Should I squeeze a little extra capital out of my investor?

This article first appeared on September 19th, 2011.

I’m keen to raise some money from an investor and get a little extra out of them so that I can live. Not a huge amount, but enough for me to eat and pay my mortgage.

Is this a good idea, or do investors expect you to be penniless until they’ve got a return on their funding?

To answer this question properly, you need to first put yourself in the shoes of the type of investor, investing in private companies.

Typically in Australia, the “smart money” comes from investors who were/are self-made entrepreneurs themselves at one stage or another.

The person you will be speaking to is likely to have:

• At one stage put everything on the line to achieve the success they have.
• Experienced more challenges, frustrations, stress, problems, disappointments then many people could imagine.
• Aware of the challenges you will face.
• Experienced what other people deem as failure at some stage.

There is a great movie out at the moment called The Billionaire about the Thai founder of the flavoured seaweed snack Tao Kae Noi.

By the age of 19, Top Ittipat had experienced more failures than most people twice his age. At the age of 27 he is now a billionaire and owns 70% of the flavoured seaweed snack market.

Closer to home, you can look at the CEO of Vocus Communications, James Spenceley, as an example. In September 2007 he sold his family home to fund his new Wholesale Telecommunications start-up. Today, Vocus Communication is an ASX Listed company with a Market cap of over $110 million.

If you believe in what you are doing and willing to back yourself… that is the first step. Does that mean everyone should sell their home to fund their business? Absolutely not.

Below are a few important points to think about as you structure your capital raising:

1. Investors want you to have “skin in the game”!

The biggest thing I have learnt is that investors want to see “skin in the game” and their decision making is based on what is in the best interests of the company.

Otherwise, what is to stop you from winding this venture down and moving onto another venture, in which they have nothing to gain from?

2. Include a budget for wages in your capital raising requirements

When you are working out the amount of capital you require, include a budget for your wages and ensure it is on the lower and reasonable side.

As the company revenue starts to grow and the business can afford it, then seek to increase your salary, but not beforehand.

3. Your investor wants the business to succeed… it is in their best interest

That sounds obvious, but too many entrepreneurs take the “Us versus Them” approach and it is incorrect.

It is an honour for an investor to invest money, to fund the growth of your business. It reflects that your idea, concept, business is something of value and potential in their mind.

They want to see you killing yourself to build the business into becoming the full potential it can be… not killing yourself through hunger and poverty.

4. Focus on what’s best for the business in your pitch

Comments like, “We are raising the money, so that I can leave my full-time job and focus on this 100%” sounds good to you… but is a massive danger sign to investors! That is hedging with no skin in the game.

There are rare occasions when investors fund people into starting a business, but that is only because an existing relationship of trust, like and respect is in place and they have full confidence in the person they are investing in.

Lastly I would say this. Being a business owner/entrepreneur is not for everyone. There are many sacrifices you will make as part of this journey.

On the upside it is a great feeling watching a simple idea come to life and then having others help make your vision a reality.