12 Insider Secrets to Raising Capital

Transcription

1 Legal Notices All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic or mechanical including recording, photocopying or by any other information storage or retrieval system, without the written consent of the publisher. This publication is sold as an educational reference only. While all attempts have been made to verify information provided in this publication, neither the author nor the Publisher assumes any responsibility for errors, omissions or contrary interpretation of the subject matter herein. 12 Insider Secrets to Raising Capital 12 Insider Secrets to Raising Capital This publication is not intended for use as a source of legal or accounting advice. The Publisher wants to stress that the information contained herein may be subject to varying state and/or local laws or regulations. All users are advised to retain competent counsel to determine what state and/or local laws or regulations may apply to the user s particular business. The purchaser or reader of this publication assumes responsibility for the use of these materials and information. The author and Publisher assume no responsibility or liability whatsoever on the behalf of any purchaser or reader of these materials. We expressly do not guarantee any results you may or may not get as a result of following our recommendations.

2 Legal Notices All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic or mechanical including recording, photocopying or by any other information storage or retrieval system, without the written consent of the publisher. This publication is sold as an educational reference only. While all attempts have been made to verify information provided in this publication, neither the author nor the Publisher assumes any responsibility for errors, omissions or contrary interpretation of the subject matter herein. This publication is not intended for use as a source of legal or accounting advice. The Publisher wants to stress that the information contained herein may be subject to varying state and/or local laws or regulations. All users are advised to retain competent counsel to determine what state and/or local laws or regulations may apply to the user s particular business. The purchaser or reader of this publication assumes responsibility for the use of these materials and information. The author and Publisher assume no responsibility or liability whatsoever on the behalf of any purchaser or reader of these materials. We expressly do not guarantee any results you may or may not get as a result of following our recommendations. Growthink s 12 Insider Secrets to Raising Capital

3 Table of Contents I. Introduction... 1 II. Types of Capital... 2 III. Insider Secrets to Raising Capital... 5 Venture Capital Secrets... 5 Insider Secret #1 Narrow Your List of Venture Capital Firms... 5 Insider Secret #2 Never Send a Business Plan... 7 Angel Capital Secrets... 9 Insider Secret #3 Find Latent Angel Investors... 9 Insider Secret #4 Actively Find Angel Investors SBA/Bank Loan Secrets Insider Secret #5 Seek out Preferred Lenders Insider Secret #6 Preparing Yourself to Get a Traditional Bank Loan Creative/Alternative Financing Secrets Insider Secret #7 Vendor Financing Insider Secret #8 Donations CAN Fund Your Business Grant Capital Secrets Insider Secret #9 Foundation Grants are NOT Available to For-Profit Businesses Insider Secret #10 The Best Place to Find Grants for Your Business Business Plan Secrets Insider Secret #11 How to Establish Credibility in Your Business Plan Insider Secret #12 Your Financial Model Must Be Incorporated Throughout Your Entire Business Plan Growthink s 12 Insider Secrets to Raising Capital

4 I. Introduction Capital, funding, or money (they all mean the same thing) is the fuel that allows businesses to grow. Without capital, businesses fail. With capital, early stage companies can begin to grow, and mature companies can achieve even greater scale. For early stage companies, particularly those with little or no track record of success, the challenge is to find the capital they need. Because the vast majority of businesses fail, banks, venture capital firms and other lenders and investors are often highly skeptical and not willing to part with their dollars unless significant conditions are met. However, there are ways to attract this kind of capital, and there are tons of capital sources that are largely overlooked by entrepreneurs This report identifies the three core sources of funding available to entrepreneurs and business owners looking to start or grow their businesses, and then presents key insider secrets for successfully raising these types of capital. Growthink s 12 Insider Secrets to Raising Capital Page 1

