As the economy improves, your business is poised for growth, but you need more money.
Unfortunately, with your earnings history, no banker, investor or traditional lender is interested. Friends, family and angel investors are tapped out, so venture capitalists could be your best option. Or are they?
VCs will risk their money, advice and resources when your business needs them most. Their cost, owning part of your business, seems minimal in light of what they say it will be worth.
The problem with using VCs is that their need to earn quick, big returns conflicts with your goal of building your business. To sell your company, the VC must find shortcuts to creating customer value.
VCs fund one out of 1,000 business plans they see. They need two of 10 portfolio companies to succeed to earn the 100 to 1 payoffs their investors expect. Therefore, VCs only stay committed to healthy businesses because problem companies are cheaper to close than fix.
Another challenge is dilution. After successive rounds of equity financing, you can end up with neither ownership nor a big payday. And every minute you spend writing business plans for investors is time you could spend building a customer base.
If your company must create a completely new business process before it can sell anything to anyone, you’re probably well-suited for venture financing. But, you should still be cautious.
Pay more for less money if it comes with fewer strings. Realize that venture capitalists exist to make their partners wealthy.
The more customers you grow, the more of a real business you have and the less equity you have to give away to get funding. If you plan on building and managing your business for the long run, focus on finding, keeping and growing customers. No business survives without a strong and well-developed ability to get new customers. Put all your efforts into creating salespeople, channels and proposals.
Reinvest the money from your early sales into customer services, benefits and products. And remember, customers get you money better than money gets you customers.
If you focus on this, you will be in the driver’s seat and will live and retire to tell about it. Andy Birol ([email protected]) is president of Birol Growth Consulting, a Solon-based firm that helps grow businesses by growing their best and highest uses. He can be reached at (440) 349-1970 or at www.birolgrowthconsulting.com.
