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25 Feb Raising capital is easy when…

Thanks to some of the sites in our network we receive a large number of requests for raising capital. It appears the rest of the market is as well. Requests for money range all over the map and, unfortunately, most of them are more of a waste of valuable time. In order to decrease the wasting of our most valuable resource, we’re often curt and/or short with a good portion of those who pitch us. This is often most painfully evident with those that want to get on the phone and tell us (in a time that takes 30 minutes or more) why _______ is so much better than the current _______ in the _______ market, etc. We do like to dive deeply, but we like to use our own time to digest and assess. We’re usually pretty quick to assess whether something would be of interest to us and/or our investor partners. That doesn’t mean your idea is bad or that your business plan won’t succeed. In most cases it simply means you plan, team or industry don’t match our investment parameters. Even with that said, we’ll continue to look at anything. You never know if there exists something outside our normal scope that catches our eye.

It probably is a bit unfair to tell entrepreneurs and founders that we’re pretty picky and, in the same sentence, say, “but, we’ll look at anything.” We like technology. We like founders that stick around. We also like a really good exit strategy. That’s a big part of what we do: we begin with the end in mind. Most founders, entrepreneurs and investors aren’t like Warren Buffett. They don’t want to hold on to a business forever. While the business is still “your baby,” it’s often a means to an end. No one lives forever and the need for a liquid harvest of the company will eventually occur.

Capital needs in business take on many forms. The most common type of capital need (and frankly the least risky) might be solid working capital financing–in the form of debt– from your local bank. We end up kissing a lot of frogs along our quest. And, sadly (and often fortunately), people come to us after they have already been rejected by many other capital sources. If 100 other people said no, it’s highly likely we will too.

That said, we offer much more in terms of capital and human resources than a traditional bank. What follows certainly applies to traditional bank lending, but is most often applicable to equity investment that occurs outside traditional finance.

Raising Money Is Easy When…

Regardless of whether a business plan is pitched to us or someone else, there are a few reasons one company may have it easier when seeking access to capital than another. In short, raising capital is rarely easy, even if your idea is very good. Here are a few characteristics that may make raising money easier. Some are under your control, others are not.

When there is traction or, better yet, existing revenue. When it comes to angel and seed investing, you’re likely looking for money to push you past “proof of concept” phase. The farther you can get down the road without raising money, however, the better. That’s traditionally what moonlighting has been for–if you can legally swing it.

When you know someone. If your uncle is ______ Rockefeller, it may be easier for you to raise some capital, but it doesn’t mean it’s likely to be “fall-over” money. Relationships are good, but they may still knit pick your plan.

When you’ve already raised money. Raising money is a positive feedback loop. A big part of it is confirmation from other investors that your idea, product, business and team are sound enough to become a sustainable force well into the future.

When there are patents. A very unnatural barrier to entry is always a good thing, but unfortunately in today’s rapidly shifting technology world the patent process is often too slow. Throw out a provisional and get the product to market–and fast. Speed and execution will always trump patentability.

When you have a honed and clean pitch. I’m not talking elevator pitch. Any serious investor will take a deep dive. Some of the best businesses never had written plans, but the exercise is helpful to understanding the competitive dynamics of any market.

When your company is public. It’s easier to raise money when your company is public. Public stock, regardless of whether it trades on the NYSE or Over the Counter is still more liquid that private stock. Many investors are more keen on investing when they know they have at least some chance of a partial recoup of their investment.

When you have 25+ years experience in a particular industry. The Mark Zuckerbergs of the world are the anomalies. The best funded projects are not only those with people that have longer and more general life experience, they’re those with industry-specific expertise in the market in which their venture is situated. Investors more easily get the “warm fuzzies” this way. When you have the right training, expertise and experience, money tends to flow more easily. It also helps to have an advanced degree. And Harvard/Stanford/Wharton etc. are always a plus as well.

When you have collateral. In a recent discussion with a client wishing to perform private company M&A, the owner wondered allowed, “why is the real estate my business resides in worth more than the company itself, but produces much less?” A very valid question. There are a number of reasons real estate often has higher value. The number one reason: it’s tougher to destroy real estate than a viable business. Businesses are very easy to destroy. More important, however, is the fact that real estate represents a physical, tangible asset that can be used as direct collateral for sourcing debt and equity financing. In the event of a default or implosion, something can be substituted in the stead of the money invested by banks, subordinated lenders and equity shareholders (in that order).

Truth be told, raising money is never an easy task. Even with all the right boxes checked and the right rainmakers in place, a company proceed down a six-month money-raising path, ending with nothing but empty hands and wasted time.

