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June 12, 2011

How to Go About Raising Capital

One of the costly mistakes that entrepreneurs commit in their business is underestimating the time to raise their capital. This underestimation is what causes most businesses to fail. Through proper calculation, capital-raising for a small business can last up to 9 months or 1000 hours. Knowing the right time to raise your capital will be important in running your business. Here is some information you need to know about capital raising:

Capital Raising has 4 phases:

Phase 1: Making the Business Plan and Investor Materials (due diligence documents and private placement memorandum, among others).

Phase 2: Writing a list of all the investors to contact

Phase 3: Communicating with investors and granting different requests

Phase 4: Negotiating with investors and completing the funding for your business

Phase 1 is probably the most time-consuming of all the phases. Making a business plan will at least take 200 hours to make it detailed and to get the right information. In order to create a successful business, you have to develop a high-quality business plan. It is not just writing your thoughts down; a business plan is actually based on numerous research and data on the industry and market you are targeting. All business plans will need adequate research to support everything that is written. All sources should be credible. The business plan will help you come up with a strategy on how you will startup, operate and profit from your business. It is best that you provide visual financial models in the form of graphs or a spreadsheet file to clearly explain what you have forecasted for the future of your business. After you have made your first draft, make sure to proofread it before presenting it to your investors.

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Phase 2 is about making a list of all the potential investors you will need to contact. A list will be a good way to narrow down highly potential investors from wishy-washy ones. Your list should be specific and targeted. Pick an investor that also suits your type of business. If you are planning to start an IT business, don’t get a pharmaceutical company to be an investor. You must know that getting the right investors is detrimental to the success of your business.

Phase 3 is about contacting your investors and heeding their requests. One of the factors in capital-raising is the percentage that your investors are willing to fund. Most often, 25% of your investors will choose to go directly to due diligence phase while 10% will offer actual funding. From this percentage, only ¼ will actually push through with the transaction. Thus, it will take you hundreds of investors to complete the funding for your business. This third phase is very time consuming as it still involves transferring and reviewing data in the due diligence phase.

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Phase 4 is about making negotiations depending on the variables talked about. It will really depend on what you and your investor have decided to agree upon. Nonetheless, as you can see, the four phases of capital-raising is tedious and time consuming. Thus, you cannot really underestimate the time to complete your funding. Don’t rush the process, rather, be patient and think through things clearly. In the end, it will be all worth it to startup your business.

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