5 Keys to Convince Investors Your Product Can Make Money

This is a guest blog post by Ines Lebow.

Even if you’re too young (or too old?) to know where the line “show me the money!” comes from, everyone knows the phrase “follow the money”. When it comes to attracting investors and getting them on board with your vision, it’s all about the money potential.

Many entrepreneurs, especially in the tech field, are under the mistaken impression that it’s all about the product. If the product is sexy, fresh, or disruptive, investors will be falling over themselves to put their money behind it. That couldn’t be further from the truth.

Consider the case of Bombas. What was their big idea? Socks. Hardly disruptive, right? Yet the co-founders of Bombas went onto the show Shark Tank and secured $200,000 in funding to launch their idea. Yes, they presented some nice ideas about making a better athletic sock, but they were still trying to pitch a sock. So what made Bombas so attractive to invest in?

Laser Focus

The co-founders of Bombas had a laser-focus on their product and market. From personal experience and lots of interaction with potential consumers, they understood that people were generally unhappy with the comfort of socks, especially for athletic activities. After lots of product testing and user feedback, they identified several areas of improvement for their future products.

Sales Record

By the time Bombas reached Shark Tank, they had already been through two funding rounds. Before their official launch, they secured more than $140,000 through crowdfunding. In the year after their launch, they raised $1 million from friends and family. They also had a track record of sales to show to eventual investor Daymond John, offering a better understanding of the potential return on investment.

Unique Business Model

At the core of Bombas is a business model committed to giving back. It’s not a marketing gimmick but part of the guiding principles of the company and its founders. For every pair of Bombas socks sold, one pair is given to the homeless. Not only does this uplift the spirits of consumers who are willing to pay $12 for a comfortable pair of socks, but it addresses a real need in the community, as socks tend to be the single most requested item at homeless shelters.

Take a Punch

Bombas proved that they were ready to take a punch, from consumers and in the market. Their extensive work in market research before even creating a product provided them with a network of targeted consumers who were willing to give detailed opinions and feedback on a product and how it was delivered. When the Bombas team created their initial prototypes, they were applauded for creating a better sock, but willing to listen and make changes to the product. Their team of consumers didn’t disappoint, but came back punching hard. As a result of the critical market feedback, Bombas made two additional improvements to their products before a general market launch.

Leadership Team

The co-founders of Bombas were able to convince investors of their ability and dedication to execute on the business vision. So while the product was “just socks”, the co-founders had a vision they were able to articulate to investors that made them consider “but look at what socks can do.”

Through these five areas, Bombas was able to convey who was driving the bus, who the competition was in the market, the investor’s potential for a financial return, and how consumers would relate to the product, their company, and their marketing model. As a result, Bombas grew from zero in 2013 to $4.6 million in 2015 to $46.6 million in 2017. In 2019, Bombas exceeded $100 million in revenue. By April 2020, they have donated 35 million pairs of socks.

What will your story be?

To learn more about creating an epic fundraising story for investors, contact me for a complimentary consultation by phone at 314-578-0958 or by email at ilebow@transformationsolutions.pro.

Ines LeBow is the CEO, Transformation Executive for ETS. She is a known catalyst for business operations, bringing 30+ years of hands-on experience. Ines has a long history of being recruited into senior executive roles to improve the execution of business operations and to drive revenue growth. You can see her LinkedIn Profile at www.linkedin.com/in/ineslebow, view the ETS website at www.transformationsolutions.pro, or email her directly at ilebow@transformationsolutions.pro.

Equity or Debt: Questions Entrepreneurs Should Ask

This is another awesome Guest blog post from Andre Averbug.

In a previous post, I covered the kinds of investors that support startups. In the last post, I discussed the different types of financial instruments available to startups. But how does an entrepreneur know which type of instrument is ideal for his or her business? Let’s now turn to the main questions one should ask when trying to decide between the two key instruments – equity and debt.

Whether raising capital through equity is right for you depends on how you answer the following questions:

