How Do I Raise Money For My Business?

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0:45Plus gig speeds with security and equipment included and a five-year price lock. Get started for just$60 a month for 12 months when you add wireless connect to a qualifying internet package. Limited time offer. Restrictions apply. Call for details. Nearly every week I get asked a version of this question and it sounds like this. I have a great business idea. How do I raise money to get it started? Now, my answer might surprise you because most people think that the money comes first, then the business. It's actually the opposite. Today I'm going to walk you through how funding works, who invests, why they invest, and what they need to see from you.

1:23And specifically, what is the first question almost every investor asks when they're looking to invest in a company?

1:34Welcome back to the$100 MBA show. I'm your host, Omar Zinhome, where I deliver practical business lessons three times a week, Monday, Wednesday, and Friday to help you start, grow, and scale your business. I got a quick favor to ask. If this show has helped you in any way, leave me a quick review. You could do so wherever you listen to podcasts. This helps me and my team reach even more people who need the same no-fluff practical business advice that you're getting from the show. It only takes a few seconds, but it makes a huge difference. Thanks for being a part of our journey to help others on their journey.

2:10To help me answer this question, Nicole is here on Q &A Wednesday. Nicole, good to have you. Hey, Omar. Great to be here. Let's get into today's question. Today's question comes from Justin. Justin asks, I have a business idea I really believe in, but I do not have the capital to get it going. How do I raise money for my business? Where do I even start? You know, I was at a cafe the other day and I overheard two people asking and talking about this exact question. I know you've got strong opinions though. I do have strong opinions and I want to make sure that people understand. I want to preface that the reason why I have strong opinions about this is because most people get this wrong and most people never actually build their business because they get stuck at this step.

2:53Yeah, that's right. And I'm going to play the role of Justin here and ask the question he's probably thinking, how much money do I even need to raise? That is a very important question. Most people, they have like some number in their head. They're like, I need$50 ,000 for this business. And whenever I probe a little bit and ask like, why$50 ,000? Why do you need 50? Why not 100? Why not$20 ,000? And they really don't have an answer. They have this nidveless number. So you really need to understand why you need the amount that you're asking for. You really need to break it down line by line. What are you going to be spending this money on?

3:27Is it equipment? Is it hires? What kind of hires? How much do these hires cost? Is it marketing spend? Is it ad dollars? You need to have an actual budget of what you're going to be spending these investor dollars in. Now, the reason why I think this exercise is really helpful is because most people, when they do this exercise, they realize, oh, I actually don't need that much money. I can actually get some results with less money. Yeah, it's almost like if money will solve all my problems, but they're not actually being specific as to A, maybe what the problems are and then what they would actually use the money for.

4:01So breaking those items down or being very clear about what I would put that capital towards is super helpful. Yeah, and I want to give a good example so people can understand. A lot of people, when it comes to business, they think differently about things when it's actually like anything else you buy. Like when you invest in a vacation, when you invest in a new outfit, well, let's go to the vacation part. You're going to go on holiday. Do you start out by saying, I need$30 ,000 for a holiday? No, you don't. You say, I want to go on holiday. I want to go to a beach. Where are the beaches that are close to me?

4:32What is a place I want to go that haven't been before? And you start budgeting out. How much money do I need for this? Well, if I go to Costa Rica, this is how much it's going to cost me to get on a flight. Is there another way to get there? Do I need to rent a car? How much are the hotels? Am I going to go on excursions? What about food? Like you start realizing how much this is going to cost. You break it down so you can figure out, can I afford this vacation? How much is it going to cost me? What are the alternatives? What's the other version of my beach holiday? Maybe I can go somewhere I could drive instead of going to on a flight.

5:02The point I'm making here is that you already do this in your life. you should do the same thing in your business. That's such a good example. Like that breakdown is so simple, but it's true. It's like they think about it in a completely different way. Yeah. And you have to understand that your business, when it starts, is version one. It's not version 500. Most people, when they think of business, are like, well, I want to create the next Disney, right? Disney is a multi-billion, almost trillion dollar business. So how do you think about it for your business? Will you think about like, how did Disney get started?

5:33Well, they started with like one short animated video with some characters, right? How much would it cost you to create one short animated video with a few characters? That's your version one. What's the version one of your business? That's all you need to kind of get started. And in addition to that, that breakdown is super helpful. What am I going to do with that money? But another line item maybe that they need to think about, and I think you want to talk about this, is the investors are going to want their money back. So how will I make more money so that the investors can get an ROI? a return on their investment.

