3 Ways to Perfect Your Financial Projections for Investors

According to the Angel Capital Eduction Foundation, only 1 to 4% of angel investor applicants successfully raise angel investment, and the primary cause is a a lack of understanding when it comes to creating a realistic set of financial projections. If you’re preparing financial projections in order to raise capital from a potential investor, there are things you can do to positively influence investors. Here are 3 of them:

Show that you Have Traction - Investors love to invest in businesses with traction. They want to see graphs that are going up and to the right. Whether that is number of users, revenue, or profits, investors like to put money behind businesses that have already demonstrated success. 
Your financial projections should be built on assumptions based on your historic performance. If you are currently growing 100% month-over-month, then utilize that growth in your financial forecasts to project into the future. If you have traction, flaunt it! 
There are many examples of companies who have raised investment simply because they are growing fast. For example, Twitter did not generate substantial revenue for years, and yet investors poured millions into the business simply because it was growing so fast. It had traction, and that was enough.


Show Projected Growth Potential - Investors are looking for companies that have the potential to provide a 10x return. Investing as an angel investor or venture capitalist is risky. There is no way an investor is going to put dollars at risk with a startup, if the best case scenario only doubles their money. 
Since investors expect to lose their investment 50% of the time or more, they will not even consider investing in a company that has relatively low potential to provide a significant return on investment. Your financial projections must be realistic, but you also need to demonstrate that there is potential for a big pay day.


Scenario Analysis - Give Examples and illustrations! Investors know that your financial projections are simply a forecast. Nobody can predict the future success or failure of a company. The purpose of your financial projections is to demonstrate a data-driven, bottom-up forecast of the next 3 years for your company. 
Your goal is simply to show that you have put some thought into the process, but that you understand that things can change. The best way to show investors what could happen is to prepare financial projections based on different scenarios. For example, show what would happen if you get that big contract with Wal-Mart, or how your financials would change if you reached the first page on Google for your targeted keywords. Walk your investors through various scenarios in order to show potential.

If you can’t demonstrate traction, that you have 10x potential, and that you have thought through various scenarios for your business, you probably aren’t ready to apply for investor funding. But if you keep these 3 things in mind, your financial projections will stand out from the crowd when presented to potential investors.

S-T-R-E-T-C-H Your Marketing Budget

Everyone knows marketing is an important part of any business operation. The difficult part is finding cost-effective ways to promote your business and get your name out there without breaking the bank. Here are a few cost-effective strategies you can use to reach current and potential clients and keep your finances on track.
 
Promote Yourself as a Subject Matter Expert - Having a dedicated audience is a great way to promote your own business for little or no money, and building recognition for yourself as an expert makes it easier to sell your brand or services.  So, instead of just spending money to sell your products, gain exposure by offering your knowledge for free. Become an expert by writing articles about your expertise and industry. Create a newsletter or blog for your company in addition to writing for other popular blogs. Get published in national publications and local papers.
 
Share Resources With Other Sites - You can avoid spending a lot of money to purchase a mailing list by swapping lists with sites that attract a similar audience. However, be sure to respect the privacy of the subscribers whose e-mail addresses are on the lists you share or you may get blocked as a spammer. To prevent this from happening, ask the site whose list you're borrowing to handle the mailing and include a link to your site that their subscribers can click to sign up for your newsletter.

Make Your Marketing Elements Work Together - If you send an email newsletter, it should contain multiple links to your web site. Your web site should promote your social media campaign, and both should promote your blog as well as any press coverage you’ve received and articles you’ve written.

Use Social Media to Get Free Advertising - Getting groups of people to discuss your product on social networks like Twitter and Facebook is worth a thousand ads. Attract followers by running contests and offering special deals on Facebook and Twitter. Mix up special offers with original content and network with relevant industry or local blogs that may mention your company in a post.

Recycle Your Current Campaigns - If you already have a campaign that's accurate and effective, don't scrap it just because you think you need a new one. Keep running it for as long as your customers respond to it.  In addition, avoid purchasing new professional photographs or sales literature for as long as possible. If you have professional photos made of your products, use them in multiple print ads. Make written content do “double duty.” If you hire a freelance writer to create your web content, ask them to repurpose it for your product data sheets and vice versa.
 
Effective marketing doesn’t need to cost an arm and a leg. These are just a few ways small business owners can maximize the return on every dollar they spend.

If Only I Had More Money I Could......

Are you looking for money fund your start up company? If so, good luck! According to Angelsoft, a company that develops deal management software for angel investors, only 51 companies out of 20,395 that were processed through their system during the past 12 months received funding.

According to the National Venture Capital Association, only 3,277 funding deals took place during 2010, and only 1/3 of the (approximately) $21 billion invested went to seed and early-stage companies, and the amount of money invested in startups decreased by 32% in the latter half of the year.

