Capital 101: Why your strategy is all wrong!

My last call was with an entrepreneur who was told that to launch his business he needed an investment. I asked him if he had developed a business plan, pitch deck, was familiar with prospective investors in his existing network, and if he had discussed his raise with a securities attorney to determine the appropriate exemptions which might best suit his campaign. The answer to all of the questions was “no, I was not aware that I needed to do these things”. 

Raising capital is not for the faint of heart. It is a process that requires an upfront investment to ensure that you are following the correct steps. Also, you must realize that the likelihood of a stranger writing you a significant check without getting to know more about your team, business, and plans are probably next to none. I don’t know any investor that is writing checks without wanting to understand the team, business plans and when they will receive their investment returns.

Too many entrepreneurs fail to gain basic information and understanding on the process of raising capital and what that means. I recall another conversation with an entrepreneur seeking an investment. I asked him how much capital he required and how much equity he associated with that capital raise. His response, “I need an investor, but I’m not giving up any equity,” I explained that if he was not offering equity for the investment, he should focus on debt options. He refused to consider debt and was adamant that he could get an investment without offering equity. I wished him well.

Here are some basic keys to developing an effective strategy when raising equity capital: (1) equity is ownership shares or stake in the business; (2) the valuation is determined by the revenue actuals, assets, or in some case the forecast of earnings; (3) the terms of the investment must be discussed and explored; (4) selling equity is selling securities – this is regulated by the Securities Exchange Commission (SEC); (5) you should discuss your capital goals with a Securities Attorney; (6) building a network of prospective investors takes time, so start early by making note of investors in your sector; (7) review Term Sheets to understand the types of clauses which are included.

Finally, be sure to speak with someone who can offer you guidance as you will need a solid team of professionals to launch and succeed with an equity capital campaign.