6:05Yes. Well, that leads us to the next question, which is the question you need to ask yourself, what are you going to get in return for the money you spent? You have to see this as an investment. I'm going to invest X amount of dollars. How are those dollars going to equal more dollars? That's basically it. Because the investor, at the end of the day, they're looking for the best chance to get a return on investment. Are you the best chance at turning their$50 ,000 or$100 ,000 into more than$100 ,000? Hopefully, you know, much more. Some investors are happy with a 2x or 3x return. Some people are looking for 10x.

6:39Some of them are looking for 100x return. So are you able to actually explain, hey, when I spend this money, you will get X amount back. If you can't do that, then unfortunately, you're not going to get an investor. Just think about it. Put yourself in their shoes. Would you give somebody your hard-earned dollars if you knew for sure that the person on the other side had no plan to get your money back or to make more money out of that money. So think about it. So if I make a hire, let's say, for example, I'm going to make a hire that hire is going to cost me twenty thousand dollars as a freelancer.

7:11What is that hire going to do for your business? How is that going to actually earn you more money? Is that the hire going to create a product for you that you could sell? Is a hire going to help you market so you can get in front of more customers? How many more customers? You got to get that granular. Anything else? Yes. again, we're talking about investors here. They are not making a donation, right? They are, even though they're called angel investors, they're not really angels. They want their money back and they want it with interest and obviously a profit. So you have to understand that, hey, if I'm going to spend this money, I need to have a formula, an exact formula.

7:50I'm going to give an example. So when we were running our software company, Webinar Ninja, we got pitched by investors constantly that wanted to like invest in our company. We want to stay bootstrapped, but this is a good exercise, even if you don't want investors so that you can understand what to do with your profits, because your profit is something that you're going to reinvest in your business. So for example, with Webinar Ninja, we knew exactly what happens when somebody gets on a trial in Webinar Ninja. So people had a 14 day trial and they signed up, they had a credit card on file, put their credit card on, they sign up, they have 14 days after the 14 days are up, they get charged for their plan.

8:24Okay. We knew that if we had a hundred trials, we would get X amount of customers every single time converting off trial. Our conversion rate was about 45%. So 45 % of our trials would become customers. So we knew every time we had 100 new trials, 45 new customers. So how do we get more trials? So we knew that if we ran ads on Facebook, for example, and got an extra, let's say, 300 new customers. So now instead of 100, we have 400 new customers. We would make a lot more, 45 times four, whatever that is, which is 180. customers. We knew we'd get 180 customers if we just put more fuel to the fly.

9:00But you have to know that equation. You have to know so that the investor knows that, hey, OK, if I invest X amount of dollars and some of those dollars are going to be invested in this way, that they're going to make more revenue and they're going to have more customers and they're going to be more growth and the company is going to be worth more. And then when they one day sell, I can have a bigger slice of the pie or get more pie out of my investment. So you really need to break it down to those exact numbers. And I suppose what you're saying there is you're coming in with a very clear ask for the funding, but also exactly what you're going to use it for and exactly how that's going to pay out.

9:35Yes. Yeah. So that clarity is really important. We had this discussion earlier before off camera about Shark Tank. Shark Tank is a good example. I really highly recommend anybody who's looking for investment to watch a show. It's cheesy and it's highly produced. It's high drama and all that. Yeah, but one of the first questions they ask them is like, okay, what are you going to do with this investment? Yeah. Like, why do you need investment? You look like you're doing fine. And, you know, some of them, they give a cheesy answer like, well, I need somebody who's going to advise me or whatever. But the ones that really get investment are the ones that have a plan.

10:06Like, hey, we need to scale our production. We want to lower our cost per acquisition for customer, or we want to be able to license this product. And we need, you know, those connections that you have. So this is a whole idea that by watching the show, you'll get some hints on what's going to be asked. Yes. And the numbers always have to be very, very clear there. So it's not like I need money for more sales. How many more sales and what's your proven sales method? Or I need money for marketing like ads, as you mentioned before. OK, what will the ad spend actually result in? So being very clear on their numbers.

