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Top Seven Capital-Raising Mistakes

Print Written by Jay Turo on Sunday, October 14, 2007
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In my experience of working with many managers and entrepreneurs that have had great success in raising capital for their businesses, as well as our experience of working with as many that have struggled, here are some of the key mistakes I see most typically made:

#1. Vastly underestimate time commitment necessary for fund-raising. Companies vastly underestimate the time commitment necessary to successfully complete a financing. We recommend that a company seeking financing budget between 500 and 1,000 work-hours to the capital-raising process, spread out over a 6 month time period. The key processes include:
  • Perfecting the business plan, offering memorandum, and other company due diligence materials;

  • Developing a comprehensive, targeted prospective investor list;

  • Contacting this list and responding to investor due diligence requests; and,

  • Negotiating the transaction.

 

To see how easily the time adds up, our experience is that only about 25% of prospective investors showing an initial interest in a transaction actually progress to detailed company due diligence. Only about 10% of this 25% actually progress to a bona fide offer of funds, of which only 25% of these actually result in an investment transaction. So completing a financing transaction requires, on average, contacting approximately 160 pre-qualified prospective investors.

#2. Poor Presentation Skills. Far too often, investment discussions go astray because of poor oral presentation skills on the part of Company management. Active investors across the risk spectrum (startup equity to secured debt) are literally inundated with investment opportunities. It is not unusual for a principal at a high profile venture capital firm to review dozens of prospective investments every month. As such, it is imperative that your investment presentation be extraordinarily brisk, to the point, and delivered with flair and great enthusiasm. If the key presenters on a management team do not have these skills, then our recommendation is to either invest immediately in professional presentation and public speaking coaching, or to replace company principals with more impressive presenters. It is that important.

#3. Non-Detailed Use of Funds Statements. We have spoken with countless companies that get stuck on the simple question, "How much money are you seeking and why?" Our experience is that the most credible and impressive operating executives present sober and credible use of funds forecasts based on multiple funding scenarios. These forecasts are built from "the bottom-up," with specific revenue and costs estimates garnered from the company's historical financials and from forward-looking surveying of vendors, salary bands, property leases, etc.

 

#4. Poor Understanding of Cash Flow. Most operating executives have a relatively strong grasp of the marketing and operational components of their business, but tend to be weak in projecting and communicating the specifics of how they actually make money. And by making money we mean creating cash. Before an investor will place cash into a company, they must be convinced that this cash will be transformed into a company infrastructure that will eventually (and sooner rather than later) create much more cash than originally invested. Creating cash requires a rock-solid revenue and cost flow business model. Among others, key variables in the model include customer acquisition costs, pricing and gross margins, accounts receivables aging, realistic administrative costs, and taxation and depreciation. The better that a company understands and communicates these cash flow variables, the stronger and more credible will be the investment offering.

#5. Targeting the Wrong Investor Audience. We have seen countless companies waste precious time and money contacting unqualified and inappropriate prospective investors. Before an investment offering is undertaken, a comprehensive prospective investor list must be created, and all of the investors on that must be qualified as to track record of investing in financing stages (private, public, equity, subordinated debt, senior debt, etc.) and market sectors similar to the company in question. While there are always exceptions, contacting prospective investors that have not recently invested in a company "like yours" is, in our experience, almost invariably a losing proposition.

#6. Accepting Too Much Feedback. Capital-raising is a long and arduous process. As discussed in bullet #1, the vast majority of investment presentations made will result in some form of rejection. But in addition to rejection, the company will also receive - either solicited or unsolicited - advice and feedback on the "flaws" of their business. While this feedback is sometimes valuable, it is critical to very carefully filter and evaluate this feedback before revising the business plan and presentation. By the time an investment offering is circulated, company management should be extraordinarily convinced and committed as to the validity and solidity of its plan. Be sure to measure all feedback, no matter how well-intentioned, against this conviction and commitment.

