It's common knowledge that raising capital of any kind has been very tough during the past 18 months. Even if you're a start-up or emerging company with the hottest new gadget on the market, finding the capital you need can be next to impossible.
The truth is, it has always been tough to raise capital (well, OK, try to forget 1997, 1998 and 1999). But the fact remains that lenders and investors of all types have been raising the bar higher and higher to decide which businesses get funded and which businesses don't. If you look at today's companies that successfully cross the funding hurdle, you'll find they often share a number of similarities. So if you're about to embark on the road to the capital markets to claim your share of debt or equity, use the following strategies to increase your chances of clearing the funding bar:
- Don't request more money than you need. That's right, keep your request to just the minimum amount you need to get the job done properly. You likely don't need "all" the money right now, so think in terms of sourcing capital as you need it. It's often better to seek a number of "rounds" or "draw downs" when funds are required and when you meet certain agreed-upon milestones.
- Invest your own money and have something to lose. Investors and lenders like it when you invest your own money in your project. They like to know you have something at stake. It also assures them that your business (and their investment) gets your complete and undivided attention.
- Don't ask the source of capital to pay you back. In the Use of Proceeds portion of your business plan, don't ask to be repaid for funds you already invested in the business. It will never happen.
- Don't raise money to get rich. Today's investors and lenders are interested in funding entrepreneurs who have the primary motivation of building a great lasting company. Getting rich should be the byproduct of great execution over an extended period of time.
- Make money in the first 18 months. The days of funding companies that lose money for years are gone. Building revenues and market share is admirable, but the capital market has learned that the longer an enterprise goes without making a profit, the more unlikely it becomes that it will ever get around to making any money.
- Have an experienced team with a track record. You absolutely must have a great product and a market that's ready for that product. But investors and lenders frankly aren't interested in either your product or your market unless they believe your team has the experience to "get the ball across the goal line." This point can't be overstated--great teams get the funding.
- Don't compete with the big guys. No one is going to fund a business plan that calls for a company to take market share away from Cisco, FedEx, Microsoft or Wal-Mart. It is far more realistic to look for opportunities in niche markets where there aren't any dominant players.
- Become number one and stay there. External sources of capital know there are tremendous business advantages to being number one. When you're number one, you have more control over pricing, product positioning and distribution channels than your competitors. And of course, the view from up front is always more enjoyable than the view from behind.
- Make your product or service patentable. Investors like products or services with intellectual property that can be protected--it makes it far more difficult for competitors to come along and out-execute you. If you do have intellectual property, protect it.
- Invest in engineering, technology, customers and sales rather than marketing. Investors like to know that you'll have something to show for the money they invested, rather than just a very clever $5 million Super Bowl ad that never really connected with the public.
- Have a great five-year business plan. Investors and lenders don't read business plans because they want to know what you're doing and where you're going. They read business plans because they want to find out if you know what you're doing and where you're going. Your business plan is a reflection of you, so dazzle your audience with your passion, knowledge, thoughtfulness and vision. Every great entrepreneur isn't necessarily a great writer or communicator, so if you can't write a professional plan to communicate your ideas, get the help of someone who can.
This story appears in the March 2002 issue of Startups. Subscribe »
