I work with companies to reach their next milestone – be that a new sales goal, improved profit margin, size of customer base or number of employees. I start by asking company leadership what they think the primary need is to obtain this objective.
They always tell me they need “money“.
Money can be obtained from one of three sources: new sales, a bank or from an investor.
The best way to get money is to simply obtain new (and more profitable) sales and bootstrap the company to the next level. When that approach won’t work, and an outside source of money is necessary, the biggest mistake companies make in trying to raise additional funds is their inability to answer one simple question:
How Are You Going to Use the Money?
I have seen many entrepreneurs and small business owners think they have smugly answered the question by responding “We will spend it on new sales people” or “We will use it to drive new marketing” or the classic “We will use it to hire key new employees”.
Inevitably, the investor or banker smiles, asks a few more questions and then chooses to pass.
They use excuses for passing that include “You are not in an area we typically invest in” or “You don’t have enough years of financials” or “I just don’t see the value proposition”.
The true reason? The entrepreneur has provided vague answers about where the money will be used and why.
The banker or investor wants to see that if they provide money, it will be used for a specific and measurable purpose: to purchase equipment, to build out new space, to improve inefficient processes or to participate in a proven distribution channel.
You only need to look at any charity fundraiser to understand this mentality. When successful charities go out to raise money, it’s always for a specific purpose: to send someone on a trip, to provide schooling for a specific child, to rebuild a building, or to cure a specific disease. They rarely ask for money to cover overhead and they are never vague about the direct benefit the money will provide.
When you are considering your pitch for money, make sure that “the ask” includes a concrete explanation of where the money will be used and how it will ultimately benefit your organization to make it to the next level. With this understanding, a bank or investor is much more likely to say “yes”.