It takes money to raise money. This means designing a budget to raise
money. While every exuberant entrepreneur believes that skilled
professionals will line up to work on commission for the privilege of
being associated with his or her venture, good help willing to
work on commission is hard to find. (If you do find someone though, treat
them like gold. After all, that's what they represent.)
Many entrepreneurs exhaust their resources developing their product and
spending money on attorneys and consultants in pursuit of venture documents.
Money needs to be set aside to raise capital too.
Entrepreneurs commit a common error in using all their money for product
development and for documentation, leaving no money to raise money.
Estimates indicate that $10 million is required to get .5 percent of the mind
of the U.S. market. Similarly, you will need financial resources to gain the
consciousness of the affluent, high-risk investors market.
So develop a budget, detailing the anticipated up-front costs
of raising money, and a realistic schedule allowing six to nine months
to close the transaction. Remember to include these costs in your
project expenditure forecasts.
Running out of money before raising capital, or setting up unreasonable,
overly optimistic funding schedules will create an atmosphere of desperation,
that will accompany you like a shadow in your discussions with financiers and
work against your financing goals.
For the entrepreneur new to raising capital, costs can be shocking. While
raising private capital is less expensive than going to the public marketplace
there are still substantial costs. Interestingly, no direct correlation exists
between money spent and money raised. Some entrepreneurs may spend $25,000 to
raise $5 million, while others will need to spend $125,000 to raise the same
amount.
Be sure to cover start-up costs, budget 5 to 8 percent of the
amount to be raised in your capitalization program, figuring that
during the first few months costs will outstrip financing raised.
Then budget an additional 6 to 12 percent to cover the back
end fees. As any seasoned capital development professional knows, it
costs money to raise money. It is "excessive optimism" to operate on a
tattered shoestring when a small investment can help you achieve your
capitalization goal.
Typical expenses to raise capital
- Development of a financing strategy
- Business plan, financing proposal
- Financial projections
- Legal documents
- Investment banking fees
- Brokerage fees
- Due Diligence
- Credit enhancement
- Offering fees
- Anticipate Due Diligence Costs
DUE DILIGENCE:
Typically, the financiers and/or agents such as attorneys, accountants, or
private investigators perform due diligence in these cases. These are
typically sophisticated and experienced business people who will evaluate not
only the venture but also the entrepreneur and business and personal
background. Due diligence is best approached with full disclosure by the
entrepreneur.
Good luck in your pursuit of your Financing Goals!
TOP!
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Twelve Key Steps to get Going
...this information was supplied by a listing sponsor, based on his past experiences on how venture project financing should be approached
by the the project principal.
"...Time after time we run across businesses that just have not done their homework
before presenting their case to potential financiers. Here are twelve things that
need to be address special in developing.
- Management
-
The financier wants to see a complete team, functioning in each
critical area, with sufficient experience to indicate competence.
Ideally the team has worked together before, hopefully succeeding,
though failure is not absolute cause for injection. They must
display integrity and exhibit "fire in the belly" commonly knows as
drive. The most common failing is lack of quality CEO. Many
entrepreneurs think that coming up with an idea for a product or service is
qualification for being CEO, but financiers don't see any correlation between the two.
- Focus
- Financiers consider whether the team is focusing on a single project
or a number of projects. I once visited a company that had six
separate and unrelated projects taking place. The focus in
management team was so diffused that we felt it virtually impossible
to ever bring anything to fruition. On the other hand, financiers may
feel uncomfortable with a one-project company if that product
result shows no sign of lending to subsequent generation of other
products.
- Practical Technology or Product
-
The company must demonstrate the practicality of turning its
technology into product that is need by people who will recognise
the need and pay to have it satisfied. We're looking for some middle
ground here. The technology should enjoy some degree of protection
from copying by competitors. Is it a need or a want? A need is only
to satisfied your self. A want is a requirement for people to buy.
- Market Analysis
-
Ideally, the market is big enough to result in an acceptable return
for financiers, but small enough to be defined and addressed.
Investor is interested in growth of the company and must have a
growth to satisfy the investment.
- Customer Identification
-
A fundamental question is whether the decision to buy your product
or service will require a substantial change in customer behaviour,
which would significantly stretch the sales cycle. It is possible to
create a product of great benefit for a specific client base that is
unwilling to use it.
- Competition
-
Having 2 or 3 competitors may help educate the market, but few
financiers will want to go up against companies with well established
installed bases even if you have a superior product or technology.
Think of all spreadsheets packages that competed against Lotus, many
were arguably better, but only one, Excel, was not overwhelmed.
- Realistic Projections
-
Many budding entrepreneurs fail to actually look at their
proposition from the financiers' point of view. The financiers will
take the following approach. If I put X amount of dollars in today
under the following assumption, will I end up with 10 times the
dollars at a certain period in the future? The projections need to
show that a tremendous return is possible, to compensation for the
risk, yet the projections need to be based on number that are
realistic. Historical data should be used if available.
- Vision
-
Every individual thinks in his own frame, but somebody on the
management team has to have a long-term view. Usually CEOs are the
visionaries, but if they aren't, somebody else has to be.
- Risk Calculation
-
Don't gloss over what could go wrong and what is likely to go wrong.
You can't eliminate risk, but you can mitigate it. Addressing risk
demonstrates the quality of your thought process. Do not leave the
risk to the imagination of the investor. Cover these criteria in
your business plan.
- Exit Strategy
-
Many people think of going public as the exit, but not every one can
do it. Companies without IPOs (Initial Public Offering, "flotation",
"going public", "stock market".) may still be sound projects, but
you have to think about alternative exits, such as management buy-out or
being acquired by another company. Venture Capitalists dread
ending up with a "living dead company" that lack the pizzazz for an
IPO. Venture Capitalists want out at a specific time with a healthy
return on investment. This can come from an IPO or management buy
out or the company buying their stock.
- Referrals
-
The most important bit of entrepreneurial homework is identifying
who finances your particular field. The financial community can be
of great help in determining the viability of your case and the
possibility of achieving the funding you are looking for. Financial
Brokers can recommend certain companies that either fund venture
capital needs or who have programs or contacts that produce the
funding. Referrals are important because Venture Capitalists prefer
certain industries or services or products to fund.
- Trust
-
Every year we see companies who want the financier to sign a
confidentiality agreement before they discussions.
A sure sign of a naive, first time entrepreneur who thinks the
financiers are going to try and steal their idea. Most financiers
won't sign these agreement.
Do your homework, don't put proprietary information in your EXEC Summary;
prepare two business plans (if necessary), one for the business activity and a second to contain the technical,
or proprietary information. You can release the confidential plan once you have a level of trust in the financier representative and have
conducted your Due Diligence reviews.
When you know whom you
should approach, what they want and how you should proceed,
then you won't have to wonder why they don't call back.
Major questions:
-
Have you Management?
Have you Focus?
Have you Practical Technology or Product?
Have you Market Analysis?
Have you Customer Identification?
Have you Competition been Identified?
Have you Realistic Projections?
Have you Vision?
Have you Risk Calculation?
Have you Exit Strategy?
Have you Referrals?
Have you Trust?
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