Venture capitalists have become more risk averse because they’ve had low levels of return on their present investments. Angel investors used to dive into pre-revenue, seed-stage companies, but things have changed.  Most angel investors now expect companies to have a product developed, a partial or complete management team in place, six figures in revenues, and marginal profitability before considering an investment. In short, you have a better chance of being struck by lightning or writing a New York Times Best Seller than getting funded by an angel investor or venture capitalist.

Here are four things you can do to make investors take you more seriously-- even in this economy.

Have “Skin in the Game” - Since investors are putting their money at risk, they expect you to do the same. This means investing “sweat equity,” accepting a below market salary, and sacrificing employment opportunities to show you’re dead serious and committed to the success of your company.

Perform and Show Results Without the Money - All investors look for companies led by exceptional managers and company performance is the best way to measure that. Insufficient capital may constraint your growth, but it isn’t an excuse to do nothing. You have to get over the rejections and keep working toward your goals and achieving milestones. If you can show progress -- even if it’s limited -- without the investors’ funding then this will send the message that you are resourceful enough to maximize every opportunity.

Make Your Customers Your Investors - Sales are your best source of capital. They also don’t require that you offer ownership in your company or pay interest. So, be aggressive in closing sales -- even if you have to sacrifice price and margin - and use the proceeds to expand. Or, ask your customers to issue you a letter of intent (LOI) to purchase or a purchase order contingent on product availability. Either will strengthen your position in the eyes of investors and also show that you can perform without their money.

Make an Offer They Can't Refuse - If you’re at a point where additional capital will make the difference between closing the doors or stellar growth, you may have to offer investors extremely generous terms. It’s a difficult decision, but it could pay off handsomely.

Running a Small Business? Worry About the Things That Matter

Regardless of what type of business you are planning to start, remember what matters if you want to succeed.

Marketing Matters

Many business owners tend to overlook the importance of marketing. Launching a ready-made website and printing a few business cards isn’t enough. Depending on what you sell, thousands of potential customers may need to see your product before you sell one. As a case in point, Ford Motor Company sells just over 1,000,000 cars and trucks each year in the US. There are 300,000,000 people in the US, and approximately 80% are driving age and older. However, only a small percentage are ready to buy a car at any given time. Therefore, Ford has to convince as many of them as possible to buy from them. Now, think about how often you see Ford advertising. TV commercials. Ads in newspapers and magazines. Sporting events. Ford logos on shirts and hats. Stories in the news. Marketing is essential if you want your business to succeed.

Money Matters

You absolutely MUST learn the basics of accounting and financial management basics even if you don’t consider yourself a numbers person. However, the good news is accounting software makes the task easier than eve. Even so, it's important to take the time to understand exactly how your software works and what all of the financial reports mean. And, if you have any plans for growth, you have to understand the basics of financial management and planning. In fact, it might surprise you to know that over 75% of the retail businesses that fail are actually profitable. They don’t fail because the idea is bad or sales are down, they fail because no one on the management team understands how to manage cash flow!

Online Matters

An online presence is quickly becoming as essential as business cards and a Yellow Pages listing used to be. Avoid ready-made sites from hosting companies because they don't give you the control you need to really use the internet effectively. Don't worry if you aren't that knowledgeable about computers. With a little effort, you can still learn the basics of building a website, increasing web traffic, and social networking.

Details Matter

Read before you sign! No matter what the document, what the purpose, read what it says. You may find that a prospective distributor is asking for a personal guarantee, meaning if your company goes under, you are personally responsible for the business’s debt. You may find that your business isn't legitimate because the online LLC registration you’ve been paying for each quarter didn’t complete and file all the necessary forms. You may find that your bank is charging you unreasonable fees for going to a teller or using the ATM. In some cases, these might be acceptable risks, but you should know the risks you're taking!

Your Level of Involvement Matters

If you outsource multiple aspects of your business and defer to a bunch of investors, you'll lose control. The more you handle of your own business, the more you know about what's working, what isn't, and how to fix it. THAT'S what matters!

Don't Just Stand There... Leverage Current Market Trends and Grow

You'd think that start up companies would be at a disadvantage in our present economy. However, here are four marketplace trends you can capitalize on to grow your company.

1. Go Global - The U.S. may be struggling, but the BRIC countries (Brazil, Russia, India and China), as well as countries in Asia/Pacific are booming. So, tapping into that growth is a good way to grow your company. Before you start, be sure you're prepared because you'll need to take orders differently, manage multiple currencies and become familiar with letters of credit, customs regulations and international shipping protocols. If you have an ecommerce site, you'll need to offer international address and phone number options on your online order form and provide payment options that cater to companies outside the U.S.

2. Embrace "Creative Credit" - As any small business owner will tell you, you have a better chance of being struck by lightning than being approved for a bank loan. Tough times call for creative solutions. So, to compensate for the lack of available financing, entrepreneurs have improved their own cash flow by negotiating better terms with vendors, "fast-tracking" cashflow and taking advantage of purchase order, or vendor, financing.

