Financing Considerations in Esports — Part 3: Be the Jockey with the Plan
Financing a startup is no easy task. If it was, everyone would have their own business. In esports, the challenges with financing can appear to be amplified. Traditionally, pitching to an investor will require you to convince them that your idea is a good one, and you as an entrepreneur are capable of making that idea a reality. There can be an added layer to an esports pitch — you may have to convince the investor that the potential of the industry is real as well. Esports is a foreign concept to many. Luckily, these hurdles are disappearing as more mainstream eyeballs focus on esports. Money is rapidly starting to funnel into our space. So how do you make sure that you get a piece of the pie?
In Part 1 of this series I focused on the mentality that you need to have and the questions you need to ask before you rush headlong into the world of financing a business. Then I followed up in Part 2 with a discussion about sponsorship, and exactly how you could dazzle the companies you are looking for support and partnership from. With this article, I promised a write-up on another type of financing; what I call “traditional financing”. I saved this for last because I feel that it is the least-pursued avenue, at least for many new organizations. Traditional financing is likely most beneficial for a company that wants to explode quickly, or for a company that has significant start-up costs before profitability can possibly be achieved. While this may not apply to more traditional esports companies such as teams or events, understanding this sort of financing is important for even the smallest business looking to grow, since it will likely be an inevitable part of your financial structure eventually.
Bank Loans and Investors
Bank loans and investors. That is a scary section heading, isn’t it? It should be. The most basic description of this sort of financing is that you (the entrepreneur) take money from someone (the investor) to start your business. The investor’s expectation is that you will pay back the money, and in addition to paying back the money they will get something else in return for taking a risk on you. After all, just like when lending for a new home buyer, there is always a chance that the loan cannot be repaid. For banks and traditional lenders, the extra that they get in return will be interest payments. Not only will you pay back the money that the bank provides you, but you will also pay a “service fee” for having the convenience of using their money. They will charge you for every day that they are not paid back in full, starting from the first day you borrow. This can get very expensive, very quickly. Luckily, it can be fairly easily budgeted and understood. There should not be many surprises with your payments.
Instead of simple interest payments, you may instead find that investors want equity in your company. Equity is ownership. They want to become a partial-owner of your business. How much they own depends entirely on how much money they give you in relation to how much they value your company. This valuation will depend on what you have built at the time that the investment was made. The more valuable your company is when you approach these investors, the most clout you will have when negotiating. Aside from equity, you might also see investors look to invest in return for partnership agreements or use of your business’ product or service, but this is significantly rarer. Always remember that these sorts of arrangements are permanent. When borrowing from a bank, the arrangement ends when you pay back the money. With an investor who provides financing in return for equity, the money may not need to be repaid, but the transfer of ownership is permanent. You lose partial control of your company, and the only way to get it back is to buy it. Not only will the person have to be willing to sell, but if you’ve used the investment to grow your company, you will be required to negotiate based on your company’s new valuation. If this is higher, then the value of ownership is higher. This is why the investor invested in the first place.
Seeking financing through these traditional avenues is serious business. You cannot simply end a relationship if things are not working out. You are making a commitment to either a large financial institution or a successful investor, and in doing so you are committing yourself for the long-haul. If you receive a loan, then you will either be declaring bankruptcy or paying back the money. If you trade equity for funding, you no longer own part of your company. Both of these scenarios are pretty big deals, and need to be extensively examined before committing.
First, Consider Bootstrapping
Bootstrapping is a term that is used to describe a situation where an entrepreneur begins a company with little capital. Essentially, the business-owner will build the company through a combination of their own investment as well as the revenue generated from their new company.
Many stories of bootstrapping include significant personal investment, or investment from family and friends. Bootstrapping also requires a quick route to revenue generation, as you will need cash flow in order to continue operations. Ideally, you will bootstrap an initial investment, and then begin generating small amounts of revenue that will help cover future costs. As you move towards profitability, you will be able to repay short-term investments made by people close to you. You can also reinvest your revenue to grow your business, hire staff when needed, etc.
There are several priorities you need to have when bootstrapping your business, including providing a benefit to your investors and properly communicating with them so they are comfortable with helping you. However, in my opinion the single-most important aspect of bootstrapping will be properly managing your cash flow. Bootstrapping is all about stretching a comparably small investment as far as you can, and quickly transitioning from reliance on the initial investment to sustainability from your revenue.
If it is possible, then the benefits of bootstrapping are significant. For one, I firmly believe that bootstrapping will alter your mentality. Cash is limited when bootstrapping, and the method forces you to have a mindset that focuses on making money rather than spending it. Too often a significant cash infusion can lead to an unjustified feeling of financial security. Bootstrapped companies need a business model that will generate cash almost immediately. Putting this level of pressure on your business can be a positive motivating factor. It can also make your business sustainable sooner, and ultimately, that is the point that all businesses need to reach regardless of what type of business they are.
