D.R.O.O.M.
D.R.O.O.M.
How To Fuel Sustainable Financial Growth: Part 1by Beth Polish
From time to time, all companies need financing as fuel for growth. Just like the fuel for your car -- which might be diesel, regular, or super -- financing for your company comes in many types. To avoid having your financing cause your company to stall or backfire, DROOM (Don?t Run Out Of Money) is designed to help you get through the critical juncture of choosing the right financing, so your company can reach the next significant level, and sustain financial growth.
Note: This is the first of two articles designed get you started in the right direction. It gives tips on how to choose the right financing fuel for your company?s needs. Part 2 will give you tips on how to increase your odds of successfully obtaining that fuel.
1. Define important milestones that prove your business model. These are the milestones that when achieved will increase your company?s value and decrease its risk in the eyes of a funding source. While the milestones vary from company to company, they generally fall into three categories (1) validation of the market for your product ? demonstrating that customers are willing to pay for your product or service; (2) solidifying the cost to create and market your product; and (3) showing that your team can execute your business plan. Use these milestones to describe your past performance as well as your future intentions. It?s important that you secure sufficient financing to achieve the next set of significant milestones.
2. Understand the legal and operational ramifications of debt and equity financing. One of the reasons it?s so important to choose the right fuel for your company is that each kind has a different effect on how you manage your business and the flexibility you will have in the future. For example, your source of financing may insist on having approval of your business plan, your strategy, partnerships you enter, new employees you hire, and they may require that you maintain specific debt-to-equity and liquidity ratios Before you decide on a type of financing, make sure you can live with its impact on your business.
3. Clarify your personal objectives as well as the company?s. Figure out where you see the company in five years. Do you want to remain independent? Buy your competitors? Go public? At the same time, think through what you?ll find personally satisfying. Are you looking for money, fame, power, influence? Is building a legacy important to you? The kind of outside financing you choose will affect your achievement of these goals. Determine whether the company objectives and your own are aligned or in conflict.
4. Institute the ?Look Yourself in the Mirror Test?. Evaluate your company from the perspective of a potential funding source. This will help you anticipate their requirements and avoid taking unrealistic paths. (There?ll be more about the mindset of debt and equity financiers in Part 2.)
5. Match the financing need with the financing source. How will you use the financing? Product development, a new
marketing or sales campaign, infrastructure development or inventory production are significant business-model
milestones. Yet the best funding source for one may be different from what?s best for another. Short-term financing
needs (such as producing inventory against a firm sales order) should be matched with short-term financing, while long-
term financing needs should be matched with long-term financing. Understanding the difference is key to your success
6. Loans negatively impact profitability. While the loan is outstanding, your profitability will be reduced by the amount of the
loan payment. For example, while the loan is outstanding, lenders will have certain management rights. Loans generally
do not change the ownership structure of your company.
7 Equity investors are owners of your company. Unlike debt financing--where once the loan is repaid, the relationship
ends-- equity investors remain part of your company until they sell their equity. They will have a large voice in how you
manage your company, including its sale or future financing. Unlike an employee, an investor can?t be fired.
Bear in mind that being in the market for financing is a form of signaling. When you solicit funds for growth, you are telling your customers, partners, market and employees something about the status of your company. Before you do anything, think through the message and make certain it?s one you want to send.
? 2004 Beth Polish, All Rights Reserved
Beth Polish?s diverse background includes past president of Anthony Robbins? Dreamlife, Inc., founding CFO of iVillage, Inc., and CFO of Goldman Sachs Ventures. She has secured financings from and worked with Allen & Co., AOL, Kleiner Perkins Caufield & Byers, Mitsubishi and others. She is currently president of The Critical Junctures Group. Beth is on the Advisory Board of Women?s Leadership Exchange and speaks frequently at WLE conferences.
