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Raising Capital: Why Is It So Difficult?

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Raising capital for a startup or small business is without question one of the most challenging aspects of growing a business. The stories are manifold of entrepreneurs and small business owners becoming both frustrated and discouraged by the amount of time it takes to secure capital, the rejections they endure, and the lack of linearity and progress checkpoints over the course of the fundraising process. Complaints we hear repeatedly from entrepreneurs regarding fund raising include the following:

  • The Stress and Frustration of "Maybe." It is common for a prospective investor - either an individual investor or a venture firm - to show enthusiasm for an opportunity upon initial review and then to leave the entrepreneur in limbo - forwarding neither a definitive "no" nor a definitive "yes" to the investment proposition.

    Here the golden rule is in effect - namely those that have the gold make the rules. While investors expect you as the entrepreneur to provide a very specific timeline in regards to growth metrics and return on their prospective investment, this expectation is too often not reciprocated in regards to an investment decision.

  • Lack of Urgency. A great challenge in raising capital for a private company is the lack of natural urgency. Because there are so many more sellers of private company stock than buyers, attempts by the seller to create urgency by setting time periods within which the investment must be consummated and/or limiting the amount of stock that can be purchased are often viewed by buyers as simply sales techniques and are not credible. The mindset among investors is often if it is an attractive opportunity today then it will still be an attractive deal next month. This is especially true for emerging company investments, for which the most likely exit is via a sale of the business or a public offering, events most likely to occur 3-5 years or more in the future.

 

So how can an entrepreneur level the playing field, mitigate the balance of power and accelerate the fundraising process? Here are three quick ideas, gleaned from Growthink's nine years of fundraising experience.

  • Have a Realistic Time Frame. In our experience, most entrepreneurs vastly underestimate the amount of time required to raise capital, as well as the number of rejections they are likely to receive. We offer our clients the 90-day rule: be prepared to spend a minimum of 90 days of virtual full-time effort on the process. At the end of this 90-day period, reassess. You will have either raised capital during this time, have a number of promising prospects, or have received feedback regarding the investment proposition such that you should be able to place a probability/likelihood of success if you continue your efforts. If you decide to continue, do so for another 90 days. Most importantly, once committed to the process, do not waiver or get side-tracked by strategic re-analysis. In the end, capital-raising is greatly a numbers game - most prospective investors will pass on your deal, but it only requires one prospective investor to say yes to be successful.

  • Consider Bridge Financing Structures. Especially when raising larger sums of money (more than $500,000), think about creating convertible bridge financing structures such that the investor that comes in now receives their position at both a discount to the to-be-determined financing round valuation and/or receives some pre-determined rate of return once the larger investment is secured. Convertible financing structures such as these help on two fronts: they create an incentive for investors to act now versus waiting and they usually can close in shorter time frames.

  • Be Irrational. Classic microeconomic theory contends that there is no such thing as an above average investment opportunity. All ideas - when subjected to competitive and market analysis - can be analytically deconstructed to a point of unworkability. Quite simply, the very undertaking of fund-raising for an early stage company is an irrational proposition. Embrace, rather than resist, this reality. With enthusiasm and persistence, appeal emotionally rather than just intellectually to prospective investors. While they may never admit it, the "gut" decision of investors is influenced more by these "soft" factors than it is by analytical and rational review. Have and communicate unwavering faith in your convictions and world view and avoid the analysis morass endemic to our information-overloaded world.


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About Growthink

Since 1999, Growthink's professional business plan writers and investment bankers have assisted more than 1,500 clients in launching and growing their businesses, and raising more than $1 billion in growth financing. 

 

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Stiennon says

Great article. In my current fund raising endeavor I am using an old sales technique. You know you are going to get at least 25 "no"s before you get a yes so every "no" collected is one step closer to getting funding. I am at eight in only three weeks of trying. I went for the easy ones first, friends and family with big bucks. Then I went for Tier 1 VC's. They are fast to come back with "no"s as well. Now I am tackling the angel community. Eight down, 17 to go. My partners say "Whoa! what happens when you get to 25 and there is no funding yet? Are you giving up?" Hell no, I just start the count over at zero.
Posted at 3:46 pm
Graeme Thickins says

I've advised tech startups for 25+ years, and, though this is a fairly short article, it may be best, most reasoned, reality-based piece I have ever read on the subject of raising capital. That last paragraph in particular is a jewel. Thank you. I intend to pass it on, and definitely will bookmark it for future educational efforts with new entrepreneurs! cheers, GraemeThickins Founder & President GT&A Strategic Marketing Inc. www.gtamarketing.com blogging at: www.tech-surf-blog.com
Posted at 7:32 pm
Mark Alan Effinger says

Very pointed, concise article that speaks volumes of truth in regards to the industry. Beware startups who think they know better. They are in for a long investment cycle. Best, Mark Alan Effinger RichContent.com
Posted at 12:11 am
Gail Nichols says

Excellent article...Having raised funding for 4 companies that I co-founded, operated and sold, I found that "It's A Steady Rain That Soaks". Networking with third party referral sources (lawyers, accountants); joining and presenting at investment forums, staying in touch with prior and current funders, and being "out there" pays off, usually in unexpected ways and never when or how we planned. Remaining upbeat, positive and committed to our ventures (including investing personally) have been key to enlisting financial partners. Our current fund raising efforts through the Internet has been an eye-opener, which I reference in my blog, SmartMoneyForum.com Onwards and upwards !! Gail Nichols
Posted at 11:09 am
Dave Webb says

Excellent post. Entrepreneurs and business owners often complain that raising capital and marketing are their two toughest business activities. I recently blogged about a unique event taking place in April in my hometown of Denver, Colorado. It's called The Capital Factor and combines how to raise business capital with killer strategies in internet marketing, direct & offline marketing, investing, financial independence, and professional development. I've talked to a couple of people who have gone to this event once before and it totally transformed their business. May be worth checking out for anyone looking how to get an infusion of capital into their business. The link to info about the event is in my blog post which is accessible by clicking on my name. Maybe I'll see you there!
Posted at 6:34 pm

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