3. Take Advantage of Social Media - Facebook and Twitter aren't just for teenagers messaging each other about about their social lives. Large companies such as Toyota, Kraft, Bayer and Disney use social media to advertise specials, manage customer service, and build brand awareness. Social media is an effective business tool and it's here to stay. Therefore, you should have a presence on Facebook and Twitter, and if you sell business-to-business, LinkedIn.

4. Adept Trends to Fit Your Business Model - Instead of jumping on each new trend you hear about, consider how your business model could benefit from it in a low-cost way. For instance, the Baby Boomer generation is retiring in greater numbers and many of them aren't comfortable booking travel reservations online. If you own a travel agency, you could carve out  lucrative "niche" for yourself by offering travel packages and specialized services for them. Likewise, with Gen-Y emerging as a buying, spending and cultural force all its own, you could cater to that generation by offering coupons for after-hours specials delivered via mobile devices.

If you adapt your current business model to tap into trends your business stands a much better chance of being able to ride the waves of change and grow to profitability. 

U.S. Businesses and Social Entrepreneurs - More Similarities Than You'd Think

I'm in Las Vegas meeting with one of our partners from Zambia who led a delegation to the Africa-USA Business Executive Conference. So, it seemed appropriate to make the subject of this post an Africa-related topic.

You'd think that social entrepreneurs working in Africa would have little in common with most U.S. businesses. However, according to a study conducted by two Wharton School professors, there are some remarkable similarities. They noted that social entrepreneurs work in highly challenging, highly uncertain condition as do corporate managers, who wrestle with all kinds of social, economic and demographic changes. As a result, they identified the following strategies for launching successful projects in risky environments.  

1) Plan ahead and proceed slowly - For those beginning new ventures, start sooner than later, but start smaller rather than bigger so its possible to "learn" your way into success. 

2) Decide what level of achievement counts as success or failure. It's best to start out with small pilot programs, but it's also important to keep your eye on the ultimate goal.  For example, as a pre-requisite to get an animal feed project going in Zambia, for instance, a Wharton-initiated project had to show it could increase the consumption of chicken by at least one million daily protein servings per year. 

2) Be aware of government and competitive forces - Success requires taking a hard look not just at the governmental policies but at entrenched business competition. For example, in Botswana, a large medical software company that stood to lose business from a medical records initiative claimed that information sharing was impossible because of database incompatibilities. It turned out only minor fixes were needed. 

3) Keep costs low in the beginning and plan for scalability - Start with the smallest version of the business that has a shot at success, and plan to learn and grow from there. 

4) Establish specific measurable goals of what you plan to provide - Whether it's 130 grams of cookies, an hour of tutoring, or passenger/miles flown, you have to know what you're delivering to know whether you're succeeding. 

5) Have a realistic exit strategy - In social entrepreneurship ventures, it’s important to understand how a failing project can be abandoned without hurting the people it was designed to help. So, the goal in this case is to leave a minimal footprint. 

6) Anticipate unintended consequences - This is difficult to do, which is is why the consequences are “unintended.” For example, the animal feed project has succeeded in increasing the size of chicken flocks. But now farmers have no good way to dispose of the larger quantities of chicken feathers, because there's no existing method to recycle them. 

7) Learn, then invest - Create an extremely early-stage business plan with 10 to 15 assumptions that are continuously tested and revised. For example, in the case of a South African cookie business, the original plan called for local distributors to sell the cookies. But in order to reach customers with more disposable income, the company is now looking to ship container loads of cookies as exports.

Looking for Investors? Here are 7 Guidelines to Follow When You Write Your Business Plan

One of the biggest mistakes companies make when they write a business plan is to include too much information about the technical aspects of the product or service. This is understandable since they've most likely spent countless hours developing and perfecting it. Unfortunately, it isn't what attracts investors.

The purpose of a business plan is to sell the value of your product or service, define who will buy it, show what they will buy it from you (i.e. instead of your competitors), illustrate how you'll make money and (most important) show investors how THEY'LL make money. Here are 7 helpful guidelines to follow to get you on the right track:

1. Be concise and make it easy to understand. Your entire plan, excluding financials and appendices  shouldn't be more than 20 pages.

2. Clearly explain the value of your product or service and explain how it's unique.

3. Set realistic and specific marketing goals and show you understand your industry.

4. Define your target market(s),  their "pain points" and how your  product  or service satisfies their needs and wants.

5. Demonstrate that your management team has a good balance of strengths and skill sets and/or provide an honest assessment of areas where you're lacking expertise. Be sure to emphasize any experience starting and successfully growing small businesses.

6. Provide realistic financials (pro forma if your company is in start up mode. No "hockey stick"  projections! 

7. Tell investors when and how they'll make money, AND provide an exit strategy. Most investors want to see a substantial return within 3 to 5 years. As for exit strategies, few companies actually go public. A more realistic scenario is selling the company.

 

Before you show your plan to any investor, look at it from an investor's point of view (or ask a friend if you don't feel you can be objective). Then consider whether you'd invest in your company if you were an investor. Finally, a business plan is a constant "work in progress." So be prepared to make changes or create different versions for various situations. Good luck and happy writing!