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Monday, August 28, 2006

Raising Capital for the start up

Raising Capital

Frustration is word to describe the experiences of thousands of entrepreneurs across the world who have tried to raise money for their businesses. Why are so many entrepreneurs having such negative experiences when they attempt to raise money for their businesses? It is not for lack of commitment from the entrepreneur and it most certainly is not for a lack of innovative ideas!

So, why is there so much frustration with raising money ? There are so many reasons that we would have no trouble writing a novel on the subject. We would start with "bank bashing" because that is a favourite among us high-tech entrepreneurs. Banks are financial demonic institutions that suck our money through service fees and only lend when we really don't need the money. Right? We could then move to the Govt. Sponsored Funds who constantly, year after year, fail to invest hundreds of millions of dollars because they can't find the "right" deals. Then there are the Venture Capital firms that don't return phone calls and never tell the poor entrepreneur the real reasons why they won't invest in his opportunity. And what about the ubiquitous angels that everyone talks about? Who are they? Where are they? Do they really exist? The final chapter of the novel would state that there is just no money for Investment for early stage technology businesses.

These negative comments all stem from a horde of experiences from the business community, and while the overall frustrations are quite justified, the statements are for the most part erroneous. Such pessimism is largely due to a lack of entrepreneurs' understanding of the investment community, thebanking business and ultimately, how to raise money in an imperfect system.

As a former owner/operator of a business, I suffered from this malady. I despised the banks, berating them for their risk aversion and their unwillingness to get on the technology investment bandwagon. I had little knowledge of the workings of the investment community or the banks. At the time I decided to raise money, I could not tell you the difference between a Labour Sponsored Fund or a Venture Capital company. I had no concept of what a convertible debenture was, nor did I know the difference between a Reverse Takeover (RTO) and an Initial Public Offering (IPO). Whether I am wiser as a result of my experiences may be debatable, but I am most certainly more knowledgeable.

When it comes to raising capital for our own businesses, too many of us just don't take the endeavour as seriously as we should. We are largely unprepared, uneducated and have unrealistic expectations. And, we think we can do it all ourselves.

Raising capital for a business requires an intense amount of preparation. Similarly, you need a business plan and a strategy to reach the objective and to reach the right investors. Assuming you are an expert in your current business and not in the raising of capital, you might be well advised to get a guide, also called a financial intermediary. If, however, you are unconvinced or adventuresome, do yourself a favour by conducting the necessary research first!

For starters, how many of you could name five venture capital companies ? Five and you are doing good, Assuming you can do this, can you now name any two of the companies in which they have invested? Now, do you know why they chose to invest in those specific companies? These are just some of the questions that you need to answer.

What type of financings are available and what type of financing could I use?

Just about everyone assumes that they need equity capital. This may or may not be true. Remember when all you have is a hammer, everything looks like a nail. There are at least a dozen standard ways to finance technology-based ventures. Which options are available to your particular situation and which options should you consider will dictate whom you ultimately approach for financing.

Who is investing and in what?

We tend to lump all companies that have money to invest into the Venture Capital barrel. The truth of the matter is that there are many different investment companies, each having their own investment criteria and many specializing in specific types of transactions. For example there are companies predicated upon Labour Sponsored Funds, Venture Capital Funds, Pension Funds, Mutual Funds, Community Sponsored Funds and Limited Partnership Funds. There are specialty investment banks, investment companies that focus on mergers and acquisitions, on factoring, on export sales financing, on purchase order financing and on commercial loans. We haven't even mentioned the brokerage firms and those organizations that specialize in Reverse Takeovers and Initial Public Offerings. The bottom line here is that if you don't know who is investing in what, then you aren't going to know who to approach with your business opportunity.

What is my opportunity worth to an investor and why?

Just about all of the business owners/ operators that I have met suffer to some degree from "entrepreneurial disease". While sometimes an affectionate term and more often not, it is used by the investment community to describe the entrepreneur that suffers from delusions of grandeur with respect to his business. A basic rule adhered to here will go.a long way. In 99% of the time your business is worth more to you than it is to any prospective investor. Remember he/she probably has fifty business plans on his desk to choose from. If you appear unrealistic or unreasonable, he won't give you the time of day.

What is the "deal" that I should expect from an investor?

The smart businessperson comes to the investor with an investment proposition and not just a business plan. They know the type of financing that is required, the terms under which they are most likely to receive the financing and the most appropriate exit strategy for the investor. Armed with this information, they are less likely to enter into a deal that they might regret later and are more likely to get the deal that they want. Unfortunately, most entrepreneurs don't do this.

With the proper preparation, your time raising money for your company can be well spent with a highly successful outcome. It doesn't have to be a frustrating experience and can be very rewarding!

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