  • Does your business have the potential to grow exponentially? Equity investors, such as angels and VC funds, will only buy equity in startups, i.e., companies that are working on scalable solutions and have the potential to increase the value of that equity substantially over the next several years. In other words, they will not invest in lifestyle businesses, which are businesses that may be successful and last decades, but without experiencing fast growth and giving investors an exit opportunity. Equity investors get their return when they sell their equity (exit) at a higher valuation to new investors, either private, such as a private equity (PE) fund or, if they are very lucky, through an initial public offering (IPO). Therefore, be realistic and ask yourself: Is my business a startup or a lifestyle business? By the way, there is nothing wrong with being a lifestyle business, and a friend or an uncle might even put some equity in it. However, professional equity investors will only invest in true startups.
  • How important is it for you to retain ownership? Some entrepreneurs are overly protective of their equity and want to maintain full ownership at all costs. This is usually not a good mindset, especially if you run a startup, given that sharing ownership with investors, management, and even staff might be key to the success of the business. You will need investors to help grow your business and more partners to align interests and have everyone onboard and working for the long-term success of the company. Remember, it is better to have smaller share of a highly successful business than 100% of nothing. So, if you feel you are the overly protective type, consider rethinking your approach – otherwise, equity may not be for you.
  • Do you work well with others and welcome mentorship and opinions? When you get equity partners you are embarking in a relationship that you don’t know how long is going to last and how smooth (or rough) it will be. Angels and VCs, particularly, will want to participate in key business decisions and often mentor you. They will likely want a seat at the Board. To maximize the chances of success for this relationship, be sure you can take opinions, you welcome feedback (constructive and sometimes not so much), and that you can share some of the decision making. Remember these investors are literally betting on you. They are putting money in the early stages of your venture, when risks are extremely high, and deserve – in fact, usually have the right – to have their voices heard. It doesn’t mean that they are always right and that you should avoid disagreements. Simply be open to healthy discussions.
  • How much support do you need, on top of the money? Equity investors usually bring a lot more than just money. They help you with corporate strategy and business development, open doors through their Rolodexes, provide industry knowledge, sit on your side of the table in major negotiations, such as sales, partnerships etc. If none of that seems important to you (really?!) and you strongly believe in your ability to grow the business on your own or with your current team, then perhaps taking a loan – if you can – would be the best approach. That is because, if your business is indeed successful, it means your equity will gain value over the years, and the cost of selling equity should be higher than taking debt.

When it comes to debt, these are some of the important questions to ask:

  • What is your current (and future) cash flow situation (projection)? You should not take a loan if you are not confident in your ability to commit to debt repayments, including interest and principal. If you are in the earlier stages of your company, have not broken-even yet, and don’t see it happening in the near future, perhaps debt is not for you. Debt requires some degree of predictability in your financial situation to ensure you can service it accordingly. For that reason, it is not a very popular instrument for early-stage startups (unless when offered in hybrid instruments such as convertibles), being more suited for later-stage companies and lifestyle businesses.
  • Do you have collateral (assets), credit history, or receivables? Banks and other lenders may still give you a loan if you don’t have enough cash flows. However, they are notoriously risk averse and will only provide you with a loan if they are comfortable with their ability to recover their loan, even if it means acquiring your assets to cover or minimize their loss. Therefore, even if you think debt is the right instrument for you, if you don’t have enough revenues, promising receivables, a credit history, or some collateral (machinery, building, inventory etc.) to borrow against, chances are you will not be able to get that credit.
  • Are you comfortable using collateral, including personal assets? When it comes to collateral, the question is actually deeper: It is not just whether you have it or not, but also if you are willing to borrow against it. Some entrepreneurs believe so much in their business that they literally bet their car or house on it! Even when the company itself does not have assets, the entrepreneur uses his or her own property as collateral providing personal guarantees to the bank. This is certainly not for the fainthearted and doesn’t make sense for everybody. Also, tragically, sometimes entrepreneurs expose personal assets without knowledge. Be sure to check the laws and regulations in your country to see whether your company provides you with limited liability or if creditors could go after your personal assets in case of debt default.

While this list of questions is certainly not exhaustive, it covers some of the key issues I had to ask myself during my fundraising experiences. If you have more ideas for questions, feel free to share them in the comments below!

 

Andre portrait

Andre Averbug is an entrepreneur, economist, and writer. He has over two decades of international experience working in the intersection of economic development, entrepreneurship, and innovation. He has worked and lived in multiple countries across North and South America, Europe, Africa, and Central Asia.

Andre has started and run four startups, in Brazil and the US, and was awarded Global Innovator of the Year in 2009 by World Bank’s infoDev. He has extensive experience supporting companies as mentor and consultant, both independently and as part of incubators such as 1776 and the Kosmos Innovation Center, and programs like Shell LIVEWire, StartUp Weekend and WeXchange.

As an economist, Andre has worked in topics ranging from innovation ecosystems, entrepreneurship and MSME development policy, competitiveness, business climate, infrastructure finance, monitoring and evaluation (M&E), and country assistance strategy for the World Bank, the Inter-American Development Bank (IDB), and the Brazilian Development Bank (BNDES). He has also consulted for clients such as DAI Global, the Economist Intelligence Unit (EIU), TechnoServe, among many others. He holds a master’s degree in economics from the University of London (UK) and an MBA from McGill University (Canada). Andre lives in the Washington, DC area.

He writes an awesome Blog called Entrepreneurship Compass and you can sign up here: https://entrepreneurshipcompass.com

8 Tips for Friends and Family Fundraising

This is a Guest blog post from Andre Averbug.

 

Friends and family investing fundraising seed capital

Startup fundraising is never easy and the current pandemic crisis makes it even harder. Typical early-stage investors, such as angel investors and venture capital funds, today might be more reluctant to take risks and bet on early-stage startups. In such situations, entrepreneurs often turn to friends and family (2F’s) to support their endeavors.

