As a consultant, I am often asked by founder-CEO’s to advise them on raising capital so that they can fuel the growth of their early-stage company. It would be great if I could tell them that I, or other advisors / banker, had the silver bullet that would magically enable them to raise the seed capital necessary to hire the team, build their product/service vision, launch and grow a successful venture.
Unfortunately, that just is not reality. Entrepreneurs often have heady notions about the value of their idea and vision for building a disruptive solution to some major problem facing consumers or businesses.
However, they often fail to realize the difficulties that lie waiting for them in trying to fund their dreams. Yes, “friends and family” can sometimes come to the rescue, but in many cases those funding sources come with either serious economic, or emotional, strings attached.
Some entrepreneurs can self-fund or bootstrap their operations to the point that the business is actually generating revenues and, in rare instances, profits. Those cases are few and far between. The vast majority of founders need to find the balance between building their business and spending the necessary time to raise capital from early-stage investors, either individuals, angel groups or small venture capital funds.
Example: Bob’s ePayments Business
Let’s take an example. “Bob” has developed a concept for a new Internet-based platform for electronic payments that would revolutionize transactions across third-world countries, a growing, yet mostly-ignored consumer market that would be greatly served by a low-cost, easy-to-use, and relatively low-tech solution (compared to Apple Pay or other smartphone-based solutions).
Regardless of the merits of the idea, let’s review how Bob could make his vision a reality. First, given the rapid pace of technical advancements and significant competitive threats, either current or prospective, Bob realized that first-mover advantage was crucial.
He quickly convinced his good friend, Jennifer, who has years of engineering experience in the payments space to help him develop a prototype in their free time (since they both had day jobs). After several months of working until 2:00 am, they were ready to show their product to a select few advisors and potential management team members.
Many Options Create Complexities
So far so good. The next part is where the proverbial rubber hits the road. Without capital, Bob and Jennifer could not convince anyone to leave their day jobs to help build the company. While they received some token advice along the way from consultants that they had met, no one was willing to risk their time on an unproven entity, even one with a significant potential payoff down the road.
The perceived risks were just too great. And, Bob and Jennifer did not come from wealthy families – no rich uncles who would fund the next round of working capital needs.
The Capital Raise Roadmap
After collectively raising over $2B in funding, the TCRH team brings a comprehensive, step-by-step guide to equity capital raising.
Bob had heard of crowdfunding and thought that might be a good potential way to raise capital easily since he could blast out the concept to hundreds, if not thousands, of prospective investors at once. Surely, a number of them would see the benefits of an investment of $1,000 to $25,000 each? The technology was sound. The market was large and untapped. He and Jennifer had solid experience and skills in both business development and technology.
He had also heard about angels. Those mythical wealthy individuals that understand the business he he was starting and would write a check for $100,000 to $500,000 without hardly any due diligence. It was a “trust me” sale, he had been told. All he needed was to connect with the right people and surely he could convince them to take a chance on making untold fortunes?
But once he started researching how to make either of these paths work, he quickly realized that he was woefully unprepared for the amount of work required to obtain the necessary investor leads, much less actually secure financing. As many founders who have been to this “rodeo” before can attest, it can be a full-time job just to find and close the needed capital for a new venture.
In some cases, by the time that happens, another entrant has appeared with millions of dollars in new venture capital financing (after having received even more millions in a prior round) that causes a complete re-think of the company’s entire strategy or, worse, a realization that it is too late.
The Capital Raise Roadmap
The steps that are needed to effectively raise capital for a new (or even existing) venture can be found in many sources across the Internet so I will just touch on them at a high level here.
Create the business model. This includes critical thinking and research in terms of strategic positioning, value proposition, and more.
- Who are the actual customers?
- What channels will the product/service be sold through?
- What partnerships/alliances can be used to help accelerate sales or implementations?
- What is the revenue model?
- What are the cost drivers?
- Who are the competitors and how will this business differentiate itself?
- What is the team that will be needed to implement the business?
Develop the materials that prospective investors will need to review the business.
- Short (1-3 page) executive summary
- Investor presentation (“deck”) that covers the major topics from the team to the model to uses of funds (anywhere from 12 to 20 pages, depending on the stage of the business)
- Key Investment Factors (can be included in the Investor Presentation or sometimes as a stand-alone piece)
- E-mail “teaser” that can be used to pique prospective investors’ interest
- The “Term Sheet” which describes the terms and legal conditions, in summary form, for the investment
- The legal documentation which will depend on the type of security being used, e.g. convertible note, equity, or convertible equity (i.e. Y-Combinator’s SAFE)
Put together the process which will be followed.
- Development of an initial investor pipeline and tracking system. The initial list of potential investors will differ depending upon the industry, geography, service or product, size of the market, and more.
- Have a single person own the steps of reaching out to investors and delivering the initial information so that there is consistency in messaging.
- Develop the communication pieces that are needed to reach out to each prospect in a timely fashion.
- Practice the pitch among advisors, friends, family…anyone that can be trusted not to divulge the “secret sauce” to a competitor.
- Make your pitch to the first group of investors and learn from their feedback. Incorporate that feedback into revised materials so that constant improvement occurs.
- As investors show interest, learn how to negotiate the terms that are most important. Price (in the form of “valuation”) is certainly critical, but not the only thing that matters. dilution provisions, liquidation preferences, and more. Navigating those waters should be done with an expert, typically a good attorney who is familiar with raising capital for early stage companies or a consultant that specializes in financings.
- Use your attorney to draft the final legal documents and have the investors review. This may entail some back and forth if they negotiate some of the finer points, so be prepared for that to take some time as well.
- Closing the deal can be done all at once or you can have “rolling closes” which just means that you can take funds over a period of time and not have to wait for all of the money to arrive at once.
- Then, you can finally get back to work.
Follow the process and be diligent and patient. The entire process from start to finish can take many months, sometimes up to 6 months (or even more).
How To Start?
So, how does one start a business and fund it at the same time? There are really only a few choices: a) do the capital raising during the day and build the product/business at night, b) go slower so that you can bootstrap as much as possible and raise the money “by hook or by crook”, or c) if you cannot wait and you are not able to do it yourself, you will need to hire a consultant/advisor to help.
However, that means you need to be able to afford to pay someone to help you with the steps that I listed above which can end up being easily into five figures. Add in the legal fees, expenses (travel, printing, etc.), and you will have to have at least $25,000 to $50,000, depending on how much you are raising and how much you can do on your own in terms of building out the necessary materials.
It is not easy and the street is littered with thousands of people that have failed. But, if you have a good idea, a good team, and a willingness to persevere beyond that of anyone you know, you will be able to make your vision a reality. Get help when you need it, but remember, at the end of the day, it’s your “baby” and you alone will be making the decisions that will affect the outcome of your vision.