To Be Or Not To Be Funded

Many clients come contraceptives me with the same question; "I have a great business model, which has generate some traction and I want to raise x-amount of capital from investors, can you help?".

The issue for me is that most of these clients have gone through the fire to build their businesses, or just get them started, and because of this they are inclined to believe that they can use that persistence and fortitude to raise money. The problem is that in my experience only 10-20% of the companies that are looking for seed capital (who haven't been approached by an external equity source) are ready to be funded.

Its not because they haven't put in the work, its simply a matter of reality versus perception. Business owners perceive that because they have a good idea and they have been able to achieve a certain level of interest in the consumer markets that they are ready to begin raising money. The reality of the matter is that these issues are important but not necessarily the most important factors in a investor's (whether small or large) decision regarding whether or not to fund the company.

It is vital to understand that the primary factor that investors look for is the strength of the management team and the ties that they possess within the chosen market that can be utilized to develop strategic advantages. Simply stated, they want to invest in management teams that can sufficiently persuade market insiders to take interest in your business. In addition to a insider on the management team, it is vital to have people who have experience in general business development (not necessarily in your particular market, but somewhere), and people with the instant car insurance quote necessary to get your product to market. In addition it is important to show that the management team has a vested interest in the success of the company, and yes, that means that investors want to see that YOU have put some capital into the company.

In addition to the management team it is important to understand that investors are not investing in what your company is today, but what your company can be tomorrow. This leads us to the most important word as it relates to a company's bankability, and that word is "SCALABILITY". Investors are putting money into your company with the hope that the future value of the company will provide them a significant return in a short period of time. To do this companies must be scalable in terms of their operations. For me the basic definition of this from an investor standpoint is "a company's ability to accelerate their revenues while decreasing the costs directly tied into the receipt of those revenues from a ratio standpoint". In short if it costs you $.50 to make $1 today, aaa car insurance quote they want it to cost $.30 to make $1 tomorrow. What this does is positively effect EBITDA which is the primary factor used to determine the value of a company.

If your company is generating revenues today but has no real plan on how capital can positively effect the efficiency of generating those revenues tomorrow then there is little ability to drastically increase the value of your company except by drastically increasing sales, which in itself will force the company to incur more costs. The scalable company that can grow sales and lower the capital needs for those sales is the one that can achieve more value in the future.

If your company has the management team, has generated MATERIAL earnings, and is scalable then you move to the next set of hurdles. This is primarily where your money comes into play, PLEASE don't fall for the idea that you can raise money without money. In reality it is a safe assumption that the costs to get you through the funding stage will be significant, but it is necessary. Why would an investor want to invest in a company that you're afraid to invest in.

I see so many clients attempt to raise money without money, and the issue is that there are things that must be presented that do cost money. In reality you could write your business plan (and in many cases this is a good idea, but only as an initial draft). The fact is that when you are so close to something, as many of you are with your businesses it is impossible to look at it objectively and therefore you will miss something that needs to be addressed. This is the reason that you should have someone else take the project over after you have done the initial draft (be it a lawyer, accountant, consultant, or other business expert). While there are ways to get these done cheap, a good business plan will usually cost between $3,000 and $7,000. If you want to curtail the costs offer the writer incentives such as options or delayed capital incentives, but understand that if you get a QUALIFIED expert then you will have a leg up.

In addition to the business plan you will need to fund market research studies and financial models to justify your entrance into the market, moreover the period of due diligence (where investors due site checks, legal checks, backgrounds, and pretty much any other check you can think of) will require you to fund things that you may not have considered such as travel, accountant reviews, patent reviews, legal opinions, Private Placement Memorandums, and more.

The reality is that these are just some of the costs but if you don't have capital ranging from 2-5% of the funds that you are attempting to raise, then you may want to consider other options. But it is important to understand that there are other options, if you are not ready to raise money then find partners, develop strategic alliances, go to your friends, and if you are REALLY confident in your company see if you are eligible to raise debt capital.

Whether or not you feel that the requirement for raising capital are justified (believe me they are intrusive, time-intensive, and generally unpleasant, until you raise the funds) you must understand that the party investing in your company is either investing their own money or they are investing money entrusted to them. For this reason they are justified in their efforts to analyze your company and make an informed decision, and while you may feel that it is their privledge to be able to invest in your company you must remember that if the company goes flat they are the ones left holding the bag.

Your ability to handle the issues discussed here will be the determining factor on whether you are to be or not to be; funded.

As always, please get in touch with me regarding your questions, I may not provide you the answer you want but it will be the truth and that is what I believe is needed to help people make informed decisions.

Please go to my blog at www.developmentstyles.comwww.developmentstyles.com to obtain more information about the funding process and other issues that are important to developing entities.

William Cain