For the past few years, investors have been more frequently sitting back on the sidelines and have held off on investing in both start-ups and existing businesses. However, this now appears to be changing and 2013 may be the year for you to raise capital for your business, whether it’s an existing company or a start-up.
First things first – why raise capital?
Raise capital if you have a business, or in some cases a business concept, that is capable of truly dramatic growth. Not a business that could double revenues, or even profits, but rather a business that could grow by 10 times or more. Think of it this way: the purpose of raising capital is to provide enough rocket fuel to accelerate your business to new heights, while compensating investors for the risk that your particular rocket may not reach the orbit you desire. More staff, new equipment, better contracts, strategic partnerships, etc. are often made more possible when a business has the cash available to enter in to such commitments.
Where do you start?
First, decide how much money you need to grow your business to the level you desire… and then ask for more than you think you need. Importantly, determine how much equity in your business you are willing to give up – this may very well determine how much you can raise. Do your best to honor investor’s desires without giving up operating control of your business. Ideally, investors should make up 20-40% of your board. While your investors should not run your company, they should have approval rights over major decisions. Remember that the best investors want entrepreneurs who are not afraid to keep running their businesses!
Set dollar values to specific goals in order to come up with an amount to raise. For instance, let’s say your goal is to launch the first version of your product. Consider what type of people you will need, what their salaries will be and how long it will take them to develop the product. Then, double the time estimate: always add a significant cushion of time or people dollars to be safe. Candidly explain your analysis to investors. They understand.
Don’t be cheap on things like legal matters and getting a solid business plan put together — spend the money it takes upfront (out of your own pocket) to do these things right. These are the things that you must invest in in order to get investors to pay attention to you in the first place. Take that business plan and package it together with your “elevator pitch”, an executive summary, financial projections and any other documents that would give a potential investor a full understand of the potential of your business.
Start the fundraising process as soon as possible — before you really need the money. Fundraising takes time and effort, sometimes taking many months or more than a year to secure funding (depending on the type of funding you are going after).
Make a list of the types of funding options that would work for your business, and then do some research into the specific investors who might work. Importantly, don’t just take money from anyone. Decide ahead of time if you want an “active” or “passive” investor. ... someone who wants to be involved in the business growth process and who will likely add value through connections, or someone who just wants to sit back and wait to make money on your business. Remember that the smaller the amount of money being raised, the more you have to have a relationship with the investor who is giving you fund. If you aren’t sure how much you like them in the beginning, think about how you’ll feel in five years. It will be hard to turn down money when it comes your way, but if it’s not from the right investor, then don’t take it. Be clear with yourself and remember that you want your investors to prosper too.
Morris Callaman, Esq., is a triage attorney and CEO of his law practice. He has represented clients in North America, Asia, Australia and the European Union, working with start-ups to Fortune 50 companies.