How to Build a Scalable Business Model That Attracts Modern Investors
The investors who are currently providing funding have different expectations compared to those from the previous funding cycle. They are looking for efficient models rather than just ambitious ideas. Hence, before you start presenting your slide deck or reach out to a venture capitalist, your model should be able to prove that it is scalable without increasing its issues in proportion.
Decouple Revenue From Headcount
The traditional mistake companies make when they’re growing is to try to hire their way out of any kind of problem. If your team size is doubling when your revenue is doubling, you haven’t actually created a scalable business, you’ve just created a staffing agency that happens to sell some product on the side.
These days, operating leverage is what investors are looking for. Your cost curve should flatten, and your revenue curve should steepen. You want every repetitive task to be automated. When you hire a new employee, you want your processes to be so standardized that they reach peak productivity in a few weeks or a month rather than after six or nine months of training. And ideally, your deliverable—whether it’s a piece of software, a franchise system, or this amazing thing you’ve been talking about—should be delivered in a way that eliminates the need for senior staff members or shareholders to be involved at every stage.
Capital Efficiency Is The Pitch
The number one reason for startup failure is running out of cash. Seems simple enough, and it is. But what’s less obvious is that many of those companies didn’t run out of cash because they didn’t raise enough of it – they ran out because they spent inefficiently in the growth stage.
Today’s funding environment increasingly looks with favor on shiny unit economics rather than shiny top-line growth numbers. Funders like to see how you can make money, not how you need more tomorrow in order to stay in business.
It has a really interesting effect on how you should think about financing your growth. Every time you add working capital, is it in exchange for equity? Because long-term, every cash injection for equity costs exponentially in the future. Not every need – an inventory increase before a large order, a quick marketing blast, a cash-flow bridge for receivables – even needs equity. There are short-term debt instruments made for this. A merchant cash advance from Bizfund can cover immediate operational needs without diluting ownership, and the more you get that operator to work for you rather than you fitting into their system, the more correctly short-term debt can be used as a strategic source of working capital.
Fix The Bottleneck Before You Scale It
Trying to get funding isn’t going to make your broken operations work better. It will just highlight more issues – and you don’t want that. If your delivery process lacks efficiency, obtaining funding will only make you reach the maximum level of inefficiency even sooner.
So, before you look for investment, identify any flaws or inefficiencies in your entire delivery workflow at your current capacity. Prospective investors will do this too, but you want to be prepared and have already addressed any bottlenecks beforehand.
Build Something Sticky, Not Just Popular
Every investor is looking for the same thing. Returns on their investment – money! If an investor is going to invest in you and your product, they will look at your customer acquisition cost (this is the cost related to acquiring a new customer) to see how much it will cost to get a new customer and then they will look at the ratio between this and the lifetime value of all of the customers that you currently have.
Looking at this will show the investor what your business is worth. If your business has paid $200 for a new customer and that customer will give you $2000 but still only last over 6 months, and you have paid $200 for another customer who will give you $500 but stay with you for another five years, the investor will recognize how valuable your customers are to your business.
This cost can come from marketing, free giveaways, discounts, etc. Ideally, you want high lifetime value customers for low customer acquisition costs.
What The Pitch Actually Needs To Show
Investors look over your financial records to determine whether you are realistic. Are you aware of the expenses associated with attracting and retaining customers as well as their long-term value? Could you illustrate how their funds are multiplied and reimbursed? Additionally, they are determining if you have the self-control to distinguish between bloat and necessary expenses. Above all, they want evidence that you recognize this capital as rocket fuel rather than a means of limping toward an arbitrary goal. You won’t simply finish the round more quickly if you grasp these concepts. In fact, you’ll have a chance to construct something that grows.