Entrepreneurs often look forward to receiving capital from investors without fully taking into account the resources required to raise money. Much like how kindling helps start a fire, using early investments to raise more money gives the Company necessary fuel.
Realistically determine your capital requirements
The amount of capital that you intend to raise is a strategic point for your investment program. You must balance your realistic financing requirements against the realities of the investors you intend to pursue. For example, let's say that you are a manufacturing firm with an R&D product that will require over $3 million to bring to market. There is only a small likelihood that you will be able to finance the project exclusively using typical angel investors. After all, most small angels invest between $20,000 - $100,000. It takes quite a few of those to raise $3 million! However, you could use a number of them to raise $300,000, which might be enough to finance a part of your project plus additional capital-raising efforts.
Thus, you must answer the following questions:
1. How much money do I really need?
2. Can I raise the money in increments and still make progress?
3. What types of investors do I think will want to participate?
4. Can I find enough of them to get the deal done?
5. Should I reinvest part of the proceeds to raise additional capital?
The budget for raising money
It costs money to raise money. Even under the most benign circumstances, most entrepreneurs will spend thousands of dollars on various aspects of the capital raising effort. The costs tend to rise with the complexity of the offering. In particular, direct public offerings cost more than most private offerings. Unlike a private offering, professionals (attorneys, CPAs) must account for the public nature of the securities in a direct public offering. The offering will likely have to pass muster with various state and federal regulatory agencies. All of this requires time and effort, which translates into money spent.
The costs for different offerings vary widely. Boutique regional legal and accounting firms tend to charge far less than national firms for the same services. On the other hand, large firms often have emerging growth or incubator programs at a discount. Some firms will defer portions of their compensation to the back end of the offering or will take stock as partial compensation. Thus, a company can sometimes reduce upfront cash outlays to half or less of the "retail" costs. At the very least, a company can control when payments are due to various entities and individuals. For example, you may not wish to retain an attorney until most of your early planning is complete. Otherwise, the attorney will sit on your retainer with little to do while you figure out your plans.
For many private offerings, the company may not need audited financials. However, most direct public offerings will require audited financial statements from all but complete start-up companies or very low offering amounts ($500,000 or less in many states).
In addition to legal and accounting fees, it is common for companies to require miscellaneous services from various other professionals. For example, the company may employ various experts and management consultants to help improve the business planning and strategies of the firm. You may need expert help with marketing your investment or finding investors.
A multi-faceted strategy
Realistically, then, if you need to raise financing above a few hundred thousand dollars, you may need to conduct multiple rounds of capital raising or use early proceeds to finance additional investment efforts. You might budget 10 – 20% of the money raised towards additional rounds of financing. This may seem like a large percentage, and it is. But, as long as you are raising money you are actually in two businesses at the same time- you are in the business of running the entrepreneurial venture that you are funding, but you are also in the business of selling the story about your venture to investors.
Take care of yourself, too
Surprisingly, many entrepreneurs plan budgets for offering expenses without taking into account their own needs! If you are teetering on the brink of financial ruin while trying to launch a venture, you will have untold difficulties. I always advise entrepreneurs to do whatever it takes to stabilize their own lives so that they can persist long enough to raise the money. While it may be "dedicated" or "noble" to live a life of poverty while trying to launch a venture, it rarely makes good business sense.
Robert Coleman is the President of the Pacific Venture Club, www.pacificventureclub.com. You can reach him via email at
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Copyright 1996-2009 Robert Coleman, ALL RIGHTS RESERVED
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