What Is Your Business and Where Is It Going?
Understanding these questions will be key when approaching serious investors and asking them for their money. Don’t be naive either, it is harder to answer these questions than it may first appear, primarily because answers need to be backed up with a well-defined plan of action before anyone will take claims seriously. It is one thing to talk confidently about a destination, but properly arriving will require the right route.
Understand that what is important to an investor or bank will be significantly different than the items and mentalities that we reviewed when talking about approaching sponsors. With sponsors, interest would be generated by demonstrating an existing fan base, since ultimately they are interested in using your business as a tool for the growth of their business. With more traditional forms of financing, the interest is in investing in your business for the promise of future growth. With this in mind, the case that needs to be made is one that demonstrates a believable path to achieve future growth and success.
A business plan may be the most straight-forward way to present this information. Keep in mind that a business plan should be a live document, and can be updated as your business grows and morphs. Still, it is a phenomenal starting point for any operation. Each section is an opportunity to dive into a specific area of your business, such as marketing or human resources or budget, and think about how this area will change and evolve as your business grows. If done correctly, your business plan can also be a guide to checking yourself and your progress; a measuring stick of sorts to keep track of whether or not your plan is unrolling properly. You never want to be rigid with a business plan — it should not prevent you from adapting when necessary. But if the correct amount of thought goes into the document from the start then it is a fantastic guide through the business development process.
Potential investors and financiers will want to review a business plan to get a feel for how you predict your business will grow. Ultimately, it is this growth that will determine whether or not their investment will pay off. In order for a bank to have its loan returned, then the business will need to generate revenue. Likewise, in order for an investor to profit on an investment, the business they invest in needs to increase in its value. These are the areas that you want to pitch when approaching potential financiers — the potential for growth and the path to revenue generation and profitability. As with anything, the approach differs based on who you are targeting. As such, it is important to consider specifically what the potential financier is looking to receive in return, and how can your business best prove that it can deliver.
It’s Not Always About the Horse — Think About the Jockey
You will want to consider your own experiences and attributes, and how those will appear in the eyes of those you are requesting funds from. How you carry yourself is relevant, and a bad impression can be detrimental regardless of how great your idea is. Think long and hard about what your strengths and weaknesses are, and how they relate to your business. Also think about the sort of first-impression you make, and how this ties in with what you are claiming to be able to do.
Self-awareness is a key attribute for any entrepreneur, and it is very important when pitching a business. Maybe your passion is coding, and you’ve built a great platform, but you just can’t wrap your head around creating a budget. That’s fine. You don’t need to present yourself as a master of everything. What you do need to do is seek assistance in the creation of your financial projections, and when presenting you want to have a very clear method to deal with the challenges that will exist due to your weakness. Perhaps you’ve offered a small amount of equity to a friend that possesses the skills you lack, or you’ve retained outside aid. The important thing that will be acknowledged is that you were self-aware enough to acknowledge a weakness, you properly identified and executed a solution, and you are not letting its existence hold back your business. This is how a good leader would address such concerns.
Ultimately that is what you need to present yourself as; a strong leader. When it comes to investing in businesses, there is a significant amount of risk involved. Betting on the jockey is a very real concept in both horse racing, and business. An idea may be brilliant, but if the entrepreneur does not have what it takes to execute then the business is dead before it ever began. Likewise, investment will happen for mediocre ideas if the person or team behind them is right. It is not strange to hear angel investors talk about investing because of a good feeling about the entrepreneur. Play up your strengths and confidently insist on your ability to execute, but also make sure to have solutions ready to address your shortcomings.
Your Mission
In closing, you have one mission when trying to generate financing through more traditional methods — prove that your business is not only a good idea, but one that can be converted to profitability quickly and will be sustainable in the long-term. Too many start-ups today stay alive only long enough to make it to the next round of financing. Your job is to demonstrate that you can create something that will last, and will pay-off those who take the gamble on your company. Convince people that you are worth betting on. As an entrepreneur, you are ultimately the best representation of what your business can become. Be self-aware enough to know your faults, but highlight your strengths. Present yourself as a professional, and the hardest part of the pitch is already dealt with.
Part 4 will conclude this series, and will return to reviewing financing considerations at a high level. I have a covered a variety of topics and ideas, and the types of financing available should be clear. Let’s tie-it all together, so that the self-aware professionals reading this can go out and execute on the business plans they have created to so eloquently sell their dream.
About the Author
Brandon Copeland founded and operates No Jokes Partnerships, an esports focused professional services firm aimed at helping esports organizations and players professionalize their operations and improve their business practices. If you would like additional assistance preparing a business plan, do not hesitate to reach out to info@nojokespartnerships.com.
