Our previous article looked at the importance of having a business plan that sets out realistic and achievable goals. Related to this is the issue of how you and your team plan to make use of the funds that you have raised. Investors will be paying very close attention to how your funds are allocated – after all, part of it will be their money.
Some items for consideration are:
Utilising funds in the manners reflected above give the impression that you are not aware of cash burn – the rate at which a company uses up its initial capital before generating positive cash flow from operations. This suggests to the investors that you and your team do not value the invested funds.
In other words, you do not view the funds as yours. You do not feel the pinch of spending money frivolously because it comes from someone else.
Investors will therefore usually require the founding team to invest some of their own money into the company as well. This shows a team’s commitment to their company and also reassures the investors that you stand to lose something should the company fail.
How much money is an acceptable amount for you to be investing in your own company? This is dependent on your own financial situation. In his book The Art and Science of Entrepreneurship, Mr. Inderjit Singh advises that “if your net worth is
high, the investors will insist on you putting in higher amounts, but if your wealth level is not that high, they will accept a lower amount. It is all a relative measure, related to what you own.”
At the end of the day, investors need to see that you are fully committed to your company. Having a relatively substantial financial investment in your company will assure investors that you will not be reckless with your money – and, consequently, theirs.