Is Bank or Investor Funding Right For Your Business?
Are you looking for investors or a bank loan to take your business to the next level? Here’s the truth: If you want to bring other people’s money into your business, you have to: 1) sell the right vision; and 2) back it up with receipts.
This is especially true if you are a woman or person of color who doesn’t come from wealth. Easy checks based on a back-of-the-napkin plan are not likely to come your way.
I’ve seen it time and time again: Founders who get funded are able to nail both pitching and substance.
This post is about aligning your business strategy and your pitch to your audience to determine whether bank or investor funding is right for your business. Once you have that figured out, head on over to this post to find out how to follow up on a successful pitch.
Sell The Right Vision To The Right People: Investors vs. Bankers
Getting other people to put money into your business – especially if they aren’t friends or family – is all about the vision you are selling. You have to be mindful of your audience and what they are looking for in a deal.
The two primary sources of outside funds for early-stage companies are investors and bankers. Is bank or investor funding right for your business?
Are you selling a vision of growing fast and selling big? This vision will likely be most exciting for investors, not bankers – especially if you won’t have revenue for a while.
Alternatively, are you selling a more traditional, “safer” vision of generating steady profits and using your cash flow to pay back loans over time? This vision will be more attractive to bankers. Most investors will likely be far less interested, especially if you aren’t planning to sell the company.
Let’s Break This Down: How do I present to an investor?
What do investors look for in a startup? Broadly speaking, investors looking at early-stage companies are trying to find startups with the potential to become a multi-billion dollar company. Angel investors and venture capital investors expect many of the companies in their portfolio of investments to fail or 1x, so they need one or two companies to be massively successful in order to pay back all of their original investments and then some. Ideally, investors are targeting 10x or more on their investments.
With this in mind, a founder who wants to succeed in attracting investment dollars needs to show (among other things):
A path to exponential scale (billion dollar business),
A product with the potential to scale without an enormous corresponding increase in costs (this is why so many investments go to technology companies), and
Options for the eventual “exit” of the company. An exit usually means the founder sells the startup to another larger company or the startup “IPOs,” meaning it goes public on the stock market.
If you aren’t selling this kind of vision, most investors won’t be interested. To be clear, this isn’t a reflection on you or your business. Startup investors are playing the “go big or go home” game. If that’s not your strategy, that’s okay! Don’t sell a vision that you don’t actually want to execute.
Play The Game That Works For You: Presenting To Bankers
How to pitch to a bank for funding? If you are playing a slower and steadier game, that’s great. Your vision of profit-generating sales and consistent growth over time (versus a long investment period and a big potential payoff at the end) is much more likely to appeal to bankers. This is especially true if you already have a product in the market and are making sales.
Pro tip: Don’t go to just any banker at a big, faceless bank. Go to a banker who works with entrepreneurs. A good banker will understand how businesses like yours work. A great banker will go a step further; they will help you understand what the bank is looking for in successful loan applicants. Then, if you are missing documentation or aren’t quite yet bankable, they will explain how to eventually become a successful applicant.
Broadly speaking, when approaching a banker you’ll need a credible plan showing how loan capital from the bank will allow you to purchase items (for example: ingredients, supplies, parts, or inventory) or pay employees to help you sell products or services and create a profit. This profit will need to be enough to keep the company going *and* pay back the loan plus interest over time.
If you are lucky and/or savvy enough to run a company that makes a steady profit and also has the potential for enormous growth and scale, you could be in that sweet spot where you could take your pick of loan capital or investor capital. In that case, you still want to be mindful of your vision and what you emphasize when talking to each audience.
Refine Your Vision, And Practice: Bank or Investor?
So, Is bank or investor funding right for your business? Or both? Now that you’ve picked a vision and a target audience, go back and look at your pitch deck with a critical eye. Or, record yourself talking about your business and then listen to the recording. Get an uninterested third party to do the same, if you can.
Put yourself in the shoes of an investor or a banker and ask yourself whether your pitch clearly shows how putting money into your business has a good chance of creating more value in the business and more money back to the banker or investor. If it doesn’t, start making some changes to align your vision with your intended audience.
How To Convince Investors To Invest In Your Business
A compelling pitch that is attuned to the right audience is just the first step. Next, you’ll need to gather materials to back up what you are selling. And you’ll need to organize and share your evidence effectively. Learn how to do it in this blog post.