Getting Outside Investment
December 12, 2023
Welcome back to Business Unfiltered with Mercer and Jeff Sauer today's topic is Getting Outside Investment.
0:00: Mercer defines getting outside investment in a business as receiving cash from external investors in exchange for equity. Jeff says outside investment can come in the form of equity or non-equity investments, such as debt financing or royalty deals. Mercer shares some strategies for getting outside investment including validation, partnership, and stability, depending on the business's needs and goals.
2:55: Equity investments and their potential pitfalls. Jeff discusses the importance of keeping equity in a business, especially for beginning entrepreneurs. Mercer agrees, emphasizing the mistake of giving away equity without proper vesting or guarantees. Both suggest using cash or leverage to compensate for help rather than giving away equity.
5:38: Investing in private companies and non-traditional funding methods. Jeff discusses the pros and cons of loaning money to a business, highlighting the potential for high returns but also the risk of failure. Jeff prefers to invest in private companies, specifically in the early stages, to maximize their potential for an outsized return.
Jeff discusses the concept of investment in a business, including the idea that contributions can be valued and counted as investments, not just cash. He provides an example of how coaching a business owner for free can increase the business's value, with the coach potentially owning a percentage of the business as a result.
10:36: Entrepreneurship, investment, and growth strategies. Mercer suggests that small business owners should focus on building a profitable, well-structured business before seeking outside investment. Jeff believes that outside investment can be a bad idea for small businesses, as it can lead to inefficient capital use and weaken the business. Mercer agrees that product market fit is crucial before seeking investment, and views angel investment as a lottery ticket.
13:36: Investment for business growth and timeline extension. Jeff believes investment can extend or shorten the timeline to achieving business goals, depending on the type of investment. Mercer adds that understanding your business machinery, including numbers and operations, can make it easier to get outside investment. Also having a plan and operating according to it can make it easier to get investment, from both angel investors and government programs.
16:20: Investing in businesses and cash flow. Jeff invests in companies with a 10x vision, prioritizing belief in the founder's ability to execute. He diversifies investments across cash flow businesses, hedging bets through group buys and cash flow investments. He invests in businesses through networking and trust, focusing on people with something to prove and a track record of success. Mercer asks about the hierarchy of investing, with Jeff prioritizing cash flow and conversion rates in their investments.
20:52: Funding options for a business with cash flow issues. Founders should consider various funding options, including personal loans and outside investment, to address cash flow issues. Jeff is considering an outside investment for equity in his business but wants to keep control and timeline in mind. He is fine with having a clock tick on his business but needs to think about the implications before acting.
23:58: The importance of understanding a business model in the current investment climate. Mercer highlights the importance of understanding a business model, citing the example of WeWork's failed IPO. Mercer and Jeff discuss the shift in investor sentiment towards profitability, with Mercer expressing a mix of agreement and skepticism.
26:41: Investment strategies in a post-pandemic economy. Investors are now more selective and discerning due to higher interest rates, prioritizing profitable businesses with sustainable growth. Focusing on growing profits instead of just revenue, with a balance between new leads and stability, is key for businesses in this market. Investors are looking for solid valuations and cash-generating businesses, rather than overpaying for unprofitable ones. Mercer emphasizes the importance of having a compelling story to attract investors and choosing an investor who can help grow the business. He highlights the benefits of getting outside investment in a business, including increasing valuation and shortening the timeline to exit. Jeff provides a personal perspective on considering outside investment, prioritizing the need for stable cash flow, and a clear plan for using the investment.
Topics Covered In This Episode
- Defining Outside Investment: Mercer clarifies outside investment as external cash infusion in exchange for equity, setting the discussion's foundation.
- Equity vs. Non-Equity Investments: Mercer and Jeff delve into various outside investment forms, stressing the preservation of equity for new entrepreneurs and cautioning against premature equity relinquishment.
- Investing in Private Companies and Non-Traditional Methods: Jeff and Mercer explore the pros and cons of lending to businesses, with an emphasis on early-stage private investments and the recognition of non-cash contributions as valuable.
- Entrepreneurship, Investment, and Growth Strategies: They advise building a profitable business before seeking outside investment, considering potential drawbacks for small businesses, including the importance of product-market fit and nuanced angel investments.
- Investment for Business Growth and Timeline: Next they discuss investment's impact on goal timelines, emphasizing understanding business operations and planning for successful investment acquisition.
- Investing in Businesses and Cash Flow: Finally, they explore investment strategies, focusing on visionary companies, diversification, trust-based investments, and evaluating conversion rates.