How Much Money to Ask from an Investor
It’s always nice when you have your business idea and you have your own funds to get the business off the ground but more often than not, it’s not the case. Usually entrepreneurs have to find investors and ask them for money. Finding an investor is not an easy task but asking for the right amount is equally as difficult.
Let’s look at two scenarios of asking for a wrong amount — asking too little and asking too much.
When entrepreneurs talk to investors and ask them for an investment, they have to justify the number. Very often entrepreneurs assume that if they ask for a smaller amount, the chances of getting the investment will be higher. This is not true. Experienced investors, if they are talking to you, they probably know about your industry and business specifics more than you think and they have a good idea of how much money a business like yours will need at that particular stage. If you show them your business plan and they understand that you, for example, under-invested in marketing or you underestimated the amount of labor you will need, they will not feel good about you. Investors’ main goal is to get return on their investments and if they realize that they are dealing with a person who doesn’t know his or her own business and the industry good enough, they will not give you the money. One thing entrepreneurs have to understand here — investors will give you as much money as you need, as long as you can justify every single dollar so don’t be afraid to ask for more, just be ready to answer every question about it.
The second scenario is when you ask for more money than you really need. Even if you justify every single dollar, the investor will know that it’s more than necessary because, again, they most likely know more about starting a business than you.
There is one thing that is really tricky here. A lot of entrepreneurs ask for more money than they need and then they consistently show a high balance of cash in their forecast cash flow statements. This happens for two reasons — entrepreneurs either try to show the investors that they are being “smart” by having a financial cushion just in case, or they simply didn’t come up with the plan to spend this money yet. Result is the same though — the investor will not like it. Their money is an expensive asset and if you show them that their money will be sitting in your bank account doing nothing, they will either reduce the investment by a certain amount (which would be good news for you) or they will walk away. A financial cushion in the bank is a nice thing to have but it won’t work with the investor. Also, by taking more money than you need at the earlier stage you will be giving away much more equity of your business which is not a smart thing to do. You can certainly create an agreement with the investor that he or she will provide additional financial support later as needed and it’ll be ok with them in most cases. Also, if the value of your company grows during this time, you will be able to get the same amount of money by giving away less equity.
Bottom line here — do your homework with as few “rough” estimates as possible and be ready to speak to every single line in your business plan. If the investor sees that you know what you’re talking about and all your words and numbers add up, you’ll do good.