May 23rd, 2008 13:57 EST
How Do I Raise Money? Here are the Basics
The question that I`m asked more than any other is "How do I raise money for my deal?"
Although the subject of raising money involves many different parameters, a few fundamentals are critical in every deal. Remember that I help young companies work on these types of issues every day as they are structuring their deals. *
First, when an investor says they are interested and that they want to move forward, it`s imperative that you capture the capital the moment that the person says that they want to make an investment. This may seem like common sense, but it certainly isn`t common practice. I`ve been in too many situations where an investor says that they are interested and the company responds that we want your capital but we`re just not ready " for whatever reason.
The problem with not being ready at the moment that you ask for the capital is that when you go back to the investor, whether it`s two weeks later or two months later, the investor`s circumstances might have changed. I`ve seen many circumstances where an investor has several hundred thousand dollars today, but two weeks or two months later, they have no capital available for the deal that you pitched successfully in the past.
Many reasons exist for this.
First, the investor might have found something better to put his or her capital into. Alternatively, the investor might have had some problem that would cause him or her to delay their investment. For example, they might have an illness in their family that would make it impossible for them to concentrate on putting your investment at the top of their priority list. But the worst scenario occurs when the investor watches the company during the period of time between when they were excited and when you are ready. If you promised certain milestones and you underperform, the investor will generally reevaluate " often to the disadvantage of your deal.
So just remember that when you`re asking for capital, if the investor says "yes", take their check on the spot and say "Thank you!" If your paperwork is not complete, put the money in an attorney trust account or escrow until you`re completely ready with paperwork in hand. In the money raising business, "one in the hand is worth a hundred in the bush."
The next most important consideration to always remember about raising capital is not to concentrate too many investment dollars from any single person or entity that you take capital from.
There`s a big story in the news right now about Microsoft`s attempted a takeover of Yahoo. This story has been unfolding over the last couple of months. Although Microsoft pulled the plug on the deal because Yahoo wanted too much money, the deal is now rumored to be revived. Part of the reason that it might be revived is that one investor, Carl Icahn, owns a significant interest in Yahoo and he has the support of many other major investors in Yahoo. Mr. Icahn has indicated his tremendous displeasure with the way that the Yahoo board handled the offer from Microsoft. They were greedy and they wanted more money for their stock than the stock was worth. But because Carl Icahn is a significant shareholder in Yahoo, he has threatened to reorganize the entire board of directors of Yahoo.
He can do that because of the significant interest that he owns in the company. Again, this why I always suggest to young entrepreneurial companies that they don`t allow any single investor to control too much of an interest in any company. This is because it`s possible for that investor to take control of the company if the entrepreneur "falls down and skins his or her knee" in the course of operating the deal. That means that if they don`t meet the financial targets as stated in the projections, then largely concentrated investors could use their voting power to throw the entrepreneur out of his or her own company.
So be aware of selling concentrated interest in your company. It`s always tempting to take large blocks of money that get offered to you, and it`s certainly easier to take money from one party than it is to spread it out and get smaller investments from many investors, but many investors never sport the power that a single, concentrated investor does.
So, as you are working hard every day to build your company, or as you`re building your career, make sure that you follow the basic premises of fundraising 101. This will not only help you to build a strong and successful company, but it will also help you to stay in control and reap the benefits of the baby that you grew from infancy.
* We recognize that raising money is tough. That`s why we highly suggest that you commit to learning how to do it right away. It is the most valuable skill that you can possess. And by the way, feel free to call on us for assistance.
About Joel G. Block, President of Growth-Logic, Inc.
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker and advisor. To bring Joel into your company, please visit www.joelblock.com or www.growth-logic.com.