MBA2286 Q&A Wednesday: When should I secure funding for my business?

0:09Heyo! Welcome to the$100 MBA show, helping you be better at business every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher, Omar Zinhome. I'm also the co-founder of Webinar Ninja, an independent software company. I started with my co-founder back in 2014. And today's episode is Q &A Wednesday. On Q &A Wednesdays, we answer a question from one of you, one of our listeners. If you've got a question you want to ask, go ahead and email me over at omar at 100mba.net. Today's question is from Matt. And Matt asks, hey, Omar, I've been running my business for some time now.

0:41and I'm wondering when is a good time to secure funding in my business? When do I know it's time to start raising capital or getting a loan? I know I'm going to need some funding to do what I need in my business, but I'm not sure at what stage I should start going out to get funding. Would love your thoughts. Thanks a lot, Matt. Well, now that funding cash flow is oxygen to every business. So Matt's question about securing funding for his business is a good one. My job in today's episode is to help you know when you're in the best position to raise funds, whether you're getting investors and giving up equity or getting a loan or some sort of debt financing.

1:20The state of your business when you seek out funding will have a lot to do with how much fund you get, how easy it is, how much equity you have to give up, the terms of a loan, all kinds of stuff that can actually have a huge impact on the future of your business. So let's get into it. Let's get down to business. If you're a long-time listener of the show, you know that I am always a bootstrap first mindset kind of person. Meaning you should try to grow your business with your own funding, keep things lean, keep things minimal viable. But I do understand that some business models, some products, some services require you to have a certain amount of money to go past the MVP stage, the minimal viable product stage.

2:02and that raising capital, whether it's investment or debt financing, is gonna be required. But I wanna make sure that you're in the best position possible when you're at that stage. I like answering this question with giving the example of the show Shark Tank. If you ever watched an episode of Shark Tank, one of the first questions the Sharks ask after a business owner gives their pitch is how many units have you sold? How much money have you made? How much revenue have you actually earned with this business so far? The reason why this question is being asked every single time and it's so important is that it's an indication of product market fit.

2:39It's an indication if that idea, that business, that product actually has legs and actually is something that people want in the market. If you already have sales and you have customers and you have cash flow and you've proven that this is actually something that people want, investors are more likely to give you money because they feel like it's not as risky as zero sales. Zero sales is really just them betting on you as a person. And unless you have a track record of incredible entrepreneurial success, it's going to be hard for you just to raise money based on that. So you need some data. You need some proof that, hey, this business idea, it's not just an idea.

3:16It's actually helping people and people are willing to part with their money to buy my products and services. The answer to this question, how much revenue have you made? How many sales have you made? also is an indication of how much equity they can get for the amount of money that you're asking for. Because sales is not the end-all be-all, but revenue is a good basis of valuation. Meaning, if a company is making a million dollars a year on an average of three to five, let's say 5x valuation, the company is worth five million. So if I'm asking for a million dollars in funding, they can expect to get 20 % equity because that's the value of a million dollars for this business based on the revenue.

3:55The better your numbers, the more healthier numbers are and that you can tell a story around that you can actually show us proof that this business is actually worth investing in, the better deal you're gonna get. The more money you'll be able to raise, the less equity you have to give up. So it's the right time to get funding when you already have some traction, when you have sales, when you've shown you'll be able to actually supply your product or service to your customers efficiently, you have a system, you've earned revenue, and you have some evidence. And I would say 12 months is the minimum really for an average business.

4:29Some businesses, six months of track record is enough if the growth is exponential or just the volume of revenue is huge. But on average, if you have 12 months of really good numbers, a good track record of sales, this puts you in a better position to be able to not be desperate really to get a better deal. Now, this also applies for a loan or debt financing, going to a bank and asking for money. They're going to see all of your bank statements. They're going to see how much money you're making, how much revenue you made. They're going to see how much money is in the bank. All that stuff is going to help understand how much of a liability you are.

