Published on julio 9th, 2009 | by admin0
The ABCs of Raising Money.
Raising money for a startup company or small business is never easy, and in the credit-crunch era, it’s especially challenging. Since we’re starting a new round of fundraising to finance the expansion of NewWest.Net, I’ve been thinking a lot about this topic, and I’ve got a few tips to share.
In the technology and Internet businesses especially, when people think of raising money, they generally think of venture capitalists. But even though there are many hundreds of venture-capital firms with many billions of dollars at their disposal, the types of companies that interest VCs represent a tiny minority of all new businesses, and they have to fit a few very specific criteria.
Most importantly, there has to be the promise of a huge payoff in the event of success—at least 10 times the initial investment (which itself generally has to be north of $1 million for it to be worth a VC’s trouble) in a five-to-seven-year time frame. This, in turn, requires two things: a «scalable» business model and an exit strategy.
The first means that you can take your initial concept and make it huge, either by reaching a single, very large global market (e.g., Facebook or Twitter) or by replicating a proven model in many different markets (e.g., Whole Foods (WFMI) or Yelp). The second means that you have a plan for how the investors are going to get their money back.
Most smart entrepreneurs can spin a story about scalability, but I’d think twice before going down this road. Conquering the world is a tough business, and once you raise money on that promise, you no longer have the choice of remaining more modest in your ambitions (and maybe more realistic about your company’s potential).
The exit strategy also poses an odd paradox. There are really only two types of exits for a venture-backed company: an initial public stock offering or a sale/merger. IPOs are tough to pull off even in the best of times, and at present, they are almost impossible: Only a handful of companies have managed it over the last 18 months. That leaves a sale—but if you say upfront you’re starting the company in order to sell it, your religious commitment to the venture could be in question.
Currently, the VC business is in a funk due to the bad exit environment and general economic uncertainty. So unless you have at least one successful startup under your belt or you’ve really, truly built a better mousetrap, I wouldn’t spend a lot of time on this option.
Angel investors, who have been the source of NewWest.Net’s funding, are far more diverse in their interests and motivations. Friends and family—that proverbial rich uncle—are a good place to start, but you’ll be much better off if you can find some other sources as well.
Former colleagues or mentors can often be excellent prospects; good angels are usually invested in you as much as in your business plan. I’ve also found that angels are very sensitive to who else is a part of the deal, so if you can get one person with a good reputation to sign on, it will be a much easier road from there. A pretty common level of commitment for an experienced angel investor is $25,000 to $50,000, though some angels will do as much as several hundred thousand.
I’ve always been a little skeptical of the many angel investor clubs out there; they often put you through a lot of hoops and are looking for VC-type deal dynamics even though they’re putting up far less money. Some even make you pay money to apply for funding, which I don’t think is appropriate. In my view, angel investments are really about your personal relationships, for better or for worse.
If you’re raising money to buy hard assets, conventional business loans can be a good way to go. Banks might be reluctant to lend to small businesses, but it’s amazing how fast that reluctance goes away if there is collateral. Equipment purchases, and things like liquor licenses, are often fairly easy to finance, though, of course, pay close attention to the terms.
In the absence of hard assets—my company, and most Internet companies, are great examples of businesses that lack such assets—it’s a different story. If you have good personal credit, banks and credit card companies will usually front you some money if you personally co-sign, though as I’ve written before, that can be a devil’s bargain.
If you have equity in your house, the Small Business Administration will often underwrite a loan but also with that personal guarantee. A new SBA program established as part of the economic recovery package is only now getting going, and it’s not yet clear for whom it will be truly useful.
State and local business development organizations often have loan programs designed for businesses that don’t qualify for bank or SBA loans. But they often have narrow economic development criteria as well and sometimes will not consider companies that already have meaningful equity invested in them. I’d do a lot of homework before launching into a process that can be heavy on the paperwork and light on the ultimate dollars.
No matter what routes you pursue, I can promise that fundraising will be much more time-consuming than you anticipate, and, in fact, this should figure into whether you undertake fundraising at all. Time spent soliciting money is time not spent building the business. If you definitely need the money, be as targeted as you can in your approach. It’s always easy to find people who want to kick the tires, but finding people to write checks is, almost by definition, one of the toughest things in business.
By jonathan.weber – The Big Money