If you are an entrepreneur in a startup or growing company, I don't have to tell you that these are economically difficult times. Entrepreneurs have been hit from every financial front imaginable: the venture capital industry has been devastated, the decline in real estate has reduced home equity loans, and the banks themselves have teetered on the edge of the abyss. Even the consumer credit card industry, the last resort of financing for many entrepreneurs, has tightened up considerably. Many credit card companies have drastically slashed consumer credit as a means of protecting themselves.
Although it may seem counterintuitive, these are actually not bad times to raise money for entrepreneurs. There are several reasons for this.
The main benefit that the recessionary economy provides entrepreneurs who wish to raise capital is a reduction in financial competition. A few years ago, entrepreneurs raising business capital found that many investors were more interested in buying real estate or investing in speculative financial instruments than funding companies. This has changed.
Individuals with money to invest presently find a greatly reduced list of desirable options to select from. The real estate market experienced a catastrophic meltdown from which it has yet to recover. The stock market has been better, but is still a source of anxiety for many investors. Investors who decide to sit on their money have difficulties finding interest rates that even match (let alone exceed) inflation. And of course, we all know what happened to the speculative financial securities being pedaled by banks and insurance companies...
Now, it is true that many individuals have had their net worths substantially reduced due to a decline in their underlying assets- real estate, stocks, and so forth. This certainly reduces the total amount of capital available in the marketplace and causes investors to be highly cautious. But, affluent individuals need to place their money somewhere. Why shouldn't it be in an entrepreneur's company?.
A second factor that benefits entrepreneurs raising capital is the rise of social networks and other forms of community building on the Internet. Capital raising is an inherently social proposition. It is through networks of contacts that most entrepreneurs locate investors. The Internet brings the world to any entrepreneur's doorstep who is willing to invest the time and energy into developing an online network of contacts.
To summarize then, the current economic environment is way, way down on institutional forms of financing (venture capital companies, banks, credit card companies, grants) but offers positive motivation for individual investors to participate in funding business ventures. The Internet provides the means by which networks of people can be brought together, and such networks of contacts are important as a resource for entrepreneurs raising money.
Therefore, raising capital through individual investors is where the action is at this time.
I want to state here unequivocally that raising money from private investors is not simple and it is not automatic. There are regulations to follow, documents to prepare, and somebody has to locate and close the investors. You need to know what you are doing and you need to plan the process.
But, individual investors are probably the brightest star of hope for entrepreneurs interested in raising capital at this time. If you have moved beyond your credit cards and home equity, investors may not simply be your best option, they may be your only option.
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 2009 Robert Coleman ALL RIGHTS RESERVED
