12/14/23
CREAM - Wu Tang
Cash rules everything around me, CREAM, get the money, dolla dolla bills yall.
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You're a founder preparing for a serious capital raise.
You will have some friendly investments come in from people that believe in you, love you, and want you to succeed. The terms have less relevance, because they're going to invest in you, regardless of the end result. They hope their bet pays off - but thats not why they are investing.
You likely won't be able to raise purely from this very friendly pool of capital. It will likely be a portion of what your ideally looking to raise.
The reality is that you're going to have to tap into new networks. And talk to more serious investors. Angel investors, local investor networks, early stage VC's, and rich people you know personally. These investors are evaluating your company from a different lens.
Their filter for whether to invest will be strongly influenced by financial upside. It's something you have to figure out how to sell. Because if looks like a donation, you won't get those checks. You need to provide a story that incorporates financial upside in order to get more serious investors to write bigger checks.
Raising on pure equity, essentially means that the only opportunity for financial upside is if you have a big exit. An unlikely outcome, and a risky bet. Pure equity is an all or nothing proposition in most cases. And in most cases it will be nothing.
The following options shift the outcome from all or nothing to all or something.
And something is better than nothing.
So I encourage you to sweeten the bet. The following are four options that could help you close more and bigger checks.
A Menu of Options
1. Equity + Revenue Share
In addition to equity, offer investors a 1% distribution of quarterly revenues until they get their principle back. A protected bet for investors, that offers compelling access to the upside if you have a big exit, plus short term protection with investors eventually getting their money back if you stay in business.
Maybe you sweeten the deal further by offering principle back + 20% (1.2x). Principle back, plus 20% on top, plus equity that provides access to big upside upon big exit.
Plus is a good word in the world of sales. Raising capital is sales.
A company I worked closely with layered in a 1.2x revenue share on top of their equity raise, and credit that addition to accelerating their fundraise from $1M to $3M raised in a seed round from angels and early stage VCs.
2. Equity + Profit Share
I can't incorporate revenue distributions because I'm operating at a loss and don't see that changing anytime soon. Taking anything off the top line is going to be bad.
-- Heard that a few times. Don't worry, you are not alone.
Profits are a harder sell than revenues. So I'd suggest increasing the financial upside of a profit sharing mechanism. Here are two creative ways you could layer profit sharing on top of equity.
-- 80% of profits returned to investors until principle is returned, 20% of profits distributed to investors in perpetuity. A company I worked closely with added this to their equity raise, and credit the shift as the inflection point that fueled them from $150k to $850k raised.
-- 50% of profits returned to investors until they receive a 2x on their investment. A company I worked closely with used this method and credits this addition as an important strategy that converted the majority of the $25k+ checks from more serious investors.
I encourage founders to be creative in how they approach this.
3. Profit Share, No Equity
One of my favorite deals in 2023 was a high end restaurant in Nashville that raised $700k from their community on a profit share contract. This is a typical financing structure for other high end restaurants and bars across the country. I would love to see more Main Street / retail companies use this financing structure.
Similar to the example above (excluding equity). 80% of profits returned to investors until principle is returned, 20% of profits distributed to investors in perpetuity.
4. Revenue Share, No Equity
This is my favorite of all the options, and I've spent the majority of 2023 figuring out how to bring this financing method to market. To me, this represents the best exchange of risk and reward in startup investing. It's the most balanced of all the options and what I look to personally invest in.
Check out this blog post for a longer breakdown of Revenue Share.
Offer investors a 2x return, based on 5% of revenues, with a target payback in five years.
That to me is the perfect proposition.
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In summary:
-- My goal is to help founders convert more and bigger checks.
-- There are options. You can be creative. You're the decision maker.
-- Choose a structure that provides a more balanced and aligned match between you and your investors. Take an honest and pragmatic view of the risk / reward for an investor.
-- Forecast your revenue or profit projections and put them in an economic model so you fully understand how it works and pitch it.
-- Mindset is everything
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If you'd like to chat, hit me up.