The Key to Getting Funded
Don't raise money before your biz needs it! Here's how to determine if the time is right and where to look for the cash.
One of the most difficult, yet exciting times in a youngcompany's history is when the founders realize that, in orderto succeed, they're going to need more money than they cangenerate on their own. If you think that's true of you and yourcompany, let's begin by making sure you're not reachingthat conclusion prematurely.
First, why do you think you need to raise outside capital? Oneof the biggest mistakes a young company can make is to raiseoutside capital before they really need to. If your company isyoung and has a great future, it's always best to delay raisingany money from outsiders until you've done all you can on yourown to establish the highest possible value. If you look foroutside investors too soon, you'll be selling at too low aprice. Instead, if you just sacrifice a bit longer and bring thecompany up to a higher level of performance, the price will be muchbetter.
Here are some rules of thumb you can use for deciding ifit's the right time for you to raise money:
1. How much money do you need? If you only need $50,000to $250,000, I'd strongly encourage you to find a way to"beg, borrow or steal" your way to get that amount onyour own, especially if your company has yet to generate anyrevenue. Non-revenue generating companies are the hardest to getinvestors excited about.
2. Have you exhausted all your options? If you're theonly one who's put any hard cash into your business, thenconduct a sanity check immediately. If no one else on your team,your board or your family will join you by writing a check, thenhow real is this dream? Friends, family, team members and clientsshould not only believe in you enough to invest, but they'rethe easiest with whom to negotiate a fair deal.
3. What would you have to give up now vs. later?Companies that continue growing and meeting or exceeding milestonesalso increase in value. So selling stock in them too early meansyou may sell that stock for a lot less now than it will go forlater. The challenge is in knowing when to sell and not wait toolong or be too greedy.
Once you've decided it's time, what's the best wayto prepare? Seeking funding is a complicated and arduous task.There's no absolute guarantee that any company will ever getfunded. After all, if it were easy, everybody would be doing it.However, here are a few tips that have proven to work in mostsituations:
- Be absolutely certain you have act together. We live in apolite society, and most of the time, people won't tell youwhat they really think of your idea. This is especially true ofinvestors. Pay to get a professional organization to review yourplan and comment on where you need to "fill in thegaps."
- Do what you say and say what you do. The best due diligence aninvestor can--and will--do is to validate that what you saidyou'd do in the past got done when and how you said it would. Ateam that can't execute on their commitments will not getfunded.
- Don't be an island. Whether it's due to a lack of trustor an inability to recruit believers, any entrepreneur who tries todo it all on their own will fail. Investors look for entrepreneurswho can infect others with their vision and passion.
- Whenever possible, have an idea you can protect. Patents,trademarks, copyrights and trade secrets add extraordinary value toa company. Investors believe that, even if a company'smanagement fails, if the intellectual property (IP) is good, theycan still get a return by selling the IP.
- Make us believe you're committed. Investors will alwayslook to see how long an entrepreneur has struggled and how much oftheir own money they've put at risk. Just having the idea isnever enough.
Jim Casparie is the "Raising Money" coach atEntrepreneur.com and the founder and CEO ofThe VentureAlliance, a national firm based in Irvine, California,that's dedicated to getting companies funded. Elliot Reiff, COOof The Venture Alliance, contributed to this article.