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.