What to Do When Raising Money

Whether you are just starting a business, or whether you are looking to raise some growth capital to really kick your business into high gear, there are several key things that are going to turn investors off right away.  Different types of investors have different criteria for investing, but there are several things that they all universally avoid.  If you can stay away from the “deal killers” you’ll be far better off, whether you are looking for a few hundred thousand from an angel group, or whether you are targeting several million in growth capital from an institution.

The reality is that there really is no easy way to raise money.  Its exhausting, takes a lot of time, and generally detracts attention away from the other pressing tasks facing the company.  There certainly are things that entrepreneurs can do to increase their odds of raising money successfully, but it is equally important to make sure that the same entrepreneur avoids the deal killers that make investors or lenders say no, regardless of how good an opportunity you have.

1.      Focus on Revenue.  Revenue is the key thing that separates the companies that have made it, that have proven that people will give them money for what they are selling from the ones that are still unsure of whether they’ve actually got something that people want.  A lot of companies, particularly those in the general technology industry, seem to think that they need to keep working on the product before it can to market.  Although there certainly are lots of situations where a significant amount of research, development, and product creation is necessary, that isn’t what we are talking about here.  The key focus here is when there is a saleable product that isn’t generating revenue.  It might be because the marketing isn’t working, or the sales plan was undeveloped, or a myriad of other reasons, but the entrepreneur doesn’t recognize any of them and wants to redevelop the product.  The lesson here is that if you are looking for funding, and you have a product that is saleable, go sell it.  If it sells, chances are someone will give you money.  Focus on the reason why everybody is there, and why are you in business.  If you’ve got revenue, everything else is easy.

2.       Have Your Own Skin in the Game.  In most cases, investors don’t want to run your business.  They might be able to do a decent job of it if they had to, but they don’t want to.  They want to give you money and have that money be worth more in a few years down the road.  Nothing will turn an investor off more than if they think they are the only one risking anything.  They want to know that you are as committed as you can be, whatever that works out.  If you’ve $5, they want it in the business.  If you’ve got $500,000, they want it in the business.  They want to know that the owner  of the business isn’t going to suddenly get up and walk away one day because they had a bad day.

3.       Have a Solid Corporate Structure.  One thing that really makes raising money difficult, particularly equity, is if there are already too many equity shareholders to start with.  If a business owner has been selling shares in their company to everybody they meet, all the while diluting themselves down in the process, it doesn’t give the later stage investors much confidence that the entrepreneur either had faith in their vision or recognized the value of their business to start with.  Its important for start up companies to be strategic in their financing efforts.  The easy money is not always the right money.

4.      Don’t Hide Assets  For technology companies, this might look like putting the intellectual property into a separate holding company.  For more industrial companies, this might be putting the building into a separate company.  Either way, when investors see this type of move, and are then told that the holding company is off limits, red flags go up.  Although there may be tax reasons for doing so, its important to recognize that investors are going to want to get their hands on as much security as possible.

5.      Pay Yourself  The entrepreneurs, or founding management team, all forgo salaries, which then allows them to report a higher than normal bottom line because their expenses have been artificially decreased.  Although forgoing your salary during the start up phase is nice, it’s a better idea to pay yourself the salary, but leave the money in the company as a shareholder loan.  Future tax benefits aside, investors want to get an accurate picture of what the company’s income statement looks like.

Raising money is never easy, but there are things that can be done that make it close to impossible.  Avoiding the five deal killers outlined above is going to take out several roadblocks and just might be the difference between a successful transaction and none and at all.

For more resources geared towards businesses that are in the financing stage or for a directory of businesses that are available to be purchased, please visit www.businesstradeboard.com.