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March 29, 2010

How Long Does It Take to Raise Capital?

A very common mistake that entrepreneurs make, that often causes their businesses to fail, is to underestimate the time it takes to raise capital. By some calculations, the time investment required to get funding for a small business can run up to 1000 hours and 9 months of time. Be careful to avoid this pitfall; here are several facts to support your efforts.

Capital raising can be broken down into four phases:
1. Drafting the business plan and related investor materials (the private placement memorandum, due diligence documents, etc).
2. Building a list of investors to contact.
3. Actually contacting the investors and responding to their various requests.
4. Negotiating and closing the funding event.

Perhaps the single most time consuming aspect of capital-raising is developing a business plan. It can take up to 200 hours or longer to develop a high-quality business plan. A business plan involves more than simply writing; it requires a great deal of research and to understand the industry and evaluate the market. A good business plan is rich with data and facts from credible sources. It uses these facts to spell out a specific strategy. Additionally, every business plan should be accompanied by a financial model in the form of a detailed spreadsheet file, a product that takes a great deal of finance, accounting, and software expertise to create. Writing and proofreading these documents takes enormous effort; they must be flawless when presented to a venture capitalist or other investor.

After creating all the necessary documents, an entrepreneur seeking capital must create a list of potential investors. A good list is targeted and specific; every investor is different and seeks different industries, stages, and locations of companies. For example, don’t contact a bio-pharma venture capitalist to fund your software startup. The right fit between firms is essential; it is even necessary to find the right fit with individual partners within a firm. Trying to contact these investors specifically and individually is also a time consuming process.

Another factor speaking to the difficulty of raising capital are the percentages of companies that proceed through each phase of the equity funding process. Given that an investor is interested, only 25% proceed to the due diligence phase, and 10% of that actually offer funding. From that percent (2.5% of interested investors), only one-fourth actually complete the transaction (.625% of interested investors!). It can take literally hundreds of investor contacts to achieve funding.

Keep in mind how time consuming each stage of that process is. Due diligence often involves the transfer and review of a great deal of data between investor and startup, some of which the startup may not have readily available. Lastly, negotiations vary greatly in length depending on the individuals and variables involved, and the type of transaction being conducted. All things considered, raising capital is an enormous but essential undertaking to grow a small business. Do not underestimate the depth of commitment that must be made to the process. The effort is worth it, because the alternative is no capital at all.

Want to finish your business plan quickly & easily? Click here for a proven business plan template.

Need to raise venture capital? Click here to learn how to raise venture capital.

Need to attract angel investors? Click here to learn how to attract angel investors.

All the best,

Amir

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