Ask This CFO

Let us say for argument sake that you have already exhausted the Angel & VC route other options to raise capital are available.  

Debt Instruments

If the business opportunity you are pursuing is the purchase/ expansion of an existing business; you may want to consider various debt instruments. Advantages include retaining equity, fixed interest payments and flexible payment/payback terms. Convertible debt is useful for companies that have a high degree of risk but do not want to give up a large portion of equity. The conversion feature of convertible debt is attractive to investors or banks that typically make loans but require equity for their added risk.

Joint Ventures

These have become increasingly popular for medical/biotechnology companies in the past few years, but any company can benefit from having a strong corporate partner. Joint venture agreements must be carefully structured to avoid relinquishing major shares of royalties or marketing rights to the partner. Expectations for both sides should be carefully documented.

Corporate Venture Capital

Many public companies have either a venture fund or business development group for strategic alliances and acquisitions, or both. Generally the venture arm of a public company will only invest “behind” a venture capitalist, leaving the due diligence and active management involvement to the venture capital investor. As noted earlier, your networks of advisors are an important referral source to venture financing. Contacts you make with corporate venture professionals are another means to identify the “right” venture firms to approach and could lead to direct referrals. While there are no comprehensive guides to locate corporate investors, most participate actively in venture conferences and local industry organizations and associations.

Happy Hunting.

How to Raise Capital for a Startup?  Aquiring Funding.

Raising capital is no small task; in fact, it can be likened to the process of climbing a ladder. At each rung, you achieve new goals for your company and the height of your ascent represents the value of the business. Initial financing are often the first or second rungs.

What happens when the stakes go up and you require additional capital?  That is the time to contact a Venture Capitalist. You’ve been rehearsing your pitch; startup story, PowerPoint presentation; you’re tired, but ready for anything. Then, the venture capitalist walks into the room. What then? Relax! The hard part is over; you have already arranged the meeting.  In other words, someone they know and trust referred you (often the best approach) or your idea has captured their attention on its own merit from an early communication. Now, you’ve got to fight to get to the top of their investment prospect lists.  Deliver a great startup story.  What happens once the story is over? It is imperative that the lines of communication stay open so that you can get to the top of that list. Keep the following points in mind.

Understand your business fully. This is obviously first and foremost. Not only should you be completely comfortable with your idea, you must know it inside and out, in terms of business. What is your value proposition to the customer? What is your target market and its expected growth? Be comfortable with your financial model–show that you’ve done your homework, because VCs will probe deeply. And, under no circumstances will you try to fake out an investor if he or she asks a tough question. If you become stumped, openly acknowledge that you need to look into it further. Whether or not they can sniff fakers out, they still probably prefer those who honestly recognize any gaps in their knowledge, and who will seek to rectify it, to those who act like they know it all, already.

Really try to distinguish yourself. How have your experiences, business-related or not, put you on track for success? Show your passion for it. Show them your commitment to the idea, your investments, financial and personal, as well as the abandonment of any alternatives to the starting of the business. Make yourself an example as to why this is such a compelling opportunity and why its pursuit is impossible to pass by.

Make a connection with the Venture Capitalists. If there are any links to the prospective investor, don’t be shy about discussing them. The easiest thing to do is to look at their past investments. Explore their relevance to your idea. Demonstrate any correlations with their portfolio companies’ fundamentals.

Remain prudently open with them. If your speech is unnecessarily circumspect, a negative atmosphere will permeate an otherwise fine meeting. That does not mean that you should forego verification of your trust, however. Don’t be afraid to ask for a commitment to confidentiality (again, verbal is sufficient). It won’t hurt to save any sensitive details until you and the investor have developed a comfortable rapport based on mutual interest. Remember: reveal enough to get a second meeting!

Always try to work on banishing skepticism. Openly and honestly discuss the risks involved in the business. Discuss the upside potential as well as the risks involved. Clearly identify the proverbial land mines and the competition.  Nothing says “credibility” like a comprehensive assessment of the competition.

