Archive, Financial Insights, Start-up Financing | October 11, 2011
Dr. Wael Badawy, IntelliView Technologies Inc., Calgary, AB, CYBF Mentor
The “Two Rule” applies to various aspects of business-building but this article focuses specifically on financing.
The application of the Two Rule in financing will evolve over the life of a business but it will always involve you and another person or group. The best way to finance a business is through sales. If, however, the business needs more money to expand, additional finance will be needed. Financing takes place in rounds.
Round 0: First Money – You & your partner/advisor/supporter
The first investor in your idea is you. You have to believe in yourself and demonstrate acceptance of the risk that you run your own business. I have been in many investment forums and a simple question is always asked, “How much of your money is in this?” Investing your money provides other investors with confidence that you believe in your ideas and plans.
A question that often arises from new entrepreneurs is “if I do not have money, how do I invest in my start-up?” You can start by employing yourself. Track your hours to build your business plan, charge them to your company, then pay yourself from your company. Track the cost of coffee, meeting and travel and make them chargeable to your company. Deposit funds in your company, record your expenses and pay yourself. However, note that if you have absolutely $0 and you cannot access any money to do the step above, PLEASE STOP where you are. You are likely not in a position to build a business at the current time.
It takes two to start a business. You could look for a business partner who is willing to contribute time or money towards your vision. You could also find an advisor who discusses issues with you, gives you advice, introduces you to others, and more. If you decide to bring someone else into your business, remember:
You should think about finding a reference or someone to validate your vision. If no partner or advisor is available, ask your partner, spouse, sibling, former colleague or other to act in this role in an informal way. By showing that others believe in your vision, you will reassure potential investors.
The best use of the money you received in Round 0 is to get more money. Be sure you have an achievable plan on how the money you receive at this stage will be used to carry the business until the next level.
Round A: Seed Money – You & your family member/friend
At this stage, funding can come from your family and close friends. These are the people that are most likely to believe in you and support you. Financing can come as a loan, money support, accommodation, work space and more.
Round B, C, D, E…: Additional Investments – You & your investors
The next step in getting financing for your business is to approach local individuals or groups who have money and are willing to support others. The key to “financing your vision” is to tell your story to audiences that will believe in you then take action by giving you money within a timeline, which in turn makes you successful. Potential investors at this stage include banks, angels or other business owners who understand the value of what you are trying to achieve.
In my career, I used a “Two rule” to approach investors at different levels of financing. At early stage, investors should be within a two hour walk from you. At the next level, they should be within a two hour drive. At later stages, they may be within a two hour flight.
The “Two Rule” is also applied to the level of sophistication of your request. If I ask my spouse or a friend for financing, I may ask in two sentences, “I want money because…” When I ask my business partner, it could be in two paragraphs to explain how it will be paid back. If it is a sophisticated investor, it is a presentation and a business plan. For a bank, it will be a financial overview and a projection.
My spouse may make the decision in two hours, my business partner in two days, my bank in two weeks (and require you and a guarantor, which is two people), a venture capitalist in 60 days – two months.
And that is the power of Two.