5 II. Types of Capital For the entrepreneur or business owner seeking to fund their company, there are three main pools of capital from which to draw: 1. Debt capital 2. Equity capital 3. Creative/alternative financing Equity capital is the term used to describe the capital that is given to a company in return for a portion of that company s stock or equity. Angel capital and venture capital are two key forms of equity capital. Conversely, debt capital is the term used to describe the capital that is given to a company in return for the company s promise to repay the capital over time with a fixed or variable interest rate. SBA loans and traditional bank loans are two key forms of debt capital. Debt capital is nearly always secured with collateral; for instance, if the business owner does not re-pay their loan, they could possibly lose their house or business equipment if they used it for collateral. Creative or alternative finance is the term used to describe nontraditional sources of capital, including capital that must be paid back, capital which requires equity to be relinquished and/or capital that is given to a company without any strings attached. There are many, many Growthink s 12 Insider Secrets to Raising Capital Page 2

6 forms of creative or alternative finance such as grants, vendor financing and donation-financing. The key differences between debt capital, equity capital and creative/alternative financing are as follows: Type of Capital Term for person or institution who provides capital Capital provider gets equity/shares of company Company accepting capital must repay loan Company accepting capital must often put up collateral Debt Lender No Yes Yes Equity Investor Yes No No Creative/ Alternative Financing Depends Sometimes (but rarely) Sometimes (but rarely) Sometimes (but rarely) Creative/alternative financing is clearly the best form of capital with regards to the fact that oftentimes no equity is issued and the financing does not have to be repaid. With regards to debt and equity capital, at first glance, it seems that equity capital is less risky to business owners. While that is true (since there is no repayment and no collateral), equity capital is typically only provided to companies meeting specific criteria (which will be discussed later). Also, with equity capital, the business owner foregoes a significant portion of the value created if/when the company reaches a liquidity event (e.g., has an initial public offering (IPO) or is sold to another business). Growthink s 12 Insider Secrets to Raising Capital Page 3

7 However, it is our experience that a small piece of a big company is better than a large piece of a small company and that if equity capital is available to your company at reasonable terms, it is often a good decision to accept it. Growthink s 12 Insider Secrets to Raising Capital Page 4

8 III. Insider Secrets to Raising Capital Venture Capital Secrets Insider Secret #1 Narrow Your List of Venture Capital Firms Venture capitalists don t just invest in whatever companies they find personally interesting. Each venture capital firm invests based on particular characteristics, including: Market Sector: Many venture capital firms focus on specific sectors such as healthcare, information technology (IT), wireless technologies, etc. In most cases, even if you have a great company, if you fall outside of the VC's sector preference, they'll pass on the opportunity. Stage preference: VCs tend to focus on different stages of ventures. For instance, some VCs prefer early stage ventures where the risk is great, but so are the potential returns. Conversely, some VCs focus on providing capital to firms to bridge capital gaps before they go public. Geographic location: Most venture capital firms only invest within 100 to 200 miles of their office(s). By investing close to home, the firms are able to more actively get involved with and add value to their portfolio companies. Growthink s 12 Insider Secrets to Raising Capital Page 5

9 Virtually all VCs have websites that make this information readily available. Find investors that are a fit with your company for all three of these areas. For instance, if you are a pre-revenue software company based in Chicago, your best bet is to find a venture capital firm within 200 miles of Chicago that has experience funding pre-revenue software companies. If you don t do this, 1) you will waste your time, and 2) you will risk overshopping your company. With regards to over-shopping, the venture capital community is fairly tight-knit. That is, most VCs know each other. They work together on deals, sit together on Boards, meet each other at conferences, etc. One risk factor that this presents is that if one investor passes on a deal, it oftentimes frightens other investors, as they start thinking if that VC passed, he/she must have found something wrong with the deal. As such, you don t want to present your company to VCs that will pass on your deal because it wasn t a fit for them, and not because your company lacks merit. Growthink s 12 Insider Secrets to Raising Capital Page 6

