Over the course of the last three years, more than 20,000 companies have attempted to raise capital or sell their business on Axial. The process brings its own set of challenges and we’ve found that a few quick tips can often help entrepreneurs increase their likelihood of successfully raising capital. To help you raise money to grow your business, here are our 9 tips for successfully raising capital:
Know Your Options
One of the biggest keys to raising capital, and especially to raising enough capital, is understanding your options. The size and stage of your company will determine which types of capital are most appropriate and who would be willing to provide the capital.
For example, if you’re starting a new bakery in town, your local bank, your 401k and your family and friends are often good sources of capital. On the other hand, if you run a well-established manufacturer with significant revenues and a long history of profit, you will be likely to get interest from larger commercial banks, mezzanine lenders, and private equity groups interested in taking a minority stake in your business.
Raising the right kind of capital for your objectives can help you get to your targets quicker, bring on the partners you need and retain the ownership percentage that you desire.
Have Clear Goals
If you’re going to raise money for your business, it’s critical that you understand the amount you need and the goals you will achieve with the infusion of capital. Being able to clearly articulate your growth objectives, how the money will be used, the types of partners you’re seeking, and the history of your business is critical to finding the right investors. Not only will the clarity help you decide which investors are a better match for your company, it will help you better understand which types of capital best fit your needs. Raising venture capital can be worth the equity you give up if you’re running a high-growth tech company, but may not be worth it if your business grows more slowly and organically.
Raise More Capital Than You Think You Need
Entrepreneurs tend to be rather optimistic. We’ll always hit our projections – easily no less. Unfortunately, the world doesn’t always bend to our whims or our will. Sometimes macro events like the Great Recession happen. Other times events closer to home, like the loss of a big client, a mistake on the manufacturing line or a mistimed press release affect our businesses. No matter the reason, projections are rarely hit as easily as we expect. By raising a little bit more capital than you had originally projected, you can build in a buffer so your company has a second shot after an unexpected event. Businesses most often close because they run out of cash, not because they can’t make sales.
Start the Process Immediately
Another facet of being optimistic is that business owners often underestimate the amount of time it takes to close a deal. Industry estimates put the average time to close for big deals at between 9 months and a year. If you need capital in 90 days to make payroll, you could already be in trouble and might be forced into options that are less than ideal. Harvey Mackay, of the MackayMitchell Envelope Company, always used to advise people to “dig your well before you’re thirsty.” The adage is perfect here as you should have a full range of relationships with capital providers well in advance of needing to raise funds, either for growth or to keep your company alive.
Check the Legal Issues
Entrepreneurs raising capital can run into legal trouble in a number of areas, but many of the issues can be mitigated by covering these three areas:
- First, when raising capital from friends and family, ensure that you’re only raising capital from accredited investors. It may be hard to determine if a friend is accredited or not, but you could end up in significant trouble down the line if your investors aren’t all up to snuff. The only current exception – from the recent JOBS Act – is if you do a fundraising through a crowdfunding site, but that type of capital has its own issues.
- Second, when your raising capital from accredited investors or professional firms, understanding how the deal is structured is critical. You can do everything according to the book legally, but if you structure the ownership or terms of the capital incorrectly you could end up owning significantly less of the company than you expected.
- Third, use a good securities lawyer who has helped write the documents for the type of capital you’re raising. Your neighbor who is a civil attorney might be able to legally write the documents for you, but he won’t be able to help you understand what different terms are common or uncommon in a contract. The best way to stay legal and get a good deal is to work with someone who has done it before.
Understand the Market for Your Business
The terms you’re going to be able to get in a capital raise are going to be highly dependent on the type of business you run, how other similar businesses are being valued, and how much interest there is in your industry. Today consumer technology startups are really popular – pushing up the valuations of companies like SnapChat, with no revenue, into the billions- while profitable businesses like managed care providers are worth significantly less.
Having a clear understanding of your current market and recent transactions will help you decide if the offers you receive are good or not. The best way to learn about your industry from a transaction perspective is to have conversations with a few different investment banks, comparing what they say about your chances in the market.
As any good buyer or seller knows, creating competition in the market for a good raises its price. Your goal when raising capital is to make your company a sought after commodity that multiple parties want as an investment. By coordinating different investors’ interest levels and driving them towards a close at around the same time, you can significantly increase the value of your business or create much better terms for your capital raise.
One of the biggest values that a banker or advisor does for you is to coordinate the process of developing competition among the right firms for you. By focusing on developing the conversations while you continue to run your business, a banker can help you get better terms and can ensure that you’re raising capital from the parties that will be the best fit for your business.
Determine the Impact on Your Capitalization Table
Different types of capital will end up affecting your bottom line and ownership over both the long and short terms. By understanding the implications of the options you have available, you’ll be better informed to make the right decision for your ultimate goals. Sometimes that means giving away equity in exchange for capital, other times you’ll choose to take on debt to finance future growth.
For example, a revolving line of credit from the bank gives you access to smaller chunks of higher interest capital to use as working capital, bridging the gap between sales and accounts receivables. The charge is interest, but you retain full ownership of the business unless you default on your loans. On the other hand, raising capital from a venture capital firm implies that you’re going to hire aggressively, grow quickly and sell your business, or go public, in the next 3-5 years. While you won’t have to pay back the money you raise from a VC, you will have to give up ownership in the business which can be much more costly in the long run. Then again, if your business is a risky startup, VCs may be the only capital providers willing to invest. Understanding the implications of the capital you raise is critical to making the right decision for your situation.
Beware of Deal Fatigue
You can do everything right, but still run into trouble down the line due to deal fatigue. This crops up in a number of ways, for both you and your team as well as for the capital providers.
Deals tend to be distracting. They suck up your time, the time of your board and often the time of your executive team. The deal is exciting when it first gets started, but by the time the fifth capital provider is combing through your books and doing due diligence, many people are going to be tired of the process. With many larger deals taking up to a year or more to close, the process can wear on the entire team. Be aware of how the process affects everyone on the team and protect them as long as you can from the distraction of a capital raise.
Also, be aware of how a long cycle can affect the capital providers. On occasion, you can string one provider along in order to get another into the mix to create competition. But, in that process you have to be careful not to wear out the first group.
Raising capital is an interesting and tricky process. Doing it right can help your business grow in order to hit the objectives you’ve set. Doing it wrong can result in a whole mess of problems or a failed business, so working with the right advisors is critical.
What experiences have you had raising capital?