Hi Scott: I read your article in EntreprenuerNewz and was wondering about a few things… We have a small company that started about a year ago. We released our service about a month ago and have had great response and signups for the amount of advertising that we have done (very very little).

Question has come up for us wether it would be wise to get some venture capital to help increase the growth rate of our business.

All of our expenses would mainly go towards advertising and sales generation. Everything else is already complete and live and we have customers signing up already.

Biggest question is: How much equity should we expect to give up to raise 1-3 million in VC?

You can take a look at our service at http://www.SalesJunction.com

Thanks,
TP

Hi TP,

It’s great to hear that you’re seeing such a good first response, especially with minimum advertising. Assuming you don’t have firm figures on what X amount of ad dollars will return what percentage increase in business, I would recommend an “internal funding” (using company funds).

While this is a much slower approach and does require an able cash flow, it will keep the future profits in your pocket. Of course there is a minimum threshold at which more advertising will increase business (i.e. $5 in flyers at Kinkos won’t likely increase revenue), but that threshold can usually be met by internal means. I would start by looking for ways to TEMPORARILY cut other areas (namely, salaries for principals).

Redirect these funds into your advertising budget for a few months and measure the increase, if any, in business volume. In any successful company model, more business equals more profit so as the redirected funds produce more revenue, use that revenue to further fund more advertising and slowly repay the gap in the other areas (in this example, salaries). If for no other reason, you could try this short-term as a way to firmly determine what percentage increase in business a given dollar increase in advertising will produce; lenders/investor will be interested in this information.

Your question stated that you were looking for 1 to 3 million; does your ad budget really need all of this at once? If the first idea is not feasible and the amount deemed necessary is not exorbitant (in excess of $1 million), consider a line of credit from a bank. This will allow you to retain full ownership in your company and pay back the debt with the extra revenue your ads are producing. If advertising is not increasing the business, stop! Don’t throw “good money after bad”. True, the effect of an ad won’t be immediate but if there is no measurable increase, further ad spending is unlikely to help. Look instead to other problem sources. For example, your positioning in the marketplace, pricing, image, etc. A line of credit will allow you to expand your ad budget, repay with extra revenues, and draw again should the need arise again in the future. Additionally, rates are incredibly low right now.

As a last resort, turn to VC. In this case, however, I would define any investor as a “partner”. What a partner will be looking for, and basing equity requests on, are your current financial position, amount of capital requested, and good evidence that future spending will result in exponentially larger profits (like proof provided by experimenting with the first idea mentioned). What should you expect to give up? As a very generic example, say the company’s net worth is $100 and you need an additional $100… well, count on giving up about 50%. How well you present this proposal (business plan) to a potential partner will also play a role, as the perceived risk in the investment will factor into the equity request. For more information on writing a successful business plan, visit our website at http://www.bizplansonline.com. Best of luck with your venture!

Sincerely,

Scott Karch
President,
BizPro

Scott Karch, author of BizPros plan writing manual, is a six-year veteran of writing successful business plans and finding capital for new businesses. He currently serves as BizPros President and as a loan officer for Main Street Mortgage, which provides both residential and commercial financing. As an Honorary Co-Chairman to the National Small Business Advisory Council, Scott was recently named the Kentucky Businessman of the Year. You may contact Scott at scott@1bizpro.com or by visiting the BizPro website at http://www.bizplansonline.com.