raising capital get the money you need to grow your business

[...]... source of capital on each rung may judge you on the quality and success of the deal made on the prior rung In other words, angels may judge you by the extent of your own commitment, venture capitalists may judge you by the extent of the commitment and reputation of the angels that you attracted, and investment bankers may judge you by the track record of the venture capitalists that committed to your deal... In today’s market, no source of venture capital wants to overfund a company—they would rather have the money sit idly in their own account than in yours—but they also understand that undercapitalization is the kiss of death The “right amount” of capital will be described in detail in the business plan and will take into account the “buckets of needs,” shown in Figure 1-3 FIGURE 1-3 TYPES OF CAPITAL TO. .. factors: risk, reward, control, and capital You and your source of venture funds will each have your own ideas as to how these factors should be weighted and balanced, as shown in Figure 1-1 Once a meeting of the minds takes place on these key elements, you ll be able to do the deal Risk The venture investors want to mitigate their risk, which you can do with a strong management team, a well-written business. .. already be too late, and the cost of desperation is very high The best time to raise money is when you can afford to be patient Being so afraid of sharing your idea that you don’t tell anyone about it You can’t sell if you don’t tell Being price wise and investor foolish It’s not just about getting the best financial deal, it’s also about learning what other strategic benefits the investor brings to the table... and the leadership to execute the plan Reward Each type of venture investor may want a different reward Your objective is to preserve your right to a significant share of the growth in your company’s value as well as any subsequent proceeds from the sale or public offering of your business FIGURE 1-1 BALANCING COMPETING INTERESTS IN A FINANCIAL TRANSACTION 02RC-CH01-03 12/15/04 4:18 PM Page 5 5 Capital- Formation... rating, collateral, and your ability to repay Bankers also closely examine the nature of your business, your management team, competition, industry trends, and the way you plan to use the proceeds A well-drafted loan proposal and business plan will go a long way in demonstrating your company’s creditworthiness to the prospective lender Commercial Finance Companies Many companies that get turned down for... committing their capital Regardless of the economy or what industry may be in or out of favor at any given 02RC-CH01-03 6 12/15/04 4:18 PM Page 6 GETTING READY TO RAISE CAPITAL FIGURE 1-2 THE CAPITAL FORMATION “REALITY CHECK” STRATEGIC PYRAMID There are dozens of different ways to raise capital for your growing business However, some strategies will be more likely to succeed than others based on your stage... Breaking the investment into tranches protects the investors against capital mismanagement and waste, and protects you against premature dilution or loss of capital You may be inclined to request that all the necessary capital be invested in a lump sum (to reduce the chances that future conditions will get in the way of receiving all the money you need) , but bear in mind that there may be some real advantages... on your stage of growth as well as the current trends within your industry There are also certain traditional "stepping stones" that are usually followed As you move up the strategic pyramid at the right, there are fewer choices for raising capital, and the criteria for qualifying become more difficult to meet, thereby reducing your chances of rising to that level It is also important to bear in mind... of equity capital for entrepreneurs in recent years is the traditional venture -capital firm These formally organized pools of venture capital helped create Silicon Valley and the high-technology industry, which is our nation’s fastest-growing sector But as you will see in chapter 9, these funds do very few deals each year relative to the total demand for growth capital, so be ready to expand your horizons . Data Sherman, Andrew J. Raising capital : get the money you need to grow your business / Andrew J. Sherman.— 2nd ed. p. cm. Includes index. ISBN 0-8144-0856-7 1. New business enterprises—United. 12/15/04 4:17 PM Page ii This page intentionally left blank RAISING CAPITAL SECOND EDITION Get the Money You Need to Grow Your Business ANDREW J. SHERMAN American Management Association New. introductions to capital sources and then prop- erly advise you on the “market terms” and structure of the trans- action. It means you need to understand the key value drivers that will influence the availability