Be Willing to Give Up Some Equity Earlier Than You Planned

Congratulations! You’ve made it all the way to end of Rule Three and put in the hard work to determine capital needs, set financial rules, time the market and take the big swing. Your business is taking off. But is the money aligned with your strategy? Required investment can be high in the growth phase, which may mean that accelerating your timeline for investment capital is a Must Do you may have to do sooner than you like.

Before we dive into the hows and the whys, take a minute to review and celebrate how far you’ve come:

There are all types of Female Mavericks in this world. Some will opt for maintaining a small lifestyle business that has no need to scale quickly or even much at all. If this is you, and you happen to operate in an industry that will allow for this, by all means, have at it. We have friends that make very nice livings doing this. And they have a lot more hobbies than we do.

But these businesses simply won’t work in a highly competitive environment. And Female Mavericks might be missing the chance of a century by self-funding a once-in-a-lifetime business opportunity. In these cases, giving away a little equity will be the only way to fully seize the moment.

Unfortunately, failing to follow this rule is what defeats most of the Female Mavericks we know who have fallen short of their dreams. Here's how to avoid this too-often fatal mistake.

Be realistic about your investment needs early on.

If you are like a lot of Female Mavericks, you can’t get your arms around the idea of giving away some of your baby. You don’t want to lose control. You have the strongest product vision. A few more milestones to hit, and then maybe you will be ready for investors. But not quite yet.

It's normal to feel this way. But it’s also helpful to put your business idea into one of following three buckets before making a decision on whether outside investment is a good idea:

1. Zero investment, slow scaling. You have decided to white knuckle, err bootstrap, your business. This can work well in either a huge marketplace with lots of vendors and low switching costs or a small niche marketplace where your Female Maverick expertise will win the day. Either way, make sure your business plan is realistic about the limited amount of marketing and product feature investments that can be made. Instead, focus on a great core product, amazing customer service, and/or a brilliant delivery system for a hard-to-access product. These will help you month after month, quarter after quarter, build a brand with loyal customers and recurring revenues. Just make sure you are not trying to compete in a fast-changing marketplace where better-funded competitors can eat your lunch in a sales battle.

2. Small-ish investment at launch, ongoing investment from cash flow. Most Female Mavericks find that their businesses fall into this category. While startup costs can be high, revenues come quickly, and cash flow can usually be leveraged to make any required future investment. These are often professional services firms with limited R&D and inventory investment needs. They work best in mature industries where companies can slowly chip away clients from competitors or in slow-moving industries where small personal or business loans will usually be adequate to meet scaling needs. We know a lot about these types of businesses - we started two of them!

3. Unicorns with significant investments needed to scale – and keep scaling. These businesses are few and far between. If you have one, don’t hesitate to get an outside investor. (Who are we kidding, they are likely at your doorstep already). These businesses require a lot of investment capital to compete. And they need it fast. Think breakthrough new products or the creation of a completely new market. In these scenarios, marketing budgets push seven figures just to launch. If you have this business, buckle up for the ride!

Know when you could use a boost.

If you slot into business bucket one or two, outside investors may not be a key element of your business plan. At least not yet. However, there are two compelling reasons why all Female Mavericks in all types of businesses should at least give some serious thought to seeking outside investment if and when they need to:

• First, your business risks grinding to a halt if you can’t rapidly develop products or achieve scale. This can happen if your business is ramping faster than you can bootstrap. You can go a little further. A little further. A little further. Until you just can’t. You simply won’t be able to get the product or service you have been slaving over to your customers without a jolt of cash. Well-funded competitors will welcome this opportunity to take your market share.

• Second, a strategically timed outside investment will bolster your ability to expand product features and scale faster. This enhances the competitiveness of your business and drives higher enterprise value. Ultimately, Female Mavericks stand to make more money personally by taking investment, despite a reduced ownership percentage.

Be better off safe than sorry.

In both scenarios, we’ve seen plenty of aspiring Female Mavericks who either didn’t want or think they’d every need an investor end up backed into a corner with a terrible choice to make: Either forgo an amazing opportunity or accept highly dilutive last-minute capital from shark investors to avoid going out of business.

To sidestep such a conundrum, plan ahead. And never take equity investment off the table, even if you don’t think you want or need it. Remember, it’s very easy to underestimate the money needed to launch, even if you are being realistic about your capital requirements. It’s worth it to go back and take a cold, hard look at the business plan. Make sure there is plenty of runway to fail a few times along the way.

You will also need to have a plan B that incorporates some creative thinking in the loan/favor department. Start early (i.e. on day one) by seeding the people who are the likeliest investors, including your parents, who might lend you $50K at the drop of a hat if you promise to be better at showing up for holidays. And, it’s worth saying it again, courting banks, credit facilities and investors long before you may need any actual cash is uber important.

What’s Next?

So now that you are an expert on Rule Three: Don’t Sacrifice Growth for a Good Night’s Sleep, you are graduating to the next level! Somewhere between beta and a sure bet is the place to start selling your business idea. You must get comfortable selling your product or service when it isn’t completely fleshed out. So next week, we dive into Rule Four: Start Before the Gun Goes Off.