Whether you are a seed, start-up, growing, established or mature company – at one point of another – you need to raise capital. In days past, this usually meant going to the bank to apply for a loan or perhaps sharing your ideas with your rich great uncle over tea. But in the modern age of the Internet and the technologies at our disposal, there are diverse and viable options for raising the capital you need. To better understand the 8 essentials you must know to raise capital. Let us first briefly discuss the common methods used to obtain capital.
Ways to Raise Capital
Friends and Family:
They have always been there for you and you for them. Often if you have a great idea or need to grow your business, they are happy to get on board and support you all the way. There are disadvantages in the fact that relationships can be strained if you are slow to see returns on investments or things “go bust”.
Loans / Banks:
1) Long term loans, most often for large investments like expansion, acquisition or working capital. These loans are typically paid monthly and tend to have lower interest rates, but you must borrow a very large sum of money.
2) Short term loans, most often for immediate needs like accounts payable, or small projects, things that keep your business functioning in the short term. These also require monthly payments and are a bit easier to get, but the interest rate may be higher for loan amounts.
3) Line of Credit is a flexible option. You apply in advance and then request only the money needed in small increments. As you continue to replenish the money you can draw out more up to your limit. The downside is that the funds are limited. And, similar to credit cards, interests can be high. These are best only used for emergency shortfalls and not as an every day means to obtain capital, although some businesses use it in this way.
4) Alternative Financing, is things like cash advances, asset-based loans, leasebacks. These can be helpful as a last resort, but due to the high interest rates and low dollar amounts, they should be used with caution.
This type of financing in provided by investors, who believe that your startup or small business can become a great success with the help of their money and they see great long term potential. The investors are taking a great risk, so they expect exceptional returns in a reasonable amount of time. This means that they will likely require a significant chunk of equity in the business and will want to have some say in how you do things regardless of whether they have a majority share. The partnership between a venture capitalist and an entrepreneur has incredible potential to generate wealth if the drive is there and smart decisions are being made with the money.
Crowd funding Platform such as Kickstarter
There are many crowd funding options today largely thanks to the success of a crowd funding website, kickstarter.com. These utilize the power of social media and hype to get everyday people excited about ideas. These can raise a lot of money in small increments, but it can be hard to generate the kind of excitement that can propel a crowd funding attempt. Additionally, you only receive the funds if you reach your funding goal and you need to provide something in return to the funders i.e. your product prototype, a trip to see your facilities or a thank you note.
This type of financing is available when loans are not an option. They are more creative, often group-based models where entrepreneurs and small business work together to obtain funding. This form of financing is often done as a form of stimulus within an industry or impoverished area. The businesses are coming in to solve problems and, to obtain those funds, they must show that they have a plan.
Private equity is usually about taking an existing company with existing products and existing cash flows, then restructuring that company to optimize its financial performance. This process can be very painful, but is done with the plan of being better and more profitable on the other side.
What do investors want?
If you are looking to raise capital, you have to stop thinking like a business owner or entrepreneur and start thinking from the investor’s point of view. This will be your ultimate guide as you navigate the sea of capital funding efforts.
What do all types of investors look at when people come to them for capital raising?
Investors of all types are all busy people. They receive hundreds of business plans, investment requests, investor pitch decks and the like a week. Going through all that requires time and effort. Usually, they would have trained staff looking through the documentation. These staff members know what to look for and they are good at what they do. If they don’t see it quickly, they will pass. Plans get selected based on their criteria and only then do the venture capitalists, investors and decision makers review the very few that they have selected. These odds are not in your favor. But once you get through these “screeners”, you have a real shot and getting the capital you need.
Are you investor ready? Investment-ready guide provides a quick overview of the needed material.
So, how do you get through to the next round?
Now that you understand how this “game” works, you know that this is your goal. So next we will discuss the 8 essentials that you need to know to get through to the next round. Essentially it comes down to the below mentioned points:
1. Provide investment-ready material
Have all your documentation ready, well structured and in the format that the investors and their team can read and understand immediately. Do not ask them to kindly go to your website to find out more at the initial selection stage. That is a sure way to end up in the shred pile. All the important, relevant and decision influencing information must be clearly included in the investor pitch deck and business plan.