10 Insider Secret #2 Never Send a Business Plan Do NOT send VCs your business plan in your initial contact. You must realize that VCs are drowning in unsolicited business plans. They are NOT going to read your business plan if you send it to them in the initial . Actually, you shouldn t even send an Executive Summary or a PowerPoint in this first . So what should you say in your ? Instead of sending your business plan, give the VC teaser points about your venture. What do I mean by teaser points? Teaser points are 5 to 6 bullets (200 words or less) about your venture with the key points of it. The goal of the teaser is to: Create intrigue and excitement Show that the market size is big enough Show that the management team is unique Prove that the venture is capable of generating significant revenues over time Create a sense of urgency (e.g., implying that you will get financing within 90 days with or without them) Growthink s 12 Insider Secrets to Raising Capital Page 7

11 If the VC is interested, they will you back to request an executive summary, PowerPoint deck, or even your full business plan. In Growthink s upcoming Capital Raising Bootcamp,, we will teach you exactly how to raise venture capital for your business. Not only will we go through our proven, 7-step method for raising venture capital and growing a successful business,, but we will explain how to complete the documents venture capitalists need, how to negotiate with venture capitalists (and what to watch out for), and much, much more. Growthink s 12 Insider Secrets to Raising Capital Page 8

12 Angel Capital Secrets Insider Secret #3 Find Latent Angel Investors While the Small Business Administration and other organizations estimate the number of active angel investors in the United States to be 250,000, the number of potential angel investors is much greater. According to TNS Financial Services, there are 9.3 million households in the United States with a net worth exceeding 1 million dollars. Three million of these households, according to Merrill Lynch & Co. and Capgemini Group, have investable assets of at least $1 million, excluding their primary homes. We consider this 9.3 million figure to be the best estimate of the number of potential angel investors in the United States. The vast majority of these individuals are latent angels, defined as individuals who have the necessary net worth, but have not made an investment. These individuals are often the best potential investors in a venture since they have the funds, but aren t bombarded with potential deals (unlike angel groups and venture capitalists who are constantly bombarded). Growthink s 12 Insider Secrets to Raising Capital Page 9

13 Insider Secret #4 Actively Find Angel Investors Angel investors are not going to find you. You have to find them. One great way to find angels is through active networking. Networking (e.g., attending events, constantly expanding your network by asking for more introductions from your existing contacts) works extremely well, but does take time and diligence - so you must stick with it. Here s a quick lesson regarding how Google raised its angel round of capital. Founder's Larry Page and Sergey Brin told their ideas to others in hopes that they would get great advice and connections. And sure enough, it worked. Page and Brin discussed their concept with their computer science professor David R. Cheriton. Cheriton then introduced them to his friend Andy Bechtolsheim. Bechtolsheim then wrote Google a check for $100,000. You can also find angel investors through focused prospecting. For example, understanding that many angel investors are retired executives, you can find them by doing via searches on Google. For example if you were seeking angel investors for an aviation company, doing Google searches on retired Boeing executive and former Boeing executive will produce names of potential angels. Growthink s 12 Insider Secrets to Raising Capital Page 10

14 Likewise, you can find the names of executives and Board members of local companies, contact them and see if they are interested in investing in your company. In Growthink s upcoming Capital Raising Bootcamp, we will take you through the entire process of raising angel capital; from understanding exactly how to find angel investors, to presenting your company to them like a pro, to structuring the deal terms so the angel funding hits your bank account without delay. Growthink s 12 Insider Secrets to Raising Capital Page 11

15 SBA/Bank Loan Secrets Insider Secret #5 Seek out Preferred Lenders The United States government WANTS you to succeed. And as a result, they lend money to entrepreneurs and small business owners through its Small Business Administration (SBA). If you are seeking an SBA loan, seek out Preferred Lenders. While Preferred Lenders comprise only 2% of SBA lenders, they make 20% of total SBA loans. Preferred Lenders have received special designation from the SBA as being the most successful lenders. With this designation, they are allowed to make their own decisions regarding whom to loan money to, without consulting the SBA first. This means that their loan processing times are the shortest and you can get your money sooner. In fact, Preferred Lenders can often write you a funding check within 24 to 48 hours! Growthink s 12 Insider Secrets to Raising Capital Page 12