Asking people close to you for money, however, has its challenges and needs to be done in a planned, sensible way. Here are a few best practices to follow:

1. Select potential leads carefully – Make a list of potential investors among friends and family based on two key factors: net-worth and personality. In terms of the former, you should only consider people you know have the resources to support you. Don’t put people close to you on the spot if you don’t think they can afford to lose the investment. If the business fails, you don’t want to see them struggling financially, no matter the circumstances. Regarding the latter, only approach people you have a good relationship with and that you think have the right temperament. Make sure the person is reasonable and understanding. Remember they will become your partners (or lenders) and business partnerships are often hard to manage. Money comes at a very high cost if the person is difficult to deal with or might freak out at the first adversity and become a headache for you and your other partners.

2. Prioritize those who might help – From your list above, try to identify people who might be business savvy, well connected, and who can bring something else to the table besides money. For example, prioritize the uncle who is a corporate executive or entrepreneur, and might help you with mentoring and contacts in the industry, over a friend who might even be more well-off, but is a medical doctor or an artist with no business knowhow or networks.

3. Approach them professionally – Just because these are people close to you and that you know might be inclined to help, it doesn’t mean you shouldn’t be professional when approaching them. Quite the opposite. Show them you are serious about your business and that you are proposing a business partnership that runs parallel to your personal relationships. Only approach them when you know exactly how much money you need and for what: present them with a use of funds table. Make them a compelling presentation of your business case and bring (or send them) printouts of your business planLean Canvas, or executive summary. They will appreciate your professionalism.

4. Think through instrument options – Make sure you understand all investment instrument options before you approach friends and family because you will need to explain it to them. For example, are you selling shares of your company (equity)? If so, at what valuation (make sure it is not overvalued to be fair to them)? Do you want a loan (debt) and, if so, under what terms, ideally? Are you considering convertible notes, where the investment starts as a loan and can be converted into equity at the next round of investment, at a discounted valuation? The latter, by the way, is likely the best option for early stage startups. [Note: I will be covering these instruments in a future post – stay tuned by signing up to receive notifications of new posts by email].

5. Make them comfortable to say “no” – Unlike professional investors like angels and VC funds, these people are listening to you specifically because they like you and want to help you personally. Therefore, you have the moral obligation to not take advantage of that (which you might do unconsciously) and you must put them in a comfortable spot. After presenting your pitch and explaining how much you need, for what, and under what terms, answer all the questions they have, and give them time to think. Don’t ask for an answer on the same day (unless of course it is a clear negative) and tell them to sleep on the offer and come back to you on a later day.

6. Consider a “2F club” – Depending on the amount of money you are asking and the number of people on your list, it might be a good idea to have more people invest smaller pieces. For example, instead of getting $50,000 from your big sister, get 5 x $10,000 from her and four other friends. This is good for diluting any one person’s risk and might also provide you with extra help. If you are going for equity, though, be mindful of having too many people as partners – i.e., too many voices at the table. Get help from a corporate lawyer or legal mentor to design an effective way for these people to become your partners, perhaps by having them all come in through a company of their own, with each owning 20% of it.

7. Tell what you expect (and don’t) from them – When friends and family invest, with their best intentions, they often want to help in many other ways too. They may want to opine on the business strategy, suggest hires, introduce you to this or that person, try the product before you launch it etc. If not managed properly, this situation can escalate to your aunt, who’s a dentist, wanting to participate in your biggest contract negotiation! Therefore, before the investment deal is closed, make sure you tell them the level of involvement you expect from them. You may simply not want them to get involved at all, which is fine, as long as this is part of the agreement and they are ok with it. In any case, keep in mind that, as partners, they do have the right to at least receive updates and participate in quarterly or biannual meetings.

8. Be 100% transparent about the risks! – Avoid problems in the future. These are people you care about and may know nothing about startup investing. They are doing this because they care about you too. Ensure they are aware that this is a risky endeavor and that they might lose their investment (equity) or that you may take a long time to pay them back (debt) if the business fails. Certify that they are ok with the risks and that they can afford losing their investment without major personal financial consequences.

Times of crisis call far stringent cost management measures and creative fundraising, including from friends and family. If you do it right, the 2F’s can be a good option to help you through these troubled waters.

 

Andre portrait

Andre Averbug is an entrepreneur, economist, and writer. He has over two decades of international experience working in the intersection of economic development, entrepreneurship, and innovation. He has worked and lived in multiple countries across North and South America, Europe, Africa, and Central Asia.

Andre has started and run four startups, in Brazil and the US, and was awarded Global Innovator of the Year in 2009 by World Bank’s infoDev. He has extensive experience supporting companies as mentor and consultant, both independently and as part of incubators such as 1776 and the Kosmos Innovation Center, and programs like Shell LIVEWire, StartUp Weekend and WeXchange.

As an economist, Andre has worked in topics ranging from innovation ecosystems, entrepreneurship and MSME development policy, competitiveness, business climate, infrastructure finance, monitoring and evaluation (M&E), and country assistance strategy for the World Bank, the Inter-American Development Bank (IDB), and the Brazilian Development Bank (BNDES). He has also consulted for clients such as DAI Global, the Economist Intelligence Unit (EIU), TechnoServe, among many others. He holds a master’s degree in economics from the University of London (UK) and an MBA from McGill University (Canada). Andre lives in the Washington, DC area.

He writes an awesome Blog called Entrepreneurship Compass and you can sign up here: https://entrepreneurshipcompass.com