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How Serious Are You?
What It Really Takes To Raise Money From Investors
There are very few subjects littered with as many half-truths, myths,
and outright lies as the subject of raising business capital from
investors. These falsehoods result in tremendous difficulties for
entrepreneurs; the majority of enterprises seeking investment capital
simply fail. Yet, by knowing and applying a few principles, you can
drastically increase the likelihood of success for your financing
program.
Hit or Myth
Before we discuss the things you should know to raise capital
successfully, let's cover some of the most common misconceptions.
Although the following beliefs are widely held, they are generally not
true and may result in serious problems if you follow them.
Myth 1. The
best place to find investors is to seek out venture capital groups and
investment banks.
Venture capital groups and investment banks are inappropriate sources
for most entrepreneurs. Traditional venture capitalists only invest in
very limited types of companies (rarely unknown startups), rejecting
hundreds of submissions every year. Before you approach a venture
capitalist, you should conduct research on that firm to make certain
that you are not wasting your (or the venture capitalist's) time.
Similarly, very few legitimate investment banks will fund small,
unknown companies. Investment bankers usually feel that the risks of
doing a small deal are much higher than for a larger project, and the
rewards (commissions, fees) are not compelling enough to warrant
serious interest.
Myth 2.
There are readily available lists of individual investors who want to
place their money into your project. This is a fundamental myth. It is
based on the following fallacies:
1. A large pool exists of private individuals who actively seek out
investments in varied, high-risk enterprises.
2. These individuals invest on a continuous basis.
The above points fly in the face of research. The average private
investor only invests in areas where he or she is knowledgeable, relies
on trusted personal contacts, and invests infrequently. Most investors
do not actively solicit new projects (you have to find them). Thus, any
general list that is supposed to have thousands of individuals
certainly could not represent the typical private investor.
The variations on this theme are many. You may encounter ads from
companies claiming to have lists of investors, access to computer
databases, personal introductions to investors, etc. In my dealings
with well over one thousand entrepreneurs, I have seen only a small
number of companies raise money by using paid investor matching
services (there are a few professional private investors who list on
these services). However, far more often than not, you will not receive
significant capital from any of these sources. In fact, you usually
will end up with less money than you started with after paying the
required fees to participate in the program. If you don't believe me,
go ahead and try them, but at least you have been warned.
If you want to take your chances with this approach, demand recent
references of companies that have successfully raised capital from the
list. No exceptions.
Myth 3. It's
just as easy to raise millions of dollars as a much smaller amount.
Entrepreneurs will generally find that raising $500,000 is much easier
than raising $5,000,000, especially when you're just getting started.
This myth arose because professional venture capital groups and
investment funds don't like to deal with projects that are too small.
However, the vast majority of entrepreneurs and their companies are not
subject to these requirements. By all means, you should look for
opportunities to raise capital in large chunks (I have seen a single
investor write a check for $1,000,000). But, when you're in the
trenches raising money, you sleep much better at night knowing you need
to raise only an additional $50,000 instead of $4,550,000.
Myth 4. You
can count on an outsider to raise your money for you.
Although related to the other myths, this is different because it
focuses on who runs the program to raise the money. When you delegate
the capital raising to an individual or company outside of your direct
control, you may fail. Outsiders rarely have the enthusiasm or
information that you and your management team have. This doesn't mean
that you should avoid finders, brokers, or other investor contacts.
But, if you are relying on these individuals to raise capital without
your direct supervision (and as your sole source of raising capital),
you may have problems.
The Mything
Links
Now that we have removed some of the most common misconceptions about
raising capital from investors, let's discuss the things that you can
do that will work. The following points individually will substantially
increase your chances of raising money from investors. In combination,
they create the bridge that will link you up directly with investment
financing.
1. Have a good project.
It's almost too simple and obvious to bear discussing; yet, many an
entrepreneur falls down on this point. Your project must be smart,
feasible, and capable of earning a terrific return for investors. If
you can't make the grade on this point, you should rethink your
fundamental strategy.
2. Use sound business principles to manage your project.
This is another basic. Even a great idea will flounder if the project
is mismanaged. Attract highly-skilled individuals to help you. Also,
listen to disbelievers as well as to your adorers; critics may be
valuable sources of information.
3. Communicate your vision effectively to potential investors.
The information that you convey to investors should be clear and
persuasive. Whether through a telephone conversation, a business plan,
or a video, investors must share your vision and enthusiasm. Investing
is not a lukewarm proposition; you either get them to buy into the
dream or you don't.
4. Have someone on your staff who can sell the investors.
It's important to have someone on your team with the ability to sell
and close the investors (get the check!). Formal sales training may not
be necessary for this individual. A person with great heart and
enthusiasm can be very effective at bringing investors onboard. Of
course, this person should also thoroughly understand the project.
5. Stay out of legal trouble.
When you sell investments, you are subject to legal requirements and
regulations from the federal level down to your own state. Ignore these
at your peril. The solution is to know what you are doing and maintain
a group of trusted advisors (attorney, CPA, consultants) to assist you.
6. Take advantage of new rules and special programs.
The Securities and Exchange Commission and many individual states have
enacted a number of new laws, regulations, and programs designed to
make it easier for you to raise money. For example, California recently
passed a regulation allowing entrepreneurs to advertise private
offerings under certain circumstances; similar programs exist or are
under consideration throughout the U.S.; use these programs to increase
your chances of raising money.
7. Raise money in increments.
If you have a limited budget and need to raise a substantial amount of
capital, plan on using early proceeds to help you raise additional
funds. The leveraging power from reinvesting can help to ensure your
success. For larger projects, you may want to consider splitting the
fund raising into multiple offerings.
8. Research and know your most likely investors.
Different projects attract different types of investors. A movie will
not necessarily attract the same investors who would invest in a
medical device. Unless investors have personal connections with the
entrepreneur, they will only participate in projects that align with
their own interests and educations.
Thus, it is important for you to determine in advance who the most
likely investors for your project might be. Will they be personal
contacts or somehow directly related to your industry? Do you share
common interests with them? Conduct research and run tests to find the
right categories of investors for your project.
9. Test investor interest before committing yourself.
Imagine how unfortunate it would be if you were to spend months
planning your investment program only to discover that you can't sell
it. Believe it or not, most entrepreneurs fail to find out if anyone is
going to invest before they go to the effort of preparing an offering.
Think about it- they don't test the price, the terms, or even make an
effort to determine if anyone is really interested first. Such poor
planning would be considered inexcusable in the introduction of a new
product; it is no different for an investment.
10. Have a marketing plan for the investment program.
Once you know who your investors will be and have confirmed that they
are interested, you are well on your way to a successful offering.
However, you still have marketing basics to sort out. Resolve these
issues: What contact techniques will you use (personal introductions,
direct marketing, advertisements), what is your expected close ratio
for prospects, what do you expect the average investment size will be,
what volume of contacts will you need, how much will it cost, how long
will it take.
11. Above all, persist.
If you really have something special to offer the world, you should be
able to raise money for it. Do whatever it takes to keep going; vary
your product line to bring in more income, take a second job, whatever.
Become indestructible. Eventually, you will win.
An article by Robert Coleman
Copyright 1995-2005 Master Plan Strategies Inc., ALL RIGHTS RESERVED
Master Plan Strategies is a consulting group that manages investment
and divestment programs. The firm offers assistance with all the steps
necessary to complete an offering of securities, from project planning
to consulting on an investor marketing program.
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