16 Insider Secret #6 Preparing Yourself to Get a Traditional Bank Loan Traditional bank loans have very low interest rates and are often perfect for entrepreneurs and business owners. The challenge is getting these loans. One insider tip for getting these loans is to establishing a history with your bank before you really need the loan. Banks (like equity investors) like to invest in business owners with which they have a pre-existing relationship. This relationship breeds trust and confidence that the business owner will spend their money wisely. As such, it s a good idea to establish a credit history with your bank six to twelve months BEFORE you need the loan. Even if you simply take out a $5,000 loan and show that you are able to make payments each month for a year, your business will be more likely to receive the larger loan you seek later. In Growthink s upcoming Capital Raising Bootcamp, we will walk you through the process and allow you to quickly and easily raise SBA and bank loans for your business. We will teach you about all of the types of bank and SBA loans that are available for your business, how to choose the right one, and a step-by by-step process for quickly and easily securing a loan for your business. Growthink s 12 Insider Secrets to Raising Capital Page 13

17 Creative/Alternative Financing Secrets Insider Secret #7 Vendor Financing Vendor financing is often a great, yet highly under-utilized, source of business funding. As the name implies, vendor financing occurs when a company receives funding from one of its vendors or suppliers. Vendor financing is actually one of the most popular forms of debt financing for companies. Vendor debt financing is often known as trade credit, and is when a vendor sells you a product or service and you don t have to pay right away, but rather the debt either needs to be paid in full within a certain period or periodic payments with interest are required. However, sometimes vendors provide both interest-free or equity-based financing for the following reasons: To gain a built-in customer base. By funding your business, you will buy more, and they will sell more, (now or in the future) of their products and/or services. Loyalty: you will be more loyal to the vendor. Learning/market research: the vendor will have you as a closer customer and will learn ways from you to improve their products and services. Equity upside, if they make an equity investment and your company has a significant liquidity event in the future. Growthink s 12 Insider Secrets to Raising Capital Page 14

18 One famous example of vendor financing is that early on, shoe maker Kenneth Cole sought out a struggling Italian shoe manufacturer knowing that they needed clients and would probably be wiling to offer financing. The Italian shoe manufacturer funded the then fledgling company. Growthink s 12 Insider Secrets to Raising Capital Page 15

19 Insider Secret #8 Donations CAN Fund Your Business Believe it or not, donations have been used to fund many companies including for-profit ventures. The most notable of donation-funded ventures is perhaps Wikipedia which has raised several million dollars in donations to date. In the for-profit space, an example of donation-funded is Peter Cooper, founder of FeedDigest. In 2004, Cooper added a PayPal button to his website and asked users of his website to donate money. His visitors subsequently donated enough money to allow him to grow. Soon after, an angel investor wrote him a check for $100,000. In Growthink s upcoming Capital Raising Bootcamp, we will reveal to you 28 proven, but largely unknown and unused, creative and alternative financing strategies to fund your startup or growing business. We will identify and explain each of these methods and provide, as appropriate, stories of companies who have successfully raised funding from each source. Growthink s 12 Insider Secrets to Raising Capital Page 16

20 Grant Capital Secrets Insider Secret #9 Foundation Grants are NOT Available to For-Profit Businesses There are many private and public foundations and philanthropy programs for funding projects that improve quality of life, or allow people to work towards achieving goals they would otherwise not be able to pursue without assistance. However, with few exceptions, the grants offered by private or public foundations are NOT available to for-profit businesses. So, do NOT waste your time looking at these grants. However, the U.S. government, along with state, and local governments DO fund for-profit ventures through grants. Within the federal government, there are 26 grant-making agencies. Growthink s 12 Insider Secrets to Raising Capital Page 17

21 Insider Secret #10 The Best Place to Find Grants for Your Business The first step in locating the appropriate grant for your company is answering the following question: What industry does my business serve? The answer to this question will tell you where to begin your search for a grant. Let s use an example business called Wendy s Windfarm to walk through the process. Wendy s Windfarm serves the Energy industry and the first place to begin a search is the Federal Governments Grant Website Once there you can click on the Menu Option entitled Find Grant Opportunities. Once you have clicked on that, you can choose to search by category this is where you recognition of industry comes in handy click on Energy. Once you click that link, you are able to view the date that the grant ends, the name of the opportunity, and the agency distributing the grant. Likewise, to find the grants that are available to you and your business, you can conduct an Advanced Search. Using the Wendy s Windfarm example, you would select the following: Growthink s 12 Insider Secrets to Raising Capital Page 18

