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Growing your business – the equity story

If you own your own business you’ll know that it burns cash daily and you need to know how to fund this. But you should also be thinking about the equity side of your business too.

Highly successful entrepreneurs live more in their balance sheet than their Profit and Loss. The P&L is a short-term view of the operating status of the business. The balance sheet tells you where the future is and how to resource the business for growth. Pre-empting where your cashflow will be 6 to 12 months out is critical. All too often entrepreneurs grow their business, run out of cash and end up raising funds under desperate circumstances, which can be expensive.

I caught up with a friend recently who is helping investors from offshore find solid businesses to support. The businesses will not only receive $10m but the investors will use their skills and networks to open up opportunities in foreign markets. Strategic investors such as these can be a huge help to a business. While a cash injection is one thing, having doors opened for you can’t be underestimated.

Funding your business can take several turns and you should always be thinking ahead to the next step. Take Xero for example. Initially the founders funded the business; a second funding round involved employees, directors and strategic investors; the next step was a stock market listing; further capital has since been raised through strategic and retail investors as well as institutions offshore.

So how do you find strategic investors? This is much harder than finding good customers and it needs to be part of your business strategy. Here are some suggestions:

  1. Start with those closest to you. While I don’t recommend taking money from family unless they are already experienced investors, they may be able to help you find the next person to speak to.
  2. Look to your team or your customers. Quite often your employees will be interested in investing because they know the business. In my experience people with ‘skin’ in the game tend to push harder to make the business a success.
  3. Find an Angel Investor to mentor you and fund you through to the next stage. These people will invest in people not ideas. Build your networks and ask for 30 minute coffee meetings to do a pitch. But do your homework first. The person you are approaching needs to be the right fit.
  4. Move onto VC or Strategic Investors. Generally your Angel will help with this. But don’t worry, as you execute your business, pick up momentum and build your PR, you will get approached. That said it pays to seek these guys out 6 to 12 months before you need the money. Presenting your story and then coming back six months later and demonstrating you have achieved what you said you would is gold for investors.

Most important of all is to have an ongoing KPI around your equity story.

We’d love to hear your insights or questions about equity in business.


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8 May 2012 #

“Pre-empting where your cashflow will be 6 to 12 months out is critical.”

I agree, which is why I would like to see Xero follow through with their long-ago promised improvements to the dismal budget function in Xero. Is this still on the table?

Hamish Edwards
8 May 2012 #

Chris we have some new functionality coming in our next release for budgets. It provides the ability to export to Excel, build your budget in Excel, then import those new numbers into Xero. Should work really well.

Gayle Buchanan
9 May 2012 #

Hi Hamish, soooo looking forward to that function – clients screaming for it – thanks for bring that up @Chris

Justin Keen
9 May 2012 #

Great post Hamish. Also have someone that you report to on a regular basis, this can be your accountant or your investor. This will hold you accountable to budgeted numbers and key drivers to your specific business. Cliched, but with the building of equity and/or wealth always have the end in mind. When and how do you want to ‘get out’.

Hamish Edwards
9 May 2012 #

Hey Justin. Could not agree more. You are far more likely to be successful in business if you produce a monthly management report and have a regular business development/board meeting. You and your accountant is absolutely perfect. The classic fault of so many business owners is not thinking up and implementing ideas to improve their business. You accountant should be helping with this, acting as a sounding board and keeping the governance discipline in place.

10 May 2012 #

Hey Hamish, will we be able to prepare a Source and Application of Funds Statement? Or can we somehow create this within the report packs?

Hamish Edwards
14 May 2012 #

Melissa, have you checked out the cash flow statement in Xero? We understand that’s how the report is now referred to.

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