5:02This is going to help your interest rates. It's going to help the terms of your loan, how much money you can borrow, how long you can borrow for, for like how many months or years. Many debt financing companies will let you borrow X amount at a certain rate. And then if you continue to earn more and more, you can then borrow another amount and use your track record as collateral. Now, this is not saying that it's impossible for you to get funding without any sales or without any track record or maybe a small sample size of a track record, whether it's through a bank or through investors, but it makes things a whole lot harder.

5:37This is why I'm a big proponent of really creating an MVP version of your business, a minimal viable product. Get your product out there. It's not your ideal version of the product or service or your business, but at least you're showing promise. You're showing revenue, showing that you know how to make money and manage a business. You know how to make sales. You know how to service your customers. These are things that investors and banks are going to look at and say, hey, this person is worth backing. And then you use the funding to get closer to your ideal picture of what your business or service is.

6:07I know this is hard for some business owners to kind of water down their idea or not actually have their dream come true immediately. But if you look at any success of any business that you know, any brand you know, this is how they do it. It's not what it is today. For example, McDonald's was a small dinky hamburger stand. One location. No billions and billions of burgers sold and, you know, multiple locations around the world or franchises or an extensive menu. There were like five things on the menu. It was simple. It was minimal viable. Nike. Nike didn't start out creating their own sneakers.

6:44They actually were called Blue Ribbon Sports and they sold sneakers from Japan. Asics, actually. Or Onitsuka, as they were called in Japan. Phil Knight, the founder, shipped these sneakers over and sold them out of his car. He then had a small corner in an apparel shop and sold from one location. Again, not Nike's even. Not even his own shoes. It was, again, MVP, no sweaters, no jerseys, no yoga wear, nothing like that. It was the minimal viable version of what Nike could be. Even big tech companies like Facebook was in this humongous social media network that we know today. It just started small and local.

7:23It was only for Harvard University. And then the next step was other universities in the U.S., just universities, meaning that you can only sign up with a.edu email. And then it was universities abroad. And then it opened up to the public. Again, MVP. Start where you can get some traction. Start where you can show a track record. And you can show that you know how to run a business and make some revenue. This puts you in a power position. Puts you in a position that you're not desperate. You're actually choosing who you want to do business with or have as an investor or bank that will support you rather than you going hat in hand.

8:02So to answer Matt's question from today's Q &A Wednesday, when should you seek out funding? Well, after you have some wins under your belt, after you have a good track record of sales and revenue. And I like 12 months because it shows that this is not, you know, an aberration. You consistently can bring in revenue. You consistently sell your products and services. You're trending upwards. The numbers are looking good and healthy. You got a good story to tell behind the numbers. And basically, it looks like you are going somewhere and the investors, the banks, they're just going to see this and say, hey, we want to come along for the ride.

8:35We want to just benefit from the trajectory you're going on. They kind of see a winner and they're like, this is going to win. I should latch my name onto it, my business to it, my money to it. But it all starts with just starting with an MVP version of your business. Get some reps, get some revenue, have a track record, have the numbers to tell a great story. Matt, thanks so much for asking today's question on Q &A Wednesday. If you've got a question you want to ask, go ahead and email me over at omar at 100mba.net. And I'll make sure to answer it right here on Q &A Wednesday on the podcast. Speaking of the podcast, if you're not subscribed yet, if you're not following the podcast, do that right now on your favorite podcast app.

9:13Find those triple dots and hit follow. That way you get our next episode automatically and you get access to over 2 ,200 episodes in our back catalog. It's the best way to support the show as well as sharing it on social media. Tell your friends, hey, listen to the$100 MBA show over at 100mba.net. Send them over there so they can subscribe for themselves on their favorite podcast app. Before I go, I want to leave you with this. Depending on your business model and your expenses and what it costs for you to scale your business, it makes total sense. You need to get funding, outside funding, to give you that next level boost, to grow faster, to put a little bit of gasoline on the fire.

9:50But you got to have a fire to start with, okay? Gas without a flame is really not going to do anything. And that's why you have to have a proven track record that your business can actually make money. And then once you got that fire burning, you can add fuel to the fire and move faster. Thanks so much for listening, and I'll check you in tomorrow's episode. I'll see you then. Take care.

10:31Thank you.