What I’ve mentioned here may likely be important, but unfortunately somewhat obvious. If I’ve missed anything in this list, please let me know. In addition, if what you’re reading is a complete waste of your time, please let me know. I’m open to all comments, and suggestions on how to improve the quality of what you’re receiving. 

Nate Nead on sablinkedinNate Nead on sabtwitter
Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
  • App User

    Thanks for the article Nate!
    We’re working on a way to make raising capital even easier!

    • Nate Nead

      I’m assuming that was posted by Adam 🙂 Unfortunately, raising capital is never an easy task, even with some of the aforementioned characteristics. I’m excited to see the release of your show and look forward to great things coming from Gnuity.

      • App User

        I’m Adam’s brother Aaron. But I am helping him with the show.
        Let us know how we can best involve you and your team!

        • Nate Nead

          Happy to help where we can. It sounds like you’ve a great deal going on prepping for the pilot.

  • Barbara Findlay Schenck

    This is a terrific checklist for anyone seeking business funding. In the newest, 4th edition of Business Plans Kit For Dummies we tell those seeking investor capital to never lose sight of the fact that today more than ever venture capitalists and angel investors need to see that an idea will provide a return on their investment: “Don’t waste your time or theirs unless you’re certain that your executive summary and business plan can convince them that your business idea is unique and timely with a large and growing market; that you have proven personal leadership abilities; that your management team has strong and relevant expertise; and that your strategy is capable of delivering impressive sales and profit margins.” I’m impressed at how well your post provides the points to convey.

    • Nate Nead

      Thank you Barbara. Couldn’t have said it better myself. Because of the ability to “startup” cheaply these days, most investors don’t want to pay for proof-of-concept anymore. They want some traction with bubble gum and duct tape on the founders side before the capital will be forfeited for equity.

      Thanks again for contributing.

  • CrowdFundingPlanning

    Dear Nate, very relevant and very good tips or check list we make it a mandatory read for our CrowdFunding Mentors and CrowdFundig planning teams

    • Nate Nead

      Thank you for contributing David. I’ve probably painted something to picturesque for most capital raising scenarios, but there are areas where the capital raising risk can be greatly mitigated. It mostly comes in the form of proper prior preparation.
      …The official preventer of piss poor performance.

  • David Aust

    Nate, I appreciate your article on raising money. I also believe there are some areas that can make capital raising easier on people. I recommend the following support systems for entrepreneurs:

    Create a Summarized Business Plan that Speaks to the Investor Audience;
    Focus on How Business Idea will Solving Investor Audience’ Pain (target-audience focus);
    Believe that Your Project will be Funded (Attitude Is Everything!);
    Graciously Accept Criticisms from Trusted Friends and Resolve those Criticisms, if You Can;
    Persist in Seeing Your Project Get Funding in your Heart;
    Believe that Investors will have a Positive Attitude Towards Your Project;
    Not Every Investor will have a Pain in the Areas an Entrepreneur is Solving (target-audience focus);
    Miracles Happen all the Time with a Positive Attitude.

    While raising money is never easy, there are support systems that an entrepreneur must establish to increase the chances of successful capital raising so that it becomes easier.

  • The funny thing about raising capital is that though the
    truth be told you just don’t want to hear it. It’s a little bit akin to putting
    together what you think is a great resume only to be told they have selected
    another candidate. And no matter how many times you argue, you just will never
    get that job offer. Many years ago I asked an investment banker how much a
    master’s degree in finance was worth, to which he replied as wide as your foot
    will open the door. It was certain at that juncture arguing the merits of my
    credits would somehow never sway the argument in my favor but nevertheless it
    was very good information. Perhaps one approach that might make more efficient
    use of your time is to create a downloadable questionnaire requiring that to be
    completed before you enter into a discussion. A brief review of the answers might
    then merit albeit brief but a diplomatic email indicating a low probability of
    success. Anyway just a thought. Your comments about founders remaining in the
    business along with having the experience and expertise within the industry
    were points well taken. Many years ago during the dot-com bubble I remember
    having an interesting discussion with a student over the value of having the
    figurative bricks and mortar within the business. Investors rushed in despite
    the often projected negative equity and it so reminded me of the California
    gold rush.

    • Nate Nead

      Hi Peter. I like the resume example. Unless your putting your business “resume” in front of someone that knows you and has experienced success with you, there will be much less excitement about who you are compared to other candidates, especially if your experience and knowledge is on par or sub par to other candidates. When raising capital, both experience, past success (proven track record) and connections matter most.