Financial people who look through the information are trained in a certain way. They go through schooling and education that teaches them to read and see information based on key metrics and points. Including those points and presenting them in a format that they understand will tell them the whole picture quickly and easily. If your financials are not presented in standardized format that they are able to read and understand quickly, then your project – no matter how good it is – will get the “reject” stamp.
2. Have a strong business plan
What do investors look for in a business plan? This is essential to understand. Guessing what they think is not a sure road to success. This is the complete roadmap and blueprint of your business. It must include a solid development and operations strategy, market study and marketing strategy, risk management, investment offering, exit strategy and other essential items needed for your business to succeed.
3. Be clear on strategy and competitive edge
How well did you think through and outline your strategy? It matters. They expect you to think through everything and think like an expert because of solid research even if you are new to this. A lot of business plans do not make sure that they outline their business and marketing strategy in full. This in turn shows investors that you have not thought through critical elements and they will pass.
4. Include all important company information
If you are an operating business or project, let the investors know. This will give you more credibility than startups. Investors will feel more comfortable with projects and businesses that have been operating for several years, as you know the ups, downs, risks and you already have hands-on experience in the sector. Even if you are not yet earning net income, having your operations or some of your operations set up is an advantage. With an operating business, projections and valuation can be done more accurately than a startup. Use that leverage to get their attention to pass through to the next round.
5. Do not undervalue your management team
Many would not think this is important as important as the business idea. But to a lot of investors this is very important, especially to Venture Capitalists. Venture Capitalists pay a great deal of attention to the management team, their experience and personality. Some Venture Capitalists will even admit that they have given money to entrepreneurs rather than to the business idea, because they knew that the entrepreneur would make it work. Attaching professionally laid out and curated CVs to business plans is highly important. Do not underestimate the human resource aspect.
6. Know the investor, valuation and scalability of your business
Knowing which investor to approach is very important to your chances of success. If your business can only be set up in one place and does not have scalability potential, then you might not approach certain investors. If your project, technology or business is subject to scalability to other countries, regions, markets this is important to mention in your business plan.
A lot of businesses assume they know the valuation of their business. Valuation in financial terms is more complex than one might think. Having a business valuation done by a certified 3rd party brings credibility, comfort and seriousness to your project as well as an advantage for your project or business in that you know your business valuation.
7. Really consider what documents do you need
Essentially it comes down to two pieces of material:
- Investor Pitch Deck: this is a presentation on roughly a 10-page slide. This is the first communication you would send to an investor, so they can scan through and see whether they are interested in reading your business plan.
- Business plan: this an in-depth document that will outline your history, vision/mission, strategy, market and marketing strategy, investment section, how the funds will be used and exit plan, management team, valuation and financial projections.
Do not be unprepared. Know these documents inside and out and make sure they convey the message that you want to convey.
8. Know the steps of capital raising
The basic and process is the following, of course this varies from investor to investor:
- Step 1: Investors receive your investor pitch deck and your business plan.
- Step 2: Trained staff member reviews the investor pitch.
- Step 3: If the pitch piques their interest, they take a look at your business plan.
- Step 4: If staff sees what they are looking for, staff member takes notes and marks up your business plan to prepare it for the investor.
- Step 5: The investor reviews the business plan presented by the staff member along with any notes from the staff member, as the staff member knows exactly what this investor is looking for.
- Step 6: A decision is made to invest or not to invest.
The “take aways”
Too many people seeking investment are not prepared properly and their materials are not investment ready – do not be one of them.
Showing investors that you have done your homework through how you present information for their review will make you stand out.
Any perceived weakness in your plan can derail your efforts and you may not get a second chance, especially with these investors. When it comes to preparing your financials, it is best to have an expert do them for you. With their financial expertise, they cannot only assure that everything is accurate, but also they know to the letter how to lay it out in the most standardized and easy to understand way.
The cost of having a professional consultant do your financials should not be considered as an expense, but an investment into your success.
Maximpact.com offers investment-ready services that fits all budgets.
Business Plan Writing Service
You can have your business plan written from scratch, update it or get it completed by an expert consultant. The business plan service includes financial projections.
Funding Assessment – Are you investor ready?
If you have a business plan already written, then before approaching investors have it reviewed to by a funding assessment expert to verify that you are investor ready.
Business Valuation – Certified Business Valuations
Do you have a 3rd party project / business / startup valuation done? If not, it is advisable to have it done. You have an option of 3 different levels of depth: