Positioning your company to raise capital
The role of the business plan/executive summary
Accredited investors
Friends and family
Hiring a team before securing funding
Bank loans
Venture debt
Crowdfunding
Guidance on picking best investors
Securing meetings with VCs
Positioning your company to raise capital
Raising capital can be a long and arduous process. What can you do to make that process go as smoothly as possible? First, make sure you have your pitch in great shape. Your pitch needs to be in more than one form, too. You should have an “elevator pitch”—a 30-second story about what your company does and why your business is compelling. Sometimes that’s as long as you will get to tell your story to someone, so you need to get potential investors interested enough to want to hear more.
The role of the business plan/executive summary
You definitely need a “plan” for your business, but you probably don’t need a formal 30-page “business plan” like the one you might prepare in business school. Preparing a formal business plan can be a good exercise—it will probably make you think critically about your business in ways you might not otherwise. But don’t expect most investors to read it or even expect to see it.
Accredited investors
Do you need an accredited investor? This is a complex question. The answer really depends on the facts and circumstances. For example, the information below assumes that the company is privately held and does not otherwise wish to engage in a public offering like an IPO. So you need to get good legal advice to determine the best answer for you.
Friends and family
You’ve got a great idea and you’ve put together a great team. All you need now is the seed capital to launch your venture. Do you ask your friends and family to become your first investors? It’s a question with no easy answer and any decision you make will come with a host of both personal and legal ramifications.
Hiring a team before securing funding
It is almost unheard of that an entire team would be in place before securing a first round of funding. In fact, the primary use of a first round of outside capital is often to hire additional team members. The network and reputation that your future investors bring to the table can also be tremendously useful when recruiting new hires. Many entrepreneurs find that they are able to recruit more talented team members (and without giving up as much equity) after securing funding from strong investors.
Bank loans
Banks generally don’t loan money to an unfunded startup without a credit history and without assets to offer as collateral. Similarly, bank loans for more mature private companies often contain financial covenants that restrict access to capital when the financial condition of the company deteriorates, which is exactly when the funds could be most helpful.
Venture debt
Venture debt is a form of debt financing typically provided by certain lenders to venture-backed companies that lack the assets or cash flow for traditional bank debt financing. Venture debt is generally structured as a term loan that is paid down over time—usually three years. Venture debt is typically senior to other company debt and is collateralized by all of a company’s assets. Unlike traditional bank debt, venture debt typically does not include financial covenants (such as a requirement to maintain a minimum amount of cash in the company’s bank account), though the interest rates on venture debt are typically higher than traditional bank loans (generally, ranging from 10% to 15%). In addition, a venture lender typically receives a warrant to purchase stock of the company. A warrant is like a stock option—it provides the holder with the right to purchase shares of stock (common or preferred) of a company at a fixed price for a period of time. A warrant issued to a venture lender is typically exercisable for preferred stock with an exercise period of five or 10 years.
Crowdfunding
In the context of financing, crowdfunding is the process of getting funding, usually online, for a project from a large number (or crowd) of people who typically each contribute small dollar amounts. With crowdfunding platforms such as Kickstarter, the entrepreneur will set a target for the dollar amount to be raised, the deadline by which it must be raised and any reward to the persons contributing to the project. Typically, the dollar amount to be raised must reach the targeted amount on or prior to the deadline or all funds raised must be returned to the people who contributed to the project. As noted, contributors in this type of crowdfunding offering typically receive a reward—a copy of the product that their contribution helped fund or some other token of appreciation. They do not receive any ownership interest in the company in the form of shares of stock, convertible notes or other securities.
Guidance on picking best investors
Entrepreneurs need to determine which VCs or angel investors to seek to raise money from. Don’t waste your time with investors that aren’t likely to be interested in your business—either because of the company’s industry, stage or otherwise. Some of the more important considerations when choosing investors include:
Securing meetings with VCs
Entrepreneurs need to determine which VCs to contact. Read about how to pick your investors. Once you’ve done your research, made a list of potential investors to approach and prioritized that list, you’re ready to plan how you get meetings with them.
