I have done many videos on the best ways to raise funds for your startup and why focusing on raising money before even starting out or gaining any traction may be the biggest mistake you make, and prevent you from succeeding all together. In reality, the number one role of a good entrepreneur is to focus on being resourceful as this skill becomes vital for the rest of your journey.
While most people believe themselves to be resourceful, they are still unable to do anything without having money, which is the first indicator that perhaps entrepreneurship or small business ownership is not for them. While most businesses never require raising capital, and the business should generate enough money to fund itself within 12 months at the very least, some businesses actually require capital in 2 – 3 stages in order to reach their highest potential.
Those three phases are:
1. The Built Phase.
2. The Launch Phase
3. The Calling Phase.
These three phases are not focused on having investors pay your salary while you try to figure it out, but rather an effort to give you the funds, resources, and help necessary to bypass all the trial and error associated with such business and go straight to the money making aspects of your business, eventually allowing for an exit.
Regardless of which phase you are in, I am going to walk you through the 3 criteria I use to determine if investing in a business is in my best interest:
1. The Vertical: The industry something is in matters, and it matters to most investors. Very few people like to venture outside of their comfort zone when it comes to investing, and that is partly based on the fact that the investor may not understand the rules of engagement or how something works.
The second reason is that most of our resources are tied into past businesses or relationships focused on our own past businesses and verticals. If I have started and sold a dozen burger restaurants, and have never ventured in the mobile app space, then it would scare me to enter that space without any resources, friends or understanding of the market let alone trust a newbie to enter it with me. We tend to focus on businesses, verticals, and industries we already understand.
2. The Track Record of the Entrepreneur: You don’t have to have succeeded once before or even had some success in the field, but at the least you need to show that you have been down this path before – even if completely unsuccessful. I would rather be in a room with someone who has been to war and been defeated than someone who has never been to war before at all.
Entrepreneurship isn’t for everyone, and it is very likely that if you haven’t been through it before you still don’t know yourself well enough yet. As an investor who is investing to make a profit back, I am looking for an individual who has tried and not given up. If some great experience in the field or industry comes along with that it’s even better. There is a lot of value in having been down a path before and learned what doesn’t work. At the very least you have walked the walk before, even if it didn’t get you anywhere.
3. Data, Data, Data: You have no idea how many times someone approaches me and says, “This idea will make a million dollars in 90 days,” and I just walk away. The reality is $1M in revenue doesn’t mean shit and 90 days is the amount of time it’s gonna take for them to get a reality check of how the world of business works. That’s it.
The best investments are the ones backed by data and by a logical approach to business. Saying that Instagram had 200,000 users in a week and is the reason you will too is completely insane and comes with no merit. Instead, having a solid plan showing you understand the industry you are approaching and your projections come from a place of research and awareness of risk, would give any investor major confidence.
The other downfall to avoid is to ensure that your arrogance doesn’t take center stage. Meaning that if you have never done anything before worth bragging about, then please don’t keep throwing out there that you are God’s gift to entrepreneurship and that this idea is it. However, if you’re an accredited and proven entrepreneur and are confident based on track record, then your self-assured attitude can be justified.
I hope these three things help you understand a bit more about what I look for when making investment decisions. Remember that the decision to invest is made with the expectation of a return. The whole idea of investing is making money, and therefore my goal with investing in a business is to make money, even if your goal is to change the world. Make sure to check out this video in order to learn more about what investors look for before investing.