10:40I mean, that always comes up in Shark Tank. Shark Tank. Speaking of Shark Tank, though, one of the things that always comes up is, how do I prove that I'm worth investing? It's almost like an audition, right? For investors, you feel that sense of, I've got to prove to them that their money is going to be worth it. Yes. Spent on me and my business. Yeah. When it comes to money, people want to see evidence. And I'm going to give an extreme example. Sarah Blakely, who's the founder of Spanx, is a billionaire, right? Built an incredible empire on women's clothing and undergarments, was starting a new business and she needed investors.

11:14Like she would have no problem getting investors. Why? Because she's successful. She's proven that she can run a successful business. She's built a bootstrapped, self-funded business that's worth over a billion dollars. OK, if Jeff Bezos wants to start a new company and wants to get some funding, right, he's going to have a very easy time getting funding. Why? Because he's already has a track record that he can win. Right. OK, but those are really out there examples. And I think what you're hinting to is traction, having some sort of proof that you're able to do this thing of business. Exactly.

11:45A lot of people are so hung up on their idea. Most investors, the vast majority, are investing in you. They're not investing in the idea because they understand that sometimes the market will change, they'll shift. And they want to make sure that you're the right person to lead this company, to maybe pivot with those changes, to change with the market, to improve your product, to be agile. So you need to prove in some way that you're the right person to back You're the right person to invest in and this is why the business comes first before the money Because you need to show that hey, I already have sales.

12:19I already have traction I already shown interest or even I have built an audience around this product. They trust me So you need to show the investor that you already have some wins and you're worth depending on you're worth investing in in some way. Even if that's like, I am an expert at this. I have a PhD in this area. I have a unique experience because this is what I did for 20 years in my full-time job. And now I'm going to take that experience and turn it into a product. That is something for them to chew on and be like, okay, this person is something that I can rely on and see that I can win with.

12:55I thought traction was going to be a bit separate to being the person like they're investing in you, But I suppose you are the one that's showing capability of delivering. A thousand percent. And one of the first questions they ask on Shark Tank is, how many sales have you made so far? Right. How much money have you made so far with this business? They want to see, is there validation in the market for this business idea, this product? Are you able to get it to a certain point on your own without my involvement? Why? Because Mark Cuban is busy, right? All these sharks are busy, right? They don't have time to hold your hand.

13:28They're probably going to give you an hour every three months or something like that of their time. So the point I'm making here is that you need to show them that, hey, I am able to win at this level. I need to take it to a next level. And this is why I need your help. This is why I need your dollars. This is why I need your expertise or whatever it might be. So you need to have some traction of some sort. And this is why even if you have a version of your product in a different form, let's say, for example, you want to create a software and you need funding for the software, you know, hire some developers.

13:58or you're not a tech founder, but you have a service version of this product, of this solution. Like you create a service business that solves a problem. Now you want to turn that into a, like a ready-made solution with software. That's a great kind of way to show, Hey, I've already have traction with the service. I've, I'm solving this problem with the service, but now I want to, you know, leverage this, scale this with software. You spent money to get that customer's call ads, referrals, word of mouth. It doesn't matter. The moment it rings out unanswered, that's not just a missed opportunity.

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16:31Traction is what we're looking at here. So aside from the big examples of Sarah Blakely and Jeff Bezos, Justin, he has traction. Where does he actually go? I know that I remember thinking in the early days when we started our business, investment firms and even angel investors, they seemed a little bit out of reach or intimidating in some way. So can you give him some practical places where he can go? Nicole, I have a friend named Grant, Grant Merrill. Shout out to Grant. Love you. You need to channel your inner Grant Merrill. Grant is one of those people that loves meeting people and networks.

17:07And like Grant will have no problem raising money anytime he wants. So he just he's just that kind of person that is always at the events, always are at the parties, always saying yes to things. And you need to start doing more of that. And I understand that sometimes that's out of your comfort zone. That was me in the beginning as well. Like, I don't feel comfortable always like trying to be at the party, at the meetups. But there are opportunities for you to meet people that know people. Right. Maybe the investors won't be there at the party, but there's going to be other people like Grant at that party that know investors that could open doors for you.