#7. Going It Alone. Raising money is one of the most, if not the most, challenging undertaking an organization will ever make. The pitfalls and hazards are everywhere, and the consequences of failure are devastating. Capital is the fuel that drives business. And without fuel, your venture will sputter along, then stop, and most likely be eventually abandoned. With the consequences of failure so dire and the challenge so great, it only makes sense to seek out the absolute best professional assistance to maximize the probability of financing success. A quality investment banker, specifically skilled in equity and debt placements, is one of the most important advisory relationships a company can establish. While law and accounting relationships are extraordinarily valuable, they are, in essence, cost centers for a business. A quality investment banking firm, in contrast, is the ultimate revenue center -- vastly increasing the likelihood of financing success and taking the vast majority of its compensation on a contingent basis. The key, of course, is to find an investment banker of true quality. Unfortunately, there are a lot of unscrupulous individuals and firms offering capital-raising advisory assistance. Our recommendation is to always check references and also make sure that the individual or firm is properly licensed with the NASD and the SEC. A transaction participated in by an unlicensed firm can subject all individuals and firms party to the transaction to significant fines and sanctions.

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Larry Holmes says

I can see immediately, just from this one page of information, that you know what you are talking about. Because of past experience, and because I am so broke I could not pay anyone for anything, I had decided I was going to have to "go it alone", because I had no other choice. Perhaps not; based on this article, I will be contacting you when appropriate. I know that I have created many of the requirements for a successful company, but without the necessary resources for capital needs (immediate and future), those resources are like an expensive, marvelous sports car stored in a garage for lack of fuel. The only good it can do is to give its owner a thrill to look at it and daydream! So far, that is all I can do with my "company". I hope that will change. Thanks for this helpful information and for taking time to spell these things out honestly and up-front. I am sure it helps you but it should also help those who may contact you, to make sure they don't "lose out" by being so far away from necessary preparations that you cannot help them without massive effort (and costs). best regards, Larry Holmes
Sunday, January 27, 2008
George says

I truly thank you for this article. As Mr. Holmes mentioned, the article does demonstrate the level of knowledge and wisdom that you possess. Currently, from our perspective, our company is still in early Beta with many of our features still under development or purposely excluded from mainstream use until we feel the time is appropriate. As we continue to improve our offerings, we will simultaneously dedicate much research time into the aforementioned venture capital funding options available. Based on our early trials, we do see that the main obstacle that we will have to overcome is mostly on our marketing end as our current customers keep expressing satisfaction with our services. In the end, it boils down to available funding and having the right people backing the project. Once again, thank you for your insight. Sincerely, George
Wednesday, February 20, 2008
john dege dabele says

This is the most helfull sitite for those of us in the undeveloped nations where education pertaining to business developemnt does not exist.
Monday, April 7, 2008
Sheila Frazier says

I enjoy getting your newsletter and all the informative articles you offer. You did a great job on our Business Plan. We can only blossom further in the near future. Thanks again. Sheila Frazier President Eaglesnest Secretarial Service, Inc.
Wednesday, May 21, 2008
AJS says

Well done.
Monday, June 23, 2008
PJS says

Having completed approximately $3.5 billion in financing and M&A transactions over the past 20 some years primarily for venture-backed companies, my experience has been that VCs rarely look favorably on having a broker of any sort involved with a fund raise. They look askance at seeing their investment dollars go to an intermediary. Private equity and hedge funds, that's different.
Wednesday, July 30, 2008
John Hunter says

Hi, I'm once again looking toward you folks for help. I was at one point going to build a shooting range, but I talked to a number of people and found out that it could be a very great problem. So, I decided to go with my first love; Photography. I know I can make it last. I know what I need to do to make it a positive venture. I love photography. I have been at it for 48 years. I've taught basic photography twice in my time. Once in upstate NY, and again at the DOM at White City, Oregon. I do still have the one problem. Money. I am trying to come up with the cash through a company that deals in membership. It's the Woodbridge Club. They are located in two places. New York and Florida. The club is part of Lombardi Publishing. If I can't get the funds I need this way, I will be back to see you folks. Later aye. Best Regards, John Hunter, jehunter1@charter.net
Wednesday, July 30, 2008
Growthink says

PJS - thank you for your comment. To clarify, Growthink is not simply a broker. The services a client receives from us are far more comprehensive from the services brokers usually offer. We help companies grow, and sometimes that involves raising capital on behalf of our clients, but it is always part of a larger growth strategy which companies engage us to help devise and implement with them in a partnership capacity.

Also, as a firm, we have never heard this objection from a prospective investor. A VC or prospective investor would much rather see an entrepreneur/company management spending their time to build the company and help it grow to hit important metrics and milestones than burning their time reaching out to prospective investors on behalf of their company.

That’s where Growthink comes in. We do the heavy lifting so entrepreneurs are free to do what they do best – execute on their companies’ growth – and we do what we do best: get traction on notable deals among decision makers at appropriate investment firms.
Thursday, July 31, 2008

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