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Fatal Flaws

Red flags that make potential financing sources think twice

Of the 800,000 or so new businesses that are formed each year, investment banker Robert Shuey of La Jolla Securities Corp. in Dallas says only a tiny fraction successfully raise outside capital.

A quick look at certain benchmarks would seem to bear this out. For instance, last year there were about 700 initial public offerings (IPOs)--a goodly number, but not when compared to the number of start-ups.

Then there's venture capital, a concept that gets a lot of attention but, in reality, is not an option for the majority of small companies.

Even the number of small private offerings--either partnerships or private equity placements--is tiny in comparison to the rate at which new companies are being formed. According to the Securities and Exchange Commission (SEC), about 10,000 Regulation D forms are filed each year. Though this is not a precise count of private deals, Regulation D forms provide a good estimate of the number of attempts.

And so, when you add it all up, the number of financings is not that great compared to the overall level of entrepreneurial activity. The fact is, not a lot of companies successfully negotiate the perils of the capital markets. As almost anyone will tell you, there are a thousand ways for a deal to go wrong but only one way for it to close.

But what is it precisely that keeps many companies from raising money? In a word, warts. Every deal has them. The only question is, are they fatal or just ugly?

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This article was originally published in the November 1996 print edition of Entrepreneur with the headline: Fatal Flaws.

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