17:39So literally go to meetup.com, go to eventbrite.com. Look at all the local events that are happening. A lot of these events are free. Some of them are low cost,$5 entry, whatever it might be. Some of them are just like cocktail hour. Some of them are just a meet and greet. Some of them are at co-working spaces where they're trying to promote the co-working space, a pitch night, whatever it might be. Go to as many of these events as you can. Even just say, hey, I'm going to go to one event a week for the next six weeks and just show up. And then there, just introduce yourself to a few people, get to know people, ask them questions about what they do.

18:09Learn. Do they have investors? Okay, you have investors? How do you get investors? Who are these investors? Cool. And your whole idea is not to like, I'm going to close a deal or I'm going to get an investor in six weeks. The idea is just like you're starting this process of being a person that is out there in the world that is available to meet other people because one day the people that you're going to be talking to will start to like what you do and understand what you do and start introducing to other people. But it starts with that first initial, you know, showing up to these events. And I would even say like, if it's, I don't know how super early we're talking about here, but those early events that in those first meetups that you might go to, and maybe you don't have that gregarious outgoing personality, even just listening to the conversations, listening to the language, listening to the way people are talking about investment and how it all plays out.

19:03That is, to me, that was one of the first things that I even just was happy about. As long as I'm around those conversations and starting to absorb that language, I think that goes a long way eventually to that confidence of having those first conversations. Yeah. I mean, I'm going to go back to Grant. We met Grant first time maybe like six years ago at a SaaS conference called SaaS Stock in Sydney. and we basically just met at the where the the sponsors are and all the booths and we're kind of walking around. It was actually we were looking at all the different vendors and who's got the best swag.

19:36Yeah. And we're just joking around having a good time. I left that day with Grant asking myself, why was it fun to hang out with Grant? What was about Grant that I enjoyed his company? So the next time I hung out with him, I just noticed that Grant asks a lot of questions. He doesn't actually, you know, sit there and give his life story and give all his best tips and give all this unsolicited advice. No, he actually just asks questions to learn more about you. And people love talking about themselves. You know, so you start sharing your story. He learns more about you. And then he just seems like an interesting person because he's genuinely curious about what you do.

20:11So you could just be Grant and ask good questions. Just ask questions about what they do, why they do it. What was the initial motivation to start this business in the first place? Do you have a co-founder? You know, what are some of the heartbreaks in that journey? Ask these questions to learn more about people. People genuinely feel connected to you because you're actually asking some good questions. I love that you're bringing up Grant. He wasn't in our prep, but it's true. It's really, Grant's a real person and we love him for it. Before we get to the next question, though, speaking of friends, what about raising money from friends and family?

20:48Because that's something that's also talked about in this space of raising capital. Raising money from friends and family is a viable option. A lot of people, they think about friends and family and they think, oh, I don't know anybody who has money. OK, you may not know people that have money, but there are people that know people have money and people with money need to do something with their money. All right. They can't just have sitting in the bank. They're actually looking for opportunities to invest and ways that they can get a very good return on investment, an outsized return than what they would normally get with some more typical investment like real estate or the stock market.

21:21So it's worth you just thinking about who do you know? Go into your phone, right? My phone's not on me, but go into your phone and go to your contact list and scroll through and see who do you know or is in your contact list that might have some money they want to invest. They don't need to have the whole amount. They could, you know, say for example, you're trying to raise$100 ,000. They might have$10 ,000. They'll get a portion of the raise of that round. So who do I know? It could be an uncle, could be an aunt, could be a neighbor, could be an ex-co-worker. But you do need to understand that this is going to be a business transaction.

21:53And you got to be cool with the fact that you're going to be taking money from a friend or family. And you should be confident enough that your business is going to get a return on investment. If you feel like, oh, I don't want to have to see them at Thanksgiving and have to explain how the business is doing. If you have those thoughts, you're not ready to raise, right? Especially from friends and family. Even if it's from a stranger, like an angel investor that, you know, you stumble upon. You shouldn't want to raise money if you are embarrassed to see them later on, right? You should feel confident enough, like, hey, I can't wait to see them next so I can show them all the great results we're having, all the traction we're having.

22:26And almost like it's easier to approach friends and family, but at the same time, you don't want it to go awkward and the relationship to go south as a result. So it's a big consideration, isn't it, when you are considering friends and family? Yeah, I think you should need to think about that. This is like any kind of relationship. Things do get a little bit more complicated with money involved. So can you maintain that relationship with them and make sure that they understand this is a business transaction? It helps if they've invested into other companies before so that they have experience in it.