Raising Funding Almost Destroyed My Startup

In early 2014 (about 15 months into my business) I had the opportunity to raise a small round of seed funding for my subscription sock company, NicHarry.com. The figure was about $25 000 and I was raising it from a single angel investor.

The angel and I had an aligned vision, we spent months discussing where the business going, how we were going to move the company towards our next goal and what we would use the funds for.

Everything was on track. We had a handshake agreement that I thought was as good as gold. It wasn’t and the deal ultimately fell through after months of work.

Here’s the major lesson that I had to re-learn:

A handshake isn’t enough.

I thought it was enough. I wanted it to be enough. I wish that I could tell you that it was like the movies and that I found a business soul mate, we shook hands and then the money was in the bank. Unfortunately that’s bullshit.

Signed contracts, term sheets and real-life agreements matter.

Handshakes are symbolic.

Money in the bank is all that counts.

The Partnership Dance

Ensuring that you have an aligned vision with your potential investor is probably more important than the money you are trying to raise and the valuation you’re looking for. The chances are the investor is going to be with you for a long time and be right there with you making decisions about your companies future.

So I spent a fair amount of time with this particular guy. We met for coffees, lunches and even played social football together (there’s nothing like a team sport to figure out a person’s demeanour) to see if we gelled as a potential working partnership . We did. It was great. So we moved on to the next step.

The Business Vision

Having a vision for your business in your head is one thing. Being able to articulate that vision clearly to an investor verbally and in document format is an entirely different prospect altogether. The latter requires writing documents, sitting down for hours and trying to predict where you think the company will be in 12 months, 2 years, 5 years and onwards. This requires documentation, planning, strategy and an idea of how you’re going to execute.

I was pushed to identify new revenue models, marketing prospects, sales channels and a variety of ways that I thought I could use the investors money, time and personal connections to grow my business.

Trying to raise funding is an incredible way to gain insight into your business.

I was forced to really analyse what I thought the pros and cons of my business model were. To take a really hard look at my financial projections in relation to my actual financials and see if I was dreaming or really onto something.

In the end, I had nailed down a business vision, a business plan and financial projections as well as a plan to use the funds.

Valuation & Commitment

Once all of the admin and work was out of the way it was time to talk about valuation and commitment in terms of funding amount, involvement and equity I was willing to give up.

I don’t like to mince words so we got down to it pretty early on.

The valuation for my less than one year old company was set at R1m (±$95 000) and I’d be giving up 25% of the company if the investor and I could hit certain milestones along the way that increased the value of the business and our bottom line.

I was happy to go forward with those terms and excited to start spending the money to grow and prove a few things I needed to make the business work efficiently.

Signing & Spending

Here’s where things start to get tricky and I started to make some rookie mistakes.

I began spending money that I didn’t have in my bank account.

I committed to SEO work. I designed and ordered new stock. I started paying my team member a tiny bit of money (‘cause that’s what you’re supposed to; actually pay your staff) and made a few more commitments along the way.

All of these were things that the investor and I had agreed were the way forward for the company. I was doing what we had agreed to do.

A couple of months into spending the investment capital and we still hadn’t signed a final contract. I still hadn’t received any of the funds and I was starting to worry.

I was concerned about over spending and the precarious cashflow situation of the business.

Turns out I was right to worry.

Stand and Deliver

After many weeks of back and forth between myself and the investors lawyer I was at a dead end.

We weren’t moving forward on the contract, I wasn’t getting meetings, no one was answering my calls and things had come to a halt.

The money wasn’t flowing in but it was sure as shit flowing out.

And then, finally, I received a call from the investor on a Friday afternoon at 5pm.

The money wasn’t going to arrive in my bank account. Ever.

The deal wasn’t going to get done.

I had put the cart so far in front of the horse that I could barely even see where it was headed.

The Good, The Bad & The Ugly

It’s worth stating that the company suffer too much in the medium term from this little blip and I’ve come out of it with some fantastic learnings and a very solid business that’s growing at a steady rate.

The Good

Raising money for your company will force you to get your shit together. You’ll need everything in order from financials to business plans to stock management and everything in between. This can only be good for your business.

It’s also always a good idea to have a vision for where you’d want to go and what you’d want to spend your money on if you had the option. Spending that money before you have it a stupid idea but knowing what you’d do if you did have it is a good plan.

This entire process has opened up new revenue streams for my business and allowed me the clarity to focus on the important parts of the company and ignore the irrelevant bits.

The Bad

Committing to money that you don’t have can be the kiss of death for any business.

It’s simple math:

Money going out > money coming in = bye bye business.

Cash flow is absolutely imperative to a young and growing business. Without money in the bank to pay for your expenses you’re in trouble and I was right there on the edge.

Fortunately this experience had opened up a new revenue model for me through the discussions with the investor so I began to hit the sales path and recover the lost investment with actual income.

Real revenue is as good, if not better than a cash injection from an investor.

The Ugly

It’s hard to go through an experience that puts your business at risk. It’s ugly to have to face your business and admit that it needs work. It’s shitty to realise that you put your business at risk by making some simple and avoidable mistakes.

But the truth is, going through this entire process has been a good experience for Nic Harry as well as for me as a founder.

I still have a good relationship with the investor and we still meet occasionally to catch up.

Raising money can be the best and the worst thing for your business so try to focus on revenues and profit.

Here are three quick tips for raising funding for your startup:

1. Get your house in order

You need to have your company workings in order. At the very least have a bank account that you can use to show the investor what you’re spending your money.

It’s a good idea to have a monthly income statement that shows money coming in and going out. This shows the investor that you’re on top of things as an entrepreneur and can be trusted with their money.

Make sure you know how things work, like your ecommerce platform for example and that you can actually explain it. Don’t be left without an answer to a simple question. This is your business, own it and everything in it. Build the investors trust using your knowledge of your own business.

2. Have a product in the market

It’s incredibly tough to raise funding without a tangible product and a working plan. Make sure that you don’t waste your one shot sitting in front of an investor with nothing to show them but your amazing idea.

3. Show some traction

An idea is not a business and a product that no one is buying is not investable.

If you’re looking to raise financing from an anyone then you better make sure you’ve sold some product, made some money and have good growth.

Nic Haralambous is the founder of Nicharry.com, a premium Men’s Accessory business. He is also a speaker and writer

In early 2014 (about 15 months into my business) I had the opportunity to raise a small round of seed funding for my subscription sock company, NicHarry.com. The figure was about $25 000 and I was raising it from a single angel investor. The angel and I had an aligned vision, we spent months discussing…