22 1. Funding Activity Category: Energy 2. Search By Eligibility: Small Business In Growthink s upcoming Capital Raising Bootcamp, we will teach you exactly how to raise money for your business via grants. We will show you where to find grants, how to develop and submit a winning application, and what to do once you have won your grant. Growthink s 12 Insider Secrets to Raising Capital Page 19

23 Business Plan Secrets Insider Secret #11 How to Establish Credibility in Your Business Plan Your business plan is your roadmap for growing your company. It also serves to communicate your company s value proposition to your employees, advisors, partners, customers and investors. Business plans are the vehicle by which you get in the door, and are the documents most heavily scrutinized by investors and lenders. To establish credibility, it is critical that your business plan does not overestimate market sizes, underestimate competition, or project results over-aggressively. Rather, your plan must present a realistic game plan for achieving success, including: Highlighting past accomplishments: The best indicator of future success is your company s past track record. The business plans of previously funded companies must show what milestones they have achieved with those funds. New companies must show how the past successes of the management team will enable the company to overcome expected challenges. Understanding and defining the relevant market : Improper sizing of your company s target market is a telltale sign of a poorly reasoned business plan. For example, though the U.S. healthcare market is a trillion dollar market, there is no company that could reap $1 trillion in healthcare sales. Rather, a more meaningful Growthink s 12 Insider Secrets to Raising Capital Page 20

24 metric is the relevant market size, which equals the company s sales if it were to capture 100% of its specific niche of the market. Defining and communicating a credible relevant market size is far more powerful than presenting generic industry figures. Understanding and catering to customer needs: Investors, partners and lenders have a laser sharp focus on the relationship between a company and its customers. In your business plan, you must clearly communicate how your products and services meet specific customers wants and needs, and identify which target markets most exemplify these needs. Your business plan must also outline an easy to follow and credible roadmap of how your company plans to penetrate your market. Proving barriers to entry: Your business plan must include strategies that demonstrate that your company can and will build long-term barriers around your customers. Claiming a first mover advantage is simply not compelling enough. Developing realistic financial assumptions: Many investors, partners and lenders skip straight to the financial section of the business plan. It is critical that the assumptions and projections in this section be realistic. Plans that show penetration, operating margin and revenues per employee figures that are poorly reasoned, internally inconsistent, or simply unrealistic greatly damage the credibility of your entire business plan. In contrast, sober, well-reasoned financial assumptions and projections communicate operational maturity and credibility. Growthink s 12 Insider Secrets to Raising Capital Page 21

25 Insider Secret #12 Your Financial Model Must Be Incorporated Throughout Your Entire Business Plan The Financial Plan and projections section of your business plan explains how the execution of your company s vision will reap great financial rewards for the investor or partner and/or give the lender confidence that they will eventually be paid back. As such, it is the section that they often spend the most time scrutinizing. Among other things, the Financial Plan must numerically detail the revenue model through past (if applicable) and pro-forma (projected) Income Statements, Balance Sheets and Cash Flow Statements. It is critical that the figures used in these statements flow from the analyses in every other section of the business plan. For instance, the relevant market size (Industry Analysis) should be reflected, as should competitors operating margins (Competitive Analysis), customer acquisition costs (Marketing Plan), employee requirements (Operations Plan), etc. Integrating your financials with the rest of your business plan gives investors and lenders a greater confidence and understanding of your business and your ability to successfully execute on the opportunity. In Growthink s upcoming Capital Raising Bootcamp, we will teach you exactly how to create an expert business plan that raises capital and positions you to grow a successful business. Growthink s 12 Insider Secrets to Raising Capital Page 22