Raising Money for Your Company: A Primer
Article by Herb Rubenstein
Introduction
Capital does not flow in mysterious ways. It does occasionally follow a fad or trend over the cliff. However, capital generally flows where someone has already demonstrated, at least in theory, that investment in a particular endeavor will be rewarded handsomely. Some venture capitalists will say that they invest in “people” and therefore the quality of the management team is the essential ingredient.
Other venture capitalists will say that they invest in ideas, products, proven systems, and market potential. If they don’t like the people they invest in, they just get rid of them anyway. The truth is that venture capitalists invest in industries or sectors that they believe are “hot.”
Almost every organization that has made it to a multimillion
dollar or even a multi thousand-dollar budget has a great rags to riches story. They will tell you that the money they needed came just in the nick of time from the last source there was any chance of getting a dime from. Most of these stories probably have some truth to them because entrepreneurs tend to feel comfortable spending all of their own money and all of anyone else’s money until they prove they are right or go bust trying.
Rules of Raising Money
There are some general rules about raising money that every entrepreneur and every organization must follow whether seeking loans (debt), capital (equity), or both.
You (or your organization) must:
• invest your own money, time and effort in order to attract capital
• seek the money before you really need it
• shoulder a significant part of the risk
• give up a significant part of the ownership rights for large amounts of capital unless you have demonstrated a strong track record
• have a clear, simple business plan
• have a track record of success to secure the best deal
• have a solid vision and show great potential for the business
• have a good management team in place or willing to join in.
One company had a very successful initial public offering. They sold 4 million shares at $12 a share. Most of the shares were not voting shares. Therefore, company officials were able to keep 97 percent of the voting control of the company after selling well over 12 percent of the equity of the company. A key ingredient that allowed them to be successful with this approach is its stand that it will never be bought-out. This view – held since the beginning by the company principles – allowed investors to leave the voting power with the people who have given the impression that they will never leave the company.
Using Credit
Raising small amounts of money for businesses through debt has never been easier. With the proliferation of credit cards in the US and easy credit, small organizations, including non-profits, can often raise up to $100,000 in debt capital. In fact, the authors are aware of companies putting more than $250,000 in company purchases on certain credit cards. It has recently been reported that 47% of all small businesses finance all or part of their businesses with credit cards and the amount of credit card debt for small businesses may equal the amount of debt owed by small businesses to banks through traditional loans. With the rebirth of “receivables” financing, companies, at a significant cost, are able to generate money through credit by selling their accounts receivables.
Conclusion
It is important to note that many businesses today do not require the amount of capital that they would have required just ten years ago. The growth in home-based businesses, leasing equipment rather than buying it, and other economic efficiencies created through information technology allow companies to do more with less capital. Strategic planners must become thoroughly aware of ways that their organizations can accomplish strategies with a low capital investment.