Entrepreneur Fund Raising
Raising capital for a new or expanding business venture can be a daunting task. With the downfall of many business ventures over the past several years, asking an outsider to make a significant investment in a start-up or expanding company can be intimidating and oftentimes met with skepticism. However, most traditional sources of financing, such as banks and credit unions, still have stringent requirements for small and start-up companies with little operating experience or credit history. As a result, entrepreneurs looking for capital often find themselves seeking financing by way of private capital raises. Sources for such funds can include family, friends, venture capital groups, so called “angel” investors and other equity funds. Each category of investor has its own positive and negative attributes. Nonetheless, before seeking funding from any source, the entrepreneur must be prepared. Investors are savvy and they will closely scrutinize any business in which they seek to invest, which may include a thorough analysis of the business’ operations, structure, personnel and projections. The following bullet points briefly summarize what a company seeking capital must, at a minimum, consider before asking for any money. It is crucial that those seeking to raise capital seek competent legal advice prior to engaging in fund raising activities.
Before seeking capital:
- Get your house in order – Make sure that the proper legal entity for the business has been selected and formed pursuant to state law, taking into consideration tax and liability protection issues. Determine whether the capital structure is clearly stated and appropriately structured to bring in outside capital. If the company has any key assets, make sure that they are appropriately titled. Additional questions to consider: Are key employees incentivized sufficiently? Are there any problems with personnel that need to be addressed? Have you protected confidential information?
- Bootstrap – Use personal financial resources and those of your family and friends before asking an outside source to invest in your company. This action will demonstrate your commitment to the success of the venture and, consequently, increase its valuation.
- Know your business – Raising capital is simply selling a business idea. Like anything else, the salesperson needs to know what he or she is selling before he or she can convince someone else to buy into it. Investors will ask tough questions about the business concept and will want thorough answers. Most investors will expect to see a business plan. The in-depth analysis involved in preparing a business plan will provide the tools to answer competently investors’ questions. At a minimum, be prepared to provide a brief executive summary of the business and, ideally, a power point presentation to share with potential investors. Develop a clear and rational strategy that describes the following: (1) key milestones, (2) succinctly articulated goals, (3) financial projections, (4) a current valuation of the business, (5) realistic capital needs and (6) a practical exit strategy.
- Pitch – Run the concept by experts in the field and practice selling it to others who can ask tough questions about it. Ensure that this question is answered in the presentation: what key feature of the business sets it apart from the competition?
- Secure your first customer – Show investors that there is a demand for the company’s products and a viable means of securing income.
When should you begin the process:
- Timing – A company’s valuation will be higher if it has been operating long enough to raise revenue and prove its viability. Keep in mind, however, that the fundraising process takes time, so don’t wait until the company is financially exhausted to start looking for outside capital.
- Having everything investors need – Investors are looking for the following components in a company: (1) a strong management team, (2) a clear business concept, (3) an exciting and growing market, (4) an estimated time to expect positive cash flow, (5) a reasonable valuation of the company and (6) clearly articulated capital needs. Have these elements in place before seeking out funding. Always keep in mind this critical concern: investors do not want to see their money being used to pay off debt or personal loans to the founders.
Where to look for funding:
- Family and friends – You should utilize this source, as well as your own funds, before looking for outside capital. If your family and friends can’t trust you, who will?
- Banks – Banks may offer small business loans to entrepreneurs; however, lender requirements have become stricter over the past several years.
- Angel Investors – Angel Investors are often current or former entrepreneurs who provide early-stage funding to budding ventures. Expect to get less money but keep control.
- Venture Capitalists – Venture Capitalists manage the money of several investors in a fund from which they can draw to invest in other companies. Venture funding is typically used at a later stage of the business lifecycle than Angel Funding. While larger amounts of funding may be available from Venture Capitalists, this type of investor will most likely expect to share control of your company in return for their investment.
Raising capital for a start-up or growing business can be an exciting and energizing endeavor, both for those involved and for the business entity itself. Nonetheless, seeking investors to raise capital is a very complicated process that has numerous legal implications. Our experienced attorneys and tax consultants can provide competent advice at every step in the process, which is crucial to its success.