What to Know Before You Try to Raise Capital

Seeking funds for your business? Don't meet with potential investors until you've taken these five important steps.

By David Newton • Nov 16, 2004

Opinions expressed by Entrepreneur contributors are their own.

Q: My company is getting to the point where we need toget outside funding. What do we need to do to get ready for raisingcapital?

A: There are five basics that must be in place before yousit down with potential investors. If any of these items is notfully at the ready, it does not matter that the others are 100percent in place. Investors will not give you credit for havingfour out of five of these items in proper shape. Rather, they willnotice the one area that needs a lot of work. Your venture'sportfolio of disclosure and readiness must be complete, withnothing missing across the board in these five areas.

So what are these five important areas? Here's arundown:

1. Have a final, airtight version of your business plan.The plan must be concise yet comprehensive in scope and provideenough details to satisfy all the questions that will no doubt beraised about your company's ability to accomplish its marketobjective.

2. Provide a personal financial statement of current incomeand past income (cash flow) for the past three to five years.As part of this personal financial disclosure, be prepared todemonstrate assets (home, stocks, pension funds, savings accounts)and liabilities (mortgage, car loans, credit card debts) in orderto show a clear dollar value of your net worth. Also, in thispersonal disclosure, it is very important that the investors seethat the lead entrepreneur and founding management team have somecapital at risk as well in the venture. Asking others to back yourvision and market strategy is especially difficult when you do nothave a single dime exposed to the risks of loss that theinvestors' capital will be exposed to, should the funding dealclose.

3. Make sure the management team is completely in place.If you cannot bring these key people to the meeting, have signedletters from them agreeing to take certain positions in thecompany. Include detailed resumes regarding their background,education and experience qualifying them to deliver tangibleresults in your new venture.

Also, be sure your company has named a core board of directorsto oversee operations, and leave one or two seats available for theinvestors to fill or have their agents join on their behalf. Alsoput together a formal advisory board of individuals who will workwith the lead entrepreneur on referrals and contacts as the venturemoves forward. Finally, have your attorney and accountant provideletters and documents about the venture, such as: articles ofincorporation, investment letters, opening balance sheet and incomestatements (when applicable), documentation on patents pending andother intellectual property and trademarks/copyrights in place orin process, and an initial capitalization sheet outlining thefounding team's stakes in the venture. If there are a lot ofmissing pieces, the investors will not invest at this junctureuntil those items are in place and secure.

4. Get both supply-side and demand-side documentstogether. For example, if you've already approached vendorsabout supplying your company with materials and supplies, and ifyou've opened up good negotiations on possible terms anddiscounts, bring letters from these firms to the meeting. Theletters should be on their letterhead and should state thatthey're already working with you in these matters. You shouldhave also opened up some preliminary discussions with somepotential buyers of your product or service in the targeted market.In the same manner, you should also bring letters from these peoplestating that you are in negotiations about some contracts that yournew venture will be able to fulfill once the capital is raised.

5. Make sure your product or service is already being used bysomeone or by a company, at least in its beta test form. Have aworking model of the device, or have a prototype of the productthat the investors can touch and see in action. If it's aservice, show how the pieces of the process are in place and howthey are going to work together in delivering that service to yourtarget clientele. An idea on a napkin is not going to get funded.That happens very rarely and is the stuff of entrepreneurialfolklore.

Once these five areas are in place, only then will an investorregard you as serious and see that you've done your homework.And always think of your readiness this way: Would youinvest in you at this stage?

David Newton is a professor of entrepreneurial finance andhead of the entrepreneurship program, which he founded in 1990, atWestmont College in Santa Barbara, California. The author of fourbooks on both entrepreneurship and finance investments, David wasformerly a contributing editor on growth capital for IndustryWeek Growing Companies magazine and has contributed to suchpublications as Entrepreneur, Your Money,Success, Red Herring, Business Week, Inc.and Solutions. He's also consulted to nearly 100emerging, 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 innature, without regard to specific geographical areas orcircumstances, and should only be relied upon after consulting anappropriate expert, such as an attorney or accountant.

David Newton

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.

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