The Best Funding Source for You
Most entrepreneurs don't know who to go to for money and when. Our raising money expert helps you sift through the choices.
As surely as the sun will rise in the east and set in the west, so also can we predict that every entrepreneur is going to need to raise money at some point in the life of their business. The question is, from what source? If you're new to this game, you've probably heard about terms like "angel investors" and "venture capitalists," but you're not quite sure how and when to use them. And you're probably also wondering if those are the only choices you have. What about banks? Do they even care about people with ideas? So, the bottom line is, how do you solve your undeniable need for funds to help you grow your business?
Hundreds of articles have been written on this subject with at least as many opinions. One overly simplistic answer is to say "Take the money any way you can get it, and then run like the wind!" Before you draw the conclusion that I'm crazy, let me explain. This is not my advice; it's simply my observation of how too many entrepreneurs act when raising money. They know they need it. They know it's extremely hard to get. So when someone finally says yes to the question "Will you invest," they don't stop to ask, "What will it cost me to take this money?" They merely take the money and get away as fast as they can-- hoping and praying the whole time that the investor won't change their mind before they can cash the check. Why do entrepreneurs do something so-o-o dumb? Because, by the time they finally get that first person to say yes, they're so far in debt that their need far outweighs their logic.
OK, so there's a wrong way to raise money. What's the right way? And who do you go to when you need to get funding? And when? Well, this next rule is extremely important to follow and totally logical but, almost no entrepreneur ever follows it:
Always stay nine months ahead of your cash needs.
Why is this important? Because no matter what source you're going to to look for cash, you need to allow a minimum of nine months to raise it. Believe me, it will take that long to do the following:
- Write a business plan.
- Assemble investment documents.
- Identify a target list of investors.
- Find ways to get an appointment with these same investors.
- Figure out and correct what turned off the first investors you pitched.
- Get enough investors interested to have a "meaningful conversation."
- Suffer the pains of due diligence.
- Correct anything discovered in due diligence that kept the last investors from investing.
- Actually discuss terms of an investment.
- Figure out what terms you pushed too hard on in the last discussion that kept the investors from investing and change your position.
- Settle on terms.
- Collect the money.
- Issue stock certificates.
- Report on progress.
So now that we've got all that out of the way, where do you go to raise money? You've really got three main choices: a bank, an angel investor or a venture capitalist. And no matter who you go to, they're all going to want to know that you're committed to this company. After all, if you don't believe enough in your own vision to invest in it, why should anyone else? Read below the thoughts of two great men on what it takes to succeed:
Now that you're in this venture, what's the next step? For some, it's to go to friends and family and share your vision with them. Who knows you better than your own family and who wants to see you succeed more? However, if that's not an option, then you'll have to start looking for cash from the professionals--angels, VCs or banks.
Let's start with banks. You'd think they'd be a natural choice, but the truth of the matter is "If you don't need the money, they'll be happy to loan it to you." As a general rule, most banks don't consider you exist until you've been in business for at least three years. Even though they'll let you open a checking account and, perhaps, allow you to put your business name on a credit card, they probably won't talk about a business "line of credit" until after your third year.
So what about SBA loans? Well, they tend to be extremely hard to get unless you're a minority business owner, and even then, the paperwork will kill you. If you're serious about pursuing this option, I suggest visiting the Business Utility Zone Gateway and seeing what resources they recommend in your area.
We're now down to the choice between angels and VCs. Generally, I have two rules for dealing with both:
1. Never go to an angel or a venture capitalist when you need the money--only when you anticipate a future need for money.
2. Never take more money from either source than you actually need to survive for no more than one year. This helps ensure that you don't sell off too much of your company at too low a price (we're assuming that your company will become increasingly more valuable as time progresses).
Once you've made the decision not to allow yourself to dig a hole of desperation, the rest of the decisions are easy:
1. Choose angels when you need less than $1 million.
2. Choose venture capitalists when you need at least $5 million.
3. Choose corporate strategic partners when the number is in between. A logical corporate strategic partner is any business that would stand to benefit if your business succeeded. For example, if you were in the business of making a formal, lace-up shoe, then any business that made shoelaces would benefit from your success--especially if you gave them an exclusive on supplying the laces for your shoes.
4. Never limit yourself to only one offer to select from. Once you get one party interested, work your butt off to leverage that offer into finding a second (or third) alternative.
5. Don't waste time pitching your deal to someone who doesn't invest in your type of company. Do your homework! Find out who likes to invest in your type of deal, then find a way to get introduced to them.