support to get through the long and daunting process.Great business partners and advisors are one of the keys to a successful round of funding. Kevin Christner of Richmond Capital Partners, Jack McGowan of Insyte Consulting and The Buffalo Angels, and David Roach of Blair and Roach were instrumental in helping the team at City Dining Cards build our presentation, connect with investors and put the deal together. This is truly a team effort.
Just when you think it’s almost finished, it’s not. There’s an obstacle at almost every turn but the biggest obstacle is figuring out how to run your existing business and raise money at the same time. It’s almost impossible to do both and raising money can feel like a full-time job. As you approach closing, subtle changes in contract terms and legalese can aggravate investors, delay closing and raise the blood pressure of everyone involved in the process. It’s important to keep your eye on the prize and remember that you’re all working together to build something great.
San Francisco isn’t the reality. We live in a world of celebrity CEOs and multi-billion dollar valuations for companies without any revenue streams. This may happen in Silicon Valley, but it’s not the reality in most places. It’s important to approach the process with vision, a great idea, a strong model and an even stronger team. Those four things are alluring to investors from as close as Syracuse and as far away as San Francisco.
Get connected: 43North, Buffalo Angels, Z80 Labs.
Patrick Finan is the founder and CEO of City Dining Cards and the founder and principal of Block Club, a branding and marketing agency.