The Art of Raising Money
Is there a good time, vs. a better time, to raise money for a business? When you factor timing into your funding plan, be sure to think of these three issues:
- When do you absolutely need the money to come into your firm's bank account?
- How linked is your company's upcoming sales and profit performance to the current economic climate?
- Where is your firm's best deal-making strength--in waiting and playing possible funding sources against each other, or in closing out a deal as soon as possible?
Let's look at these issues more specifically with some examples. In previous columns, I've discussed the need to understand what stage your business is in before you pitch your funding needs to capital providers. Assuming you know your stage of development, when you need the money can range from yesterday to sometime during the next six to nine months.
Time is always a luxury when raising funds, if you have it on your side. So if your business is running out of cash and there are huge payments and deals to finalize this week and next, then there is no such thing as "timing" your deal preparation, because you have to get funds now. But if you are targeting 30 to 60 days out for one or two specific moves you'd like to make with your company, your "timing" might allow you to wait on that angel investor who's out of town until the month after next, or postpone that presentation to the bank because the lending officer told you they were very backed up.
And of course, if you're simply strategizing about an intermediate-term investment six to nine months from now, you are able to back away from deals that aren't right for you, keep a lasting dialogue going with a funding group that has some initial interest, or wait on that great funding contact who told you they would be interested sometime during the early part of next year.
With regard to how your firm is linked to the economic environment, your timing for pitching a deal might be tied directly to when your cash flow looks its best, or when you land the biggest account you've ever serviced, or when the wholesale buyers in your industry start to pick up the pace on new orders. The issue here deals with whether outside economic news plays a significant part in your firm's positioning and performance when asking for funds. Certainly you're much better off asking for funds after you sign up two new regional suppliers rather than before those deals are signed. If inventory is turning slower than normal but you expect a solid rebound by the fourth quarter, then timing your funding pitch to incorporate the good economic news coming later is probably better than going after the funds now, while your product cycles don't look as good and cash flow is weak.
Finally, where you locate your firm relative to the funding channels will also affect your timing. This is a function of both when you need the money and how your company stacks up relative to the current business climate. If you have very limited prospects for funding presentations, then your firm cannot play two or more funding providers against each other during negotiations. However, if you are in a place where there are a few firms all showing interest in your proposed deal, your timing works in your favor, as you can hear from different sources, weigh various terms side-by-side, and see if one of these wants to step up and make the deal happen, knowing there are other prospects.
Some would say that your company's where is not as advantageous when you have to get the funds sooner rather than later, or if your company's market position needs more time to improve. But getting more than one funding source interested in your deal doesn't have to be only a function of when you need the money or how things are going in your industry. Where you stack up with potential investors or banks is more a function of you working your contacts and referrals in order to get as many prospects as possible.
Remember, you cannot allow timing to be an excuse for not getting a funding deal. Are there timing issues? Certainly! But many firms put funding deals together quickly and in tough economic times. And if you don't need the money for six to nine months and your industry is doing well, that still does not guarantee that the timing is perfect for closing a deal.
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.