What to Know Before You Try to Raise Capital
Q: My company is getting to the point where we need to get outside funding. What do we need to do to get ready for raising capital?
A: There are five basics that must be in place before you sit down with potential investors. If any of these items is not fully at the ready, it does not matter that the others are 100 percent in place. Investors will not give you credit for having four out of five of these items in proper shape. Rather, they will notice the one area that needs a lot of work. Your venture's portfolio of disclosure and readiness must be complete, with nothing missing across the board in these five areas.
So what are these five important areas? Here's a rundown:
1. Have a final, airtight version of your business plan. The plan must be concise yet comprehensive in scope and provide enough details to satisfy all the questions that will no doubt be raised about your company's ability to accomplish its market objective.
2. Provide a personal financial statement of current income and past income (cash flow) for the past three to five years. As part of this personal financial disclosure, be prepared to demonstrate assets (home, stocks, pension funds, savings accounts) and liabilities (mortgage, car loans, credit card debts) in order to show a clear dollar value of your net worth. Also, in this personal disclosure, it is very important that the investors see that the lead entrepreneur and founding management team have some capital at risk as well in the venture. Asking others to back your vision and market strategy is especially difficult when you do not have a single dime exposed to the risks of loss that the investors' capital will be exposed to, should the funding deal close.
3. Make sure the management team is completely in place. If you cannot bring these key people to the meeting, have signed letters from them agreeing to take certain positions in the company. Include detailed resumes regarding their background, education and experience qualifying them to deliver tangible results in your new venture.
Also, be sure your company has named a core board of directors to oversee operations, and leave one or two seats available for the investors to fill or have their agents join on their behalf. Also put together a formal advisory board of individuals who will work with the lead entrepreneur on referrals and contacts as the venture moves forward. Finally, have your attorney and accountant provide letters and documents about the venture, such as: articles of incorporation, investment letters, opening balance sheet and income statements (when applicable), documentation on patents pending and other intellectual property and trademarks/copyrights in place or in process, and an initial capitalization sheet outlining the founding team's stakes in the venture. If there are a lot of missing pieces, the investors will not invest at this juncture until those items are in place and secure.
4. Get both supply-side and demand-side documents together. For example, if you've already approached vendors about supplying your company with materials and supplies, and if you've opened up good negotiations on possible terms and discounts, bring letters from these firms to the meeting. The letters should be on their letterhead and should state that they're already working with you in these matters. You should have also opened up some preliminary discussions with some potential buyers of your product or service in the targeted market. In the same manner, you should also bring letters from these people stating that you are in negotiations about some contracts that your new venture will be able to fulfill once the capital is raised.
5. Make sure your product or service is already being used by someone or by a company, at least in its beta test form. Have a working model of the device, or have a prototype of the product that the investors can touch and see in action. If it's a service, show how the pieces of the process are in place and how they are going to work together in delivering that service to your target clientele. An idea on a napkin is not going to get funded. That happens very rarely and is the stuff of entrepreneurial folklore.
Once these five areas are in place, only then will an investor regard you as serious and see that you've done your homework. And always think of your readiness this way: Would you invest in you at this stage?
David Newton is a professor of entrepreneurial finance and head of the entrepreneurship program, which he founded in 1990, at Westmont College in Santa Barbara, California. The author of four books on both entrepreneurship and finance investments, David was formerly a contributing editor on growth capital for Industry Week Growing Companies magazine and has contributed to such publications as Entrepreneur, Your Money, Success, Red Herring, Business Week, Inc. and Solutions. He's also consulted to nearly 100 emerging, fast-growth entrepreneurial ventures since 1984.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.