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May 22, 2011

A Beginner’s Guide To Raising Capital

One of the most costly mistakes that entrepreneurs make when trying to start a business or to finance their expansion is underestimating how long it can take for them to raise the capital they need. While obviously everyone’s experience is different, it is not unusual that an entrepreneur may have to wait up to nine months and spend as much as 1,000 hours of their time trying to raise capital. If you’d like to avoid having your business fail due to an inability to get the funding you need when you need it, read on so that you know what to expect from the outset.

Click here to raise money!

There are four stages involved in raising capital:

1. Writing a business plan, private placement memo, due diligence and other materials potential investors will need to see.
2. Compiling a list of potential investors to reach out to.
3. Getting in touch with the people on this list and communicating with them.
4. Negotiations and closing the funding effort.

Surprisingly, in most cases, the stage which takes the most time and effort is putting together a business plan; it often takes upwards of 200 hours before a solid, well written business plan comes together. There is a lot more to a business plan than just writing. A lot of research has to be done into your industry as well as historical, present and forecasts of the future of your market sector are necessary to develop a business plan which will get investors’ attention. There should be ample facts and citations from authoritative sources which support the strategy laid out in the plan.

Along with your business plan, you also need a financial model. Producing this important document takes a lot of skill and knowledge of accounting and finance – and writing, proofreading and editing your business plan and financial model are all serious undertakings as well. Before these documents ever cross the desk of a potential investor or venture capital firm, they need to be absolutely perfect.

Once all of the paperwork is in order, the next step is to compile a list of potential investors. Your list should be narrowly targeted towards investors who tend to invest in businesses in your economic sector, in your geographical location and in businesses at the same stage of development as your business. For instance, if you’re starting an IT firm, venture capital firms which specialize in funding biotech startups probably isn’t going to get you anything except disappointed. Your list needs to include only potential partners which are a good fit with your firm. Narrowing your focus will also save you a great deal of wasted time during the process of pursuing investment.

Click here to raise money!

Another thing to consider in terms of how tough it can be to raise capital is how many companies make it through certain benchmarks in the equity funding process. Assuming that an investor is interested at all, only about a quarter of companies make it as far as the due diligence stage; and only around 10% ultimately receive an offer of funding. This leaves us with a figure of about 2.5% of investors who will actually offer to invest in your venture – and out of this 2.5%, about one quarter (which is to say .625%) will follow through. In most cases, entrepreneurs need to contact hundreds of potential investors to finally receive funding.

Each stage of the process takes a great deal of work and can be lengthy in itself. The due diligence process usually requires a lot of documents being passed back and forth and carefully reviewed; and it’s entirely possible that you may not have all of the information that investors ask for on hand, no matter how carefully you’ve prepared yourself before beginning to raise capital.

The negotiation phase can also take a lot of time, though this depends entirely on the particulars of your company, the requirements of the investors and the amount of funding being offered. It’s true that raising capital is hardly a bowl of cherries, but it’s also something that many small businesses must do to get off the ground or to expand. Don’t make the mistake of underestimating the amount of time and work that go into seeking investment. It’s well worth doing, however, since the ultimate reward is badly needed funding for your business and the alternative (no capital investors at all) is hardly an attractive one.

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