Do you really need an investor for your business?

I had a great meeting with a new contact yesterday who was seeking some financing for her business. When asked what the funds were for she advised that the money would be used for marketing. Her business has already had a small measure of success and has accumulated a few hundred interested prospects and a handful of customers. Her reason for wanting to spend money on marketing the business was to try and drive more people to the front door of her business. I have heard different versions of this story from many entrepreneurs and businesses including Bridge Capital who has had outside investors.

As we dug a little deeper into her business there were a few points of advice I provided that you might find helpful.

1. Have you exhausted your existing base of customers?

Sometimes getting a lift in your business can be done by cycling through a few customers to see what they think. Did they enjoy your products or services? What would they suggest could have been better? Would they use your company again? Why or why not? What would it take for them to tell their family and friends about your business? Do you have a referral program or retention program for existing customers? It’s always easier to work with what you have instead of trying to work with something you don’t have.

2. Have you tested different levels of pricing?

For this particular business, they had not found the sweet spot for the price they charged customers. I suggested taking some sample sizes of their existing prospect database and testing out different levels of pricing to see where the sensitivity was. Try 10 prospects at price X and then try another at price Y and keep going until you finally see traction and drop off. The gap between those two points is probably where you want your pricing to be.

3. Have you defined the cost of bringing in an outside investor?

Marketing is always an easy cost/value calculation to make. What is the cost of the investor you are seeking versus offering price discounts, referral options or other incentives to existing prospects? The argument is usually “if I was able to get X from an investor we would be able to attracted Y new customers and earn Z in revenue” which may be true but was is the respective cost per customer based on what the investor wanted in return for their capital? It’s probably cheaper and easy to work with your existing opportunities compared to bringing in an outside investor to “fix” your challenges. Outside investors want a return on their money not new problems to get involved in – and don’t forget that investors will enforce accountability (we’ll leave that topic for another day).

Human nature would suggest we always look to take the path of least resistance and for entrepreneurs and businesses this can mean spending inordinate amounts of time looking for a magical “investor”. Even if such an investor existed I have seen that capital is rarely the problem and most times only covers up underlying issues. Understanding that investors are helpful when it comes to getting a business going and to helping a business grow quite often an investor is not helpful when a business is not producing the anticipated results. At best an investor will provide some time for the business to sort itself out but the cost of that time can be very expensive either in the form of interest, ownership or both. The businesses I know of that have survived and experienced success were the ones whose owners were able to grind out a result without taking capital unnecessarily. When they did seek capital it was strategic and accompanied measurable goals.

I am in the business of helping people and businesses access money but there are deals I see where the results of my help could possible push them under the water line which is not a deal worth doing – no matter the fee. I am continually amazed and inspired by the stories of entrepreneurs that were able to achieve great success that can be traced all the way back to the moments of desperation and pressure. Do you really need an investor for your business? I don’t know but you should take the time to make sure you do.

“No pressure, no diamonds.” – Thomas Carlyle