Raising Capital? Take These 4 Steps for Success. How to interest investors outside, way outside, your inner circle of friends and family.
By Stephen Sheinbaum Edited by Dan Bova
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There's a good chance that you need capital to start a company, and to grow it. And while your own savings or "friends and family funding" may have gotten you started, big growth will probably require much more.
Related: VC 100: The Top Investors in Early-Stage Startups
1. Do your homework.
Step one is to investigate who puts money into your type of business. Are companies like yours financed by banks or private equity firms? Do they get capital from crowdfunding sites like Kickstarter or IndieGoGo, or impact investors like the Global Impact Investing Network?
There are many financial options out there, and more seem to be added every day. Do a Google search that combines the name of your industry with a type of finance, like "restaurant crowdfunding" or "private equity sports training." Then try to learn how much of your company the P/E firm will want to own in return for its investment and whether its principals will require a seat on your board.
If you go the crowdfunding route, think about what you will offer as a reward and whether you can afford to give it, especially if your offer is oversubscribed. Your company will not benefit if you have to go into debt to satisfy your crowdfunding investors. As for bank funding, do some preliminary sleuthing on whether that strategy is an option: Check your bank's website and the U.S. Small Business Administration's requirements for a loan guarantee.
And don't forget to check whether your local or state governments or the national government offers tax advantages to people who invest in your company. Those can be powerful incentives.
2. Pick the best partner.
The right partner is vital. You want to form a partnership to obtain capital, of course, but hopefully you'll get much more. Your partner's experience and track record in your industry can be the best way to find many of the other resources you need, to grow -- from the right marketing advisor to the right real estate broker or human resources professional.
Yes, you'll need to vet the resources provided, but at least you won't be spending the time to scout them on your own. So, how do you find them? Look first to your inner circle of associates, friends and family. Ask your chamber of commerce who the local industry leaders are and reach out to them for advice.
Also check professional networking sites, like LinkedIn. Those sites can help you evaluate the funders you've identified and lead you to potential advisors or board of directors candidates.
Related: 3 Ways to Bring On a Silent Partner
And while you're on the subject of partnerships, you'll need a strong team of partners internally as well. Identify the tasks that will have to be done at every step of the capital-raising process, and decide who on your internal team will take responsibility for those tasks' success. If there are gaps in your internal team, consider creating an advisory board or board of directors, using industry experts.
3. Learn the lingo.
Were you initially baffled by the term "impact investors"? Finance has its own language and you'll need to learn to speak it if you want to gain the confidence of a potential investor. See if your local college has classes in entrepreneurial finance or look for webinars -- information programs on the Internet.
If you believe that your business has the kind of measurable social or environmental effect that an impact investor will want to see, decide whether you can prove that claim with facts and figures that also show a positive financial return for that investor.
If a private equity investor asks for your "exit strategy" and you say "IPO," can you demonstrate that companies similar to yours have done initial public offerings and delivered for their investors? To find the terms you need to know, do an Internet search that pairs the kind of finance you are seeking, with "101" or "basics."
Take note of the jargon and prepare an explanation of how your business plans fit those previous investments. The more knowledgeable and engaged you are, the better off your business will be.
4. Be simple, clear and concise.
Be sure that the business plan and financials you present clearly demonstrate your strengths, and address any weaknesses. Potential investors will try to learn everything they can about you and your company, and they'll have a myriad of resources at their disposal to do so.
If there is a blemish somewhere in your past, it will be best if your investors learn it from you personally, not the Internet. Be prepared to tell the story of your strengths and weaknesses multiple times: You may need to speak with dozens of people before you get any serious interest. Also prepare for the fact that there will be many more long conversations with your chosen investors before you close on financing.
