Different capital sources define “fundable” in a variety of ways. A business that may currently be unfundable by a venture capital firm may be fundable by an angel group. Another company may be unfundable by a bank loan or an angel group, but may be fundable by several informal investors. Here, we’ll define a “fundable” business as one that has a reasonable chance of securing equity capital from well-aligned funding sources.
For Startups
Consider the information following each question to get a sense of the present fundability of your startup or early-stage business. It is possible that with dedicated effort, a currently unfundable business may be fundable in the future, assuming that certain limitations can be overcome.
Do you have a great product or service idea, or a complete business system?
The value of a product or service idea all by itself is very low. The practical measure of its worth is what a business can do with the idea. So for an idea to have significant value, a business has to champion and support it, resulting in the transmutation of brainwaves into cash. If you plan to borrow money on the strength of your assets or good name alone, you can start with a rough idea and fund the development of that idea into a business concept that individuals or companies may invest in. However, you will not find investors willing to bankroll an idea alone, or banks willing to loan money on the strength of an idea. Both want to see the establishment of a business that can turn ideas into gold.
How do you know that customers will buy your product or service?
So you’ve got a great idea, and turned it into a saleable product or service. Customers are probably not clamoring to buy it from you yet. Maybe things are still in the development or beta stage. Investors need to know that customers will buy from you at a price that will support a profitable and highly successful company. They want to see evidence that lots and lots of customers will buy your product or service, and it has to solve a painful problem for them while delivering great value. Purchase orders, letters of intent, and sales receipts can provide substantial evidence. A longstanding relationship with the buyer of a major potential customer who is coaching you to success in selling to that company can also sway investors. If these things are lacking, a financial analysis showing how much money your customers will save by buying from you can be very useful.
Who are your key associates (employees, subcontractors, and strategic partners) that will deliver your products or services?
It’s tough to raise money if you’re a “one-man-band.” It’s even harder to hire good employees if you aren’t adequately funded. Fortunately, there are many ways to effectively address a current lack of employees during the funding process. Most revolve around organizing and enlisting an external team that shares your vision and passion, and will help you become successful after you are funded. This team should be highly qualified to support your company’s most pressing needs.
When will your business achieve positive cashflow?
Positive cashflow is a major milestone for all start-up companies. If you’ve got a reasonable idea of the timing, then you’ve probably done some preliminary calculations. Having no idea means you’ve got some work to do before you’ll get funded.
When will your business achieve profitability?
Profitability is another major milestone. Either you know the timing, or you don’t. If you don’t, get your homework done before you expect any funding.
How much profit can your business reasonably generate the first 12 months after achieving profitability?
This is another size question. After the company becomes profitable, it should generate a profit the following year? Many start-up businesses lose money during the first year, but begin to operate at a profit some time during the second. Of course there are exceptions (life science companies may lose money for 10 years before becoming highly profitable). But in most instances, timing and volume are critical. If the net of the first and second years is a break even, the business has to make lots of money in the third year if it hopes to attract investment capital now.
How much funding will your business need to achieve positive cashflow and profitability?
Many entrepreneurs will say something like, “I just need $50,000 to buy a machine, or some inventory, or pay for technology development. If I get that money, I should be OK.” If your explanation is along these lines, you’ll need a good cashflow projection to help prevent your business from running out of cash. The amount sought in this example is usually far less than is needed. Not asking for enough is worse than asking for too much, because running out of cash is one of the fastest ways to shut your business down.
How much capital can you personally contribute to the funding of your business?
If you’ve got enough of your own money and are willing to put it into your company, there’s nothing to stop you from starting a business. In many cases, founders don’t have enough to properly fund the company. Lenders and investors like to see that founders are financially committed to the success of the business. There’s no motivation quite like the knowledge that you can’t afford to fail and lose all your investment. While it’s possible to raise money without having a big piece of your own nest egg invested, it’s a lot harder to do so when you get past the friends and family stage.
Assuming you had the right preparations, how much money could you get from friends and family to help launch your business?
Small businesses are 3 to 5 times more likely to get funding from informal investors, including friends and family, than they are from angel investors or venture capitalists. You want to treat them right. They are usually your biggest fans. They often represent your best chance to get seed capital. If they can and are willing to make a loan or an equity investment in your business, you may be able to get started right away!
How much revenue per year can your business generate at the end of 3 years?
If your company has the potential to achieve $30 million or more in revenue within 3 years, its scalability will be of interest to sophisticated angel investors. But most businesses don’t have this level of realistic growth potential. And that’s OK. A smaller company usually has more modest funding requirements. If you can satisfy lenders or investors with acceptable potential returns based on your projections, you have a reasonable chance to get funded from sources that are well aligned with your needs.
Established Businesses
Consider the information following each question to get a sense of the present fundability of your established business. It is possible that with dedicated effort, a currently unfundable business may be fundable in the future, assuming that certain limitations can be overcome.
Does your business have positive cashflow?
Positive cashflow is an operating imperative for all businesses. If you’re solid on this subject, you’re off to a good start. If you’re out of cash and have been in business a few years, chances are good that you’ve exhausted most of your capital resources. It will be difficult to get funded in this condition. Performing financial triage on your company may be necessary to survive, with a focus on strengthening your cashflow. Once you are healthy again, you’ll be in a better position to get funded.
Does your company operate profitability?
As with cashflow, this vital metric is essential to survival, growth, and attracting additional funding. Kudos if you are profitable, prepare for triage if you aren’t.
What will you use the capital for?
If you plan to finance growth, you’re more likely to attract capital than if you need to meet a balloon payment, pay down debt, or buy a new BMW. Of course, growth alone does not necessarily mean you’ll get funded. Growth rates, new business volumes, anticipated profit margins, and risk levels will all be analyzed, among other things. Every significantly improved performance that growth capital will provide adds another point in your favor when talking to investors.
Is your company a lifestyle business or a scalable business?
Successful lifestyle businesses provide a comfortable life for their owners, but do not normally provide high enough returns to attract investors. Growth in lifestyle businesses is normally funded with secured debt, additional founder investment, or bootstrapping. Scalable businesses are more likely to attract investment capital, provided the opportunity and potential for success are compelling enough.
How many of your existing channels, partners, and customers will support your new business volume?
If you can leverage your existing relationships to rapidly and economically achieve and sustain significantly higher business volumes, your growth plans will be more credible to both lenders and investors. If you are pioneering new markets, products, or customers, the higher risk associated with these activities will make it harder to secure funding, unless your company has a well established track record of similar pioneering success.
How much revenue per year do you expect your expanded business can generate at the end of 3 years?
If your company has the potential to achieve revenues in excess of $30 million within 3 years, its scalability will be of interest to sophisticated angel investors. A smaller company will typically have more modest funding requirements. If you can satisfy lenders or investors with acceptable potential returns based on your projections, you have a reasonable chance to get funded from sources that are well aligned with your needs.
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