The Four Keys to Raising Capital
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It's no secret that raising capital to grow your business or invest in property has become harder. Traditional lenders are requiring you to jump through more hoops, and they are applying less attractive terms after all the jumping is over. Private lenders and investors are more cautious and have upped their standards, as well. What's a businesswoman to do?
It's Simply Common (Business) Sense
It's actually not the mystery that many make it out to be. More than anything, good common business sense will prevail. It's often said that the key to raising capital is a person's ability to sell. Selling is a crucial skill for any entrepreneur. When it comes to raising capital, the question is "What are you selling?" In other words, what is the lender or investor looking for?
The key to raising money, whether it's to start or expand your business or to purchase and operate a rental property, comes down to four factors.
- The Project
- The Partners
- The Financing
- The Management
If you can show a prospective lender or investor that you have command over these four pieces of the puzzle, then selling will not be an issue, and you will attract more money than you thought possible.
The first time I raised money for my business, I wasn't aware of these four gems, so much of my sales pitch to prospective investors was based on BS--blue sky. The "sell" was much more difficult because 1) I didn't know what the investor was looking for and 2) I relied solely on my persuasion skills instead of sound business sense. Even though it was much more difficult, I was still able to raise a quarter of a million dollars from 10 investors. And in the end, every investor got his or her initial investment back and made an excellent return on that investment. The process today, whether I'm the one raising the money or people want money from me, is much more efficient and leads to better results.
The Overall 'Want' of a Lender or Investor
The what-I-want umbrella covering any deal an investor is considering is that she wants a healthy return on her investment. If I give you X dollars, then how much money will I get back? That's the overall want of an investor.
(Note: When I refer to a "lender or investor," I am referring to anyone or anything from a traditional bank or lending institution to a private organization or an individual. The same criteria apply no matter whom you are approaching for capital.)
Music to an Investor's Ear
A presentation should not be long or complex. It will differ depending on the business or investment involved. Often when a "pitch" is short and concise, it reflects that the people presenting it are confident in knowing what the investor wants and secure that they can deliver it.
Let's take a closer look at the four key factors:
- The project: What is the project the lender or investor is providing you capital for? If it's your business, then what exactly is your business? What makes your business unique from others in your industry? And what is the advantage your business has that will build the investor's confidence? What will make it successful? Keep it simple. Keep it concise. Keep it real.
- The partners: Who are the key partners behind the project? Who is putting the deal together? What is the track record of the partners, and what experience do they have. Put yourself in the investor's shoes for some perspective. Whose music project would you be more likely to invest in--Paul McCartney's or Mike Tyson's? Whose new skin-care company would you back--Mary Kay's or Lindsay Lohan's? It's not rocket science. It's common business sense. The experience the partners bring to the table and how comfortable the investor is with their level of expertise are what will drive any investor's decision.
- The financing: Show me the real numbers. This is obviously a bit trickier for a startup company because most of the revenue numbers will be projected numbers, not actual numbers. This is where previous experience can overcome that obstacle. Show the investor, as accurately as you can, how the project--be it a business or an investment--will make money. Be realistic. As an investor, I do not want to see the best-case scenario. I want to see the most realistic numbers, including the problems and roadblocks ahead. Every business and investment project has problems; pretending that yours won't makes you look like an amateur.
How much money are you raising in total? Where is the money coming from? Is the money being raised from private parties, traditional lenders, pension funds or government programs? What are the terms? For example, let's say I'm being approached for the down payment on an apartment building. I'm told the other 80 percent is coming from a top lending institution. What would be more attractive to me as an investor: borrowing the 80 percent at a lower interest rate that must be refinanced in two years or getting the 80 percent at a slightly higher fixed rate for 25 years? The first option presents more unknowns down the road while the second scenario has fewer potential surprises.
How are you going to use the money being raised? What are the funds being allocated to? One hint--if it's ever suggested that some of the money raised is to pay you, as the owner of the business or the deal, then my door is closed. If you want a paycheck, get a job. And, of course, you must answer these two key questions for your potential investor: How soon until I get my initial investment back, and what is the return on my money? The bottom line: Is your financing structure attractive to an investor?
- The management: It's said that "money follows management." I agree. However, your case is so much stronger when you address all four components, not just management.
Investors want to know who's running the day-to-day operations. This is key to the ongoing success of any venture. What is the experience level of the management team? Who are they? What are their backgrounds? What makes them vital to the success of this project or business?
If you are starting your own business or if you're raising money to grow your existing business, then the partners and the management team may be the same people. That's not a problem at all, given experience and expertise on the team that the investor has confidence in.
How It Plays Out in Real Life
Let me give you a real-life example of how this formula works.
My husband, Robert, and I were approached by a friend about an investment opportunity. We knew this gentleman personally but had not done any business dealings with him. He is very well-respected in the business community.
Here is what he told us:
"This is the investment--an Arizona landmark resort with three golf courses plus two additional golf courses from a second as-prestigious resort. It has gone into foreclosure and we are certain we can purchase it for about 25 percent of what the previous owner put into the property." (The Project)
"My two partners and I are purchasing this investment. This is the 54th venture we've done together. Here is a list of those projects and the results. You know of one of my partners, Mr. XYZ." (Just about everyone in town, and beyond, knows of this man. He is a business legend.) "We've been actively searching for three years for a great project, and we feel this is the one." (The Partners)
"We are raising 10 percent of the purchase price as a down payment. Two pension funds are putting up X number of dollars, and the bank that has foreclosed on the property is financing the rest of it. You can conservatively expect a return of X percent on your investment, and you should have all your money back within three to four years." (The Financing)
"As to the management (at this point he drops a four-inch binder on the table that falls with a thud), this is the company that will be managing the hotel. It also operates the ABC and MNO resorts." He then drops a second four-inch binder on the table. "This is the company that will manage the golf courses. There is a listing of the other golf course it manages. We've checked out both of these companies thoroughly." (The Management)
"That's the investment. What do you think?"
What We Thought
It took us all of five minutes to say, "Count us in." Here is the beauty of our friend's approach: This is a multimillion-dollar venture. He could have gone into all sorts of graphs, figures, projections and data. He could have spent hours telling us about what a great deal this was. Instead, he took all of 10 minutes, answered the four key issues, and five minutes later we had a deal.
Raising capital does not have to be a laborious, drawn-out affair. If you can keep it to the four key points and provide your investor with confidence, then money will flow to you.
Oh, just one last point--you'd better deliver.
For more on pitching investors, see "Improve Your Odds of Getting Funded."