For a start-up company, landing that first check from an investor is a milestone.
What many start-ups don’t realize is that the seed capital they raise – often from friends and family – is just the first step in a fundraising journey that can drag on for months or even years.
Here are some of the lessons learned along the way:
• Don’t expect to raise all the money at once. While the purpose of a business plan is to show investors your company’s true potential, but don’t fold your cards if you can’t raise the money you need to execute your entire plan right away.
• Be prepared to give investors more. Even in good times, investors in early-stage companies expect to be compensated for the risk that your company might fail and they’ll walk away with nothing but a write-off. With early-stage capital in short supply, start-ups need to be ready to give away a larger chunk of their company than they might have when times were flush and to pay higher interest on the money that they borrow. As an example a company raised $800,000 in convertible debt at 12% interest in 2008. After the market crashed, they raised another $600,000 but at 15% interest in April 2009. The new note will convert to equity upon a $5 million capital raise.
• Adapt your business plan to the funds available. If you wait to fund your entire plan before starting operations, you may never get your company off the ground. At the same time, you may need to scale back your plans if you decide to start your company with less. Reformulate the business plan in a way that will allow you to execute on a reduced scale.
• Be ready to survive on a shoe-string. Many entrepreneurs think that, once they raise capital from investors, the pressure is off and they can get back to running their company. The truth is that you’ve got to keep a laser focus on expenses – especially if your company is burning cash and you don’t know where the next check is going to come from. When you raise money in pieces rather than all at once, you have to stretch the money as far as possible, particularly tricky is managing your payables to keep your suppliers current while waiting for payments from your customers.
• Be honest with your investors. Whether your investors are friends, family, angels or VCs, nobody wants to be kept in the dark. It’s better to break the bad news about money concerns, such as missed revenue projections or cash-flow gaps, before there’s nothing left in your company’s bank account. Communicate!
With the market for small-business capital still tight and the recovery lackluster at best, start-ups looking for capital would be wise to take a page from the Score playbook. Raise money when you can, be prepared to pay a premium for your capital and scale back your plans if necessary, but do whatever it takes to get your business up and running and your product out the door.
For Help preparing Private Placement Memorandums or Angel/VC investment presentations contact SCORE.
Tags: Business Capital, Business Funding. Private Placement, investors, VC
