It’s an important moment in the professional life of any entrepreneur: making the ask for capital from an investor or lender. But how should entrepreneurs frame their request? Learning the “anatomy of an ask” can be the difference between success and failure for a young startup.
For many entrepreneurs, the natural way to ask for capital is to tell an investor, “I need to raise money for six months of operations.” That’s a mistake, says Brad Treat, Entrepreneur-in-Residence with Rev: Ithaca Startup Works and the Southern Tier Startup Alliance, and a mentor to startups throughout Upstate New York.
Rather than focusing on extending the life of a business or length of operations, it’s crucial that entrepreneurs frame the ask as a request for the necessary funding to propel their startup towards a key milestone.
“When a lender or an investor commits money to a business, they want to know that that money is going towards de-risking the company,” says Treat. “And so, it’s goals, not calendars. That’s how I want entrepreneurs to think about the ask—it’s looking towards some milestone that makes the business less risky, and therefore more likely to succeed.”
To help explain that concept, Treat uses the analogy of bridges versus piers. Capital should be a bridge across the way, facilitating progress towards a long-term destination.
“A pier gets you to the middle of the lake,” he says. “Whereas a bridge gets you to the other side.”
Rather than charting out an exact timeline to achieving profitability, which is often unknowable, Treat encourages entrepreneurs to look for inflection points on the road toward meaningful revenue. These typically involve the development of a product, leading up to the first sale.
“Before I had a first sale, I had a prototype,” he says. “And before that I had a minimally viable product, which was built on a proof of concept.”
For many entrepreneurs, the time to first seek out external financing is after a proof of concept has been settled on, when they are ready to develop a minimally viable product (MVP). If an MVP is successful, it will have positive knock-on effects for the company by de-risking the investment and making future capital less expensive. For example, Treat notes that for some companies, a successful, simple MVP can go a long way towards convincing investors to make a larger commitment.
“In this region, we work with a lot of food companies,” he says. “In that case, your minimally viable product is one bite. I could decide if I want a whole scoop from just one taste.”
When teaching this subject to his mentees, Treat relies on one more analogy to get his point across, drawn his days as a professional whitewater kayaker.
“There’s two ways people run rivers,” he says. “There’s those who want to map out the entire river before going into the water. That works for the really safe rivers. But as the rivers get more interesting, and by extension more dangerous, you run rivers by making the decision, ‘Can I safely get to the next spot?’ You can’t have the whole thing figured out ahead of time, so you just have to know that you can get to that next safe spot. And once you get there, you can make a determination about reaching the one after that.”
Entrepreneurs don’t have to chart an entire series of milestones out in advance, but Treat says that they do need to communicate to investors a clear vision for how to achieve at least the next one.
“If you think about a river, there’s turbulence, and so it’s going to take some skill and some drive and some passion to run it,” he says.” “So, I make sure entrepreneurs have the skills and resources to make decisions along the way.
“You have a long-term destination,” he continues. “But you haven’t worked out every paddle stroke.”
For more resources on how to make an ask, Brad recommends…