Searching for Capital
Searching for capital is a very different kind of activity compared to other management functions. It requires sales skill, financial acumen, intuition, and the ability to organize complex tasks–all at the same time. Most entrepreneurs are not prepared for how difficult and time-consuming the money raising process can be. Statistics are constantly floated in the business press about all the billions of dollars of capital, somewhere between $30 to $40 billion that are available for investment each year–“Then why is it so hard for me to just get my $100,000?,” the small business owner asks sadly.
As we move from a manufacturing-based economy to an information-based one, the problem of finding capital for small business becomes more acute. Small businesses are now responsible for much of the job creation and growth in the economy–and are starving for capital–but the capital markets in the country have always been geared toward the needs of mid-sized and larger businesses. Banks and other traditional lenders that are accustomed to providing loans to finance the purchase of hard assets–equipment, machinery, buildings–are not prepared to loan money to companies whose primary assets are intellectual property. But information-based companies require large amounts of marketing dollars to get their message heard by their customers as competition in their industry intensifies.
The fact is much of the time spent looking for capital ends up being wasted time. The entrepreneur is not prepared to make a good impression on the investor nor prepared for the steps it takes to close the transaction. Entrepreneurs often contact investors who have investment parameters or investment interests that the entrepreneur’s company does not closely match. Some entrepreneurs spin their wheels for months, even years, trying to find sources of capital and then give up, concluding there really isn’t any capital out there.
But there is! The secret is in how you go about finding the investors and what you do with them once they are found.
Entrepreneurs who are successful at money raising have a mastery of these three factors:
Preparation means getting your company ready to be “shown off” to a potential investor or lender, preparing the business plan and other materials that are needed to introduce your company in a professional manner, and preparing for the negotiations themselves.
Positioning means understanding that there are thousands upon thousands of sources of capital in the US today. Sources that run the gamut in terms of amount they are capable of investing, what types of companies they are interested in, what criteria they use to evaluate deals, and what form of investment they prefer to make (debt or equity, minority or majority share). A successful capital search requires determining which sub-group out of this vast universe of investors best fits the type of company you have, and concentrating your efforts on this group.
A classic mistake many entrepreneurs continue to make is to pursue the 500 or so large venture capital firms in the US, when fully 90% of the venture capital that actually goes into companies comes from the hundreds of thousands private or “angel” investors. These wealthy individuals are looking for the chance to earn a greater return than they could in the stock market, combined with the excitement of owning a significant part of a growing enterprise. Why the mistake? One reason is that it is easy to get a directory of these Venture Capital firms and write or call them, but the “angels” are not organized into easily accessible groups. Finding the angels requires a significant networking effort.
Perseverance simply means a willingness to invest the time and energy to get the job done. Entrepreneurs invariably think the process of finding capital will take substantially less time than it turns out to. They underestimate how much of their time needs to be devoted to all the steps in the process from preparing a business plan to present to investors, to closing the deal and depositing the check(s). Part of the frustration entrepreneurs feel when they are seeking capital comes from their own underestimation or unawareness of all that is entailed in closing a transaction.
Acquisition of capital is as much a part of the management of a company as producing or selling products and services. It is an ongoing function throughout the life of the business, and the sources of capital that are most suitable, and cost-effective, for a business change as the business grows and evolves.
The purpose of The Quest For Capital is to give the entrepreneur a down-to-earth road map through the capital raising trail, with easy-to-use tools to improve their chances for success, based on the actual experiences of our clients over the years. We believe in using a strategic approach to finding capital–mapping out your strategy to attract investors in exactly the same way you would map out a strategy for penetrating a new market, or taking customers away from a competitor.
With this strategic approach, you determine the profile of the type of investor you want and then go out and find people or firms who resemble that profile–the same method you were taught in marketing courses in college. You have already determined how much capital you need and for what purposes. You have a good idea of the terms you are looking for from an investor or lender. You are ready to present yourself to the investor as an experienced business person capable of building a large company. You know what questions they are likely to ask and are prepared to answer them.
The Most Basic of Questions Before Your Quest Begins
Before you embark on the trail of investors, you need to soberly and objectively answer this question: “Would anyone want to invest in or lend money to my company?”
Another way of asking this same questions is, “Will my business ever be valuable enough to generate a reasonable rate of return for investors?”
For a small but significant percentage of companies, the answer to this question is, unfortunately, no. The growth potential of the company may be ordinary. It may never generate enough cash flow to do anything more than pay the owners’ salaries. Perhaps it is a business with razor-thin margins, that goes along nicely but is never a major success story.
This soul searching is not something many entrepreneurs want to do. Optimistic by nature, they believe that, if they only had a little more capital, they could double the size of the business. If they do manage to double it what would it be worth at that point? Who would want to buy it so the investors could exit with the 20% to 50% return they are seeking.
Hopefully you can answer this question with a confident, resounding, YES! (But you have to ask it).
The Quest For Capital is also a “do-it-yourself” guide intended for entrepreneurs who want to manage the process of finding capital themselves rather than turn it over to an intermediary. A small business owner’s weariness with the lengthy series of steps required to find investors, sometimes leads them to turn the job over to a “money broker” or “finder” which may or may not do any good because it is quite difficult to evaluate the competence of these individuals. We recommend that business owners stay deeply involved in the process. You wouldn’t think of turning over your marketing to an independent contractor you don’t talk to for weeks at a time, but that is precisely what many companies do with the critical function of finding capital for their business. This does not mean the entrepreneurs is alone in the negotiations–we recommend that he or she consult with advisors and business associates as the transaction proceeds. But it does mean that the entrepreneur has well-defined strategies and executes those strategies with the help of others, but always stays in control of the project.
The good news is that there has never been a time when funding for ventures was so plentiful, and much more attention is being given by the business press, governmental agencies, and business trade organizations to capital formation for small and early stage companies. The process is slowly becoming more organized, with formal organizations devoted to putting investors together with companies in need of capital, and venture capital conferences being sponsored for the same purpose.
The bad news is that there are always more good ideas than there are means of funding those ideas. Americans are habitual inventors, tinkerers and creators. Our economy is once again the envy of the world not because of our industrial titans or our billionaires, but because of the millions of small ideas that have been turned into large companies in the last twenty years, and will continue to do so in the next twenty. Your challenge, in competition for capital against all the other great ideas and dynamic small businesses, is to get your business plan moved, as if by magic, to the top of the stack on the investor’s desk. This guide was created to show you that there really isn’t any magic to it at all.