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Entrepreneur’s Question: any advice for a start up trying to raise private equity investor capital in this economy?

April 5th, 2009 · 1 Comment

This came to me as a question on Twitter.   Of course I couldn’t respond in 140 characters with anything meaningful.  I figured I must have a couple of blog postings I could reference that would answer this question.  I found out I’ve written about many aspects of raising capital but none that addressed this question specifically.   So here is the answer as succinctly as possible, with links to other relevant videos or documents.

Raising Capital in a Down Market is no different than raising investor money, particularly angel investor capital, at any other time.   Historically, the number of companies seeking early stage capital that raised all their money, and were considered investor ready in that at least one angel group approved them to pitch to them, has fluctuated between 15% and 23%—maybe a high of 28% during the dot.com boom.  That means over 75% never raise all their capital…in good times and bad.   And as we see from the information shared in this blog post http://myvirtualangelworld.com/2009/03/31/angel-investors-down-but-not-out-some-bright-spots/ companies are in fact raising capital from angels now and when we thought 2008 was bad, it was actually better Y2Y over 2007.    So the question really needs to be reformed:

What do the companies that are successful in raising capital do that is different from the companies that aren’t successful in raising capital?  Entrepreneurs that are successful in raising early stage angel investment capital….

1.   Plan that is going to take twice as long as hope or think it will

  • You’ll gain momentum as you hit milestones and stay in touch with investors.  Objective Investors..those that are in the business of investing..don’t want to be first money in unless they enter as group and negotiate special terms.

2.  Expect it will take talking/pitching to at least 5X as many investors as you think you need to to find the ones that will make a buying decision

  • We actually have a formula we use called the Kugarand Theory of Private Equity.   For every investor that strokes a check, you’ll have 3 you think will write a check (all indications are favorable but they don’t take action for some reason), and to get to those 3, 15 will have had to see it or been exposed to it via Word of Mouth if not a direct pitch.   Do the math and it can be disconcerting to many an entrepreneur.   But for some reason, entrepreneurs are OK with that kind of formula for filling a sales pipeline….raising capital is an inexact science, but you increase your odds if you approach it like sales.

3.  Realize selling investors is very similar to selling customers:

  • need to fill the pipeline—suspects, to prospects, to qualified interest, to buyers
  • need to understand your investor/customer’s motivation, so tailor the message
  • follow through in a  timely manner,
  • consistently stay in touch with updates and relevant polite conversations until get a real yes or no decision,
  • no action does not mean “no”, and a “no” now does not mean a “no” forever, individual have all kinds of reasons to delay or reallocate funds,
  • and be prepared with the proper documents to sell equity and have the due diligence binder ready to eliminate a drag on the decision cycle.

4.  Don’t over inflate their company’s value just because they don’t want to give up too much equity.  

  • The company’s valuation and the amount of equity required for the capital sought is logical and defensible.   It is subject to the defensible and protected IP, the validation of the business model with sales or joint ventures/agreements, the management team’s ability to execute, and the future opportunity.  
  • Better to do the capital raise in stages so that value goes up at each round and smaller and smaller amounts of equity are given up in each round.  Plan the cap table from the beginning.

5.  Recognize that the greatest risk AND REWARD goes to those first investors, so the most favorable terms and sweeteners should be offered to get the pump primed.

6.  Take every opportunity to get in front of investors at conferences, groups, individuals, “who do you know”, and budget time and money accordingly…but smart about it.

So those are the best practices for raising capital.  

And yes there are some things that are different in the investor behaviour right now vs 18 months ago.   Early stage investors are being a little more judicious in their decision to invest…they are being a little more cautious so that means taking a little longer to make the buying decision.  Also, they are pushing down the valuations on companies so that they get more equity for the same investment.   Best way to counter that is through a convertible note or other instrument to defer establishing the valuation until later in the capital raise or corporate development.

I conducted a webinar a few months back and held the class live at CEO Space in May.   Here is a replay of the webinar as a video.   It goes through the process of raising a seed round, getting the appointment through to how to pitch investors at conferences.   It also explores the sales funnel concept and the Kugarand Theory of Private Equity Investing.    It starts out black in the first 30 seconds, but audio is on.   Enjoy and comment back please.

Find more videos like this on StartupChicks

To get more great information about meeting investors and finding investor capital, go to http://www.launchfn.com and fill in the optin box on the upper right hand side of the screen.  You’ll get 5 emails with valuable information over a 3 week period.  You’ll also be rerouted to page with an opportunity to register and schedule an initial consultation with Capital Consultants from LAUNCHfn.   The next investor event after the SE Private Equity Conference on April 14 and 15 (http://www.sePrivateEquity.org) will be the Network of Business Angels & Investors forum on May 13th.

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Tags: Entrepreneur Biz-Buzz · Entrepreneurs Seeking Capital Corner · Just Ask Karen!

1 response so far ↓

  • 1 Randolf // Nov 2, 2010 at 1:18 am

    what a wonderful blog you have. I’d like to be optimistic about the economy too.

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