The Three Steps To Raising Capital and Why Most Companies Fail Miserably
Most entrepreneurs have never raised capital. And, like it or not, an entrepreneur's ability to raise capital, and NOT her business idea or managerial skills, often determines the success, or lack thereof, of a venture.
To make matters worse, raising capital is extremely challenging and complex. The questions that entrepreneurs need answered in order to raise money is nearly endless:
- How long should my business plan be?
- How do I create a financial model?
- How do I need to legally structure my company?
- Who are the right investors?
- Should I be seeking equity or debt? Or both?
- Should I enroll in a debt management program?
- How do I find and convince them to invest in my company?
- What type of stock must I issue investors?
- How do I negotiate financing terms?
- Etc., Etc., Etc.
Navigating through the capital-raising waters is extremely difficult for most entrepreneurs and as a result, most fail to achieve success. The first reality that most entrepreneurs encounter is just how long it takes to raise capital. Simply the process of understanding how to raise capital could take six months to a year, and if you don't learn how to do it right, you'll burn bridges left and right.
Raising capital can be broken down into three steps.
1) What Type of Capital?
The first step is to understand what types of capital might be available to your firm. And there are many, from venture capital to traditional bank loans to customer financing to convertible debt. In fact, there are dozens of viable financing options that are accessed every day. Unfortunately most entrepreneurs go after the wrong option since they aren't familiar with their options. For example, only about 10% of business plans that are submitted to venture capital firms could possibly warrant ventures capital.
2) Develop Your Business Plan
Once you understand what type(s) of capital is right for your venture, the next step is to develop your business plan. The business plan is not just a strategic document. Rather it is a marketing document that sells your company to investors or lending.
In this regards, your plan must be tailored to the stage of your company and the type of investor. For example, if you are seeking an equity investment, the plan should focus on the potential for investors to receive 10 times their money back or more. Conversely, if you are seeking debt capital, your goal is simply to prove that you will easily be able to make all loan payments.
3) Execute, Execute, Execute
The third and final step of the capital raising process is execution. Specifically, once you identify the right source of capital and craft your business plan, you need to sell it to your prospective investors and lenders. This step can be further be broken down into list creation, prospecting, and negotiations.
For equity investors, for example, you may need to create a list of 150 potential investors. Contacting each of them may yield 40 with an initial interest. From those, 15 may take a first meeting. From those, maybe 5 will result in additional meetings, and hopefully 3 will result in investment term sheets.
Raising capital is a numbers game. You need to start with a large list and methodically work through it and pursue all opportunities.
Don’t go it alone. The capital raising maze is vast and complex, and if you don't raise capital, your business will never realize its full potential. It is critical that you have top-quality resources and experienced advisors who can guide you in your path to business success.
Dave Lavinsky is co-founder and President of Growthink, the leading business plan consulting firm. Since 1999, Growthink’s business plan writers have written more than 2,000 business plans for entrepreneurs, start-ups, middle-market companies and larger corporations like Atari, DeustcheBank, Hooters, NEC, McKesson, and Porsche. Growthink also recently launched GrowthinkUniversity.com, a website that teaches entrepreneurs how to raise capital.