Speaking of competition, a little competition between investors couldn’t hurt. Granted, orchestrating all this is like an artistic balancing act. One good practice is to approach a few potential investors at once. You never know–comparisons between firms can prove quite illuminating. In addition,  seeing as how valuation is typically very subjective, some competition should help the process along.

As with the initial round of Angels, you want to seek a true partnership. In essence, you are really buying more than selling. Will this VC make a good partner? How does he/she listen? Does he/she have keen instincts? Is he/she respectful, helpful, and positive? The realization of your idea is a daunting challenge, so you want to surround yourself with strong supports. Follow your instincts on this one. You two will need good chemistry for the long haul.

Finally, don’t think that it is uncouth to check investor’s credentials after meeting with them. There’s nothing like getting it straight from the horse’s mouth–go to entrepreneurs who have worked with this investor and ask tough questions. Was the investor very constructive and easy to get a hold of during tough times? How did their involvement directly affect the success or failure of the company? Remember that a good venture partner will make a difference, and startup equity is very dear, so make sure you’ll be getting your money’s worth.

Raising capital is no small task; in fact, it can be likened to the process of climbing a ladder. At each rung, you achieve new goals for your company and the height of your ascent represents the value of the business. Initial financing are often the first or second rungs. Now, before you try to get all the media’s attention by charging into a VC’s office you should first consider Angel Investment.

Angels are wealthy individuals who will attempt to help finance your business with personal checks for anywhere from $20,000 to $1 million. Choose your Angel investor very carefully. The initial funding of a few hundred thousand dollars may allow you to quit your day job, and enable you to focus more time on the setting up of the business. Also, this construction capital should be adequate while not diluting the company’s ownership significantly.

Don’t be shy about Angels! Start looking early, and tell everyone about what you’re doing. Don’t worry about giving away too much of your idea nearly as much as not getting early funding soon enough. A good start is to talk to friends, family, lawyers, PR firms, accountants, and marketing consultants–anyone who’s had dealings with Internet Startups. It is very important to keep in mind, however, that we’re looking for more than just money here. We want an honest commitment from Angels: we want them to make the venture a success.  They should assist in developing contacts, recommending potential employees, identifying a good public relations firm, negotiating licenses as well as supplying however much capital is needed. Ask them to take an active role in the company, and tell them outright that you will expect them to make the startup a success. Even offer a position such as formal advisor or director of the company.

When beginning your pitch, keep your purposes in mind: you want to entice them to call you for a more extensive conversation. But keep you plans to yourself at first. Your initial goal is not to get them to invest on the first communication. You may want to put together an abridged business plan: essentially, a document version of the startup story we discussed in the previous Blogged entry. Keep your business plan concise; remember there is no substitute for fundamentals.

 The size of the investment should depend how high you are on the ladder. Are you in grad school and armed only with your idea? Or are you actually in business and have a product and revenue? Don’t worry too much about the exact numbers, as Angels are probably more aware of the ladder than most entrepreneurs. And they realize their place in the grand scheme of things: they give you a little now, so that eventually, you will ask for millions later from a VC firm. In terms of equity, it is not unreasonable to give 20 percent of your company to a first round Angel.  Just remember that initial investors will be heavily diluted in following rounds of funding. By the time an IPO rolls around, they may only account for a few percentage points.

Special investor rights are a common form of deal that angels may want to try to cut. Here’s where hiring that great lawyer will come in quite handy. But keep in mind; you’re negotiating in the spirit of partnership. After all, your very first employees are somewhat like founders. Similarly, initial investors deserve a special place. Don’t try to bully an Angel the way you would approach a VC, but also, don’t waste your time with someone who acts like his $50,000 check is a term sheet. You want to conduct yourself in a professional manner, reasonable and attentive. Find someone with whom you relate well, because once the dotted line is signed, the knot is tied.

Keep the faith, just remember, if it was that easy everybody would be doing it.