Ten Practical Tips for Raising Capital
Raising capital is one of the most important, stressful, exciting, anxiety-inducing and (hopefully) thrilling process that a young company can go through. While every situation is different, understanding the process itself (and avoiding common pitfalls) is incredibly helpful in getting successfully funded. Having learned plenty from guiding young companies through this process, I wanted to share what I’ve learned and offer as much practical advice as I can (with as little legalese as possible). It goes without saying that this isn’t intended to be fully comprehensive, but I think the points below have some value for anyone going through the process or who thinks they will be raising capital in the future. Enjoy.
- Choose the right structure for your company. For many companies, this comes down to the timeless (and dull) “LLC vs. C-Corp” debate. You’ll see countless opinions on the best approach but, at the end of the day, each situation is unique. While some (but not all) investors prefer to invest in corporations, the LLC structure has some meaningful benefits as well (especially if there is not an immediate plan to raise capital). Making a misstep at this stage is rarely fatal, but it may create plenty of headaches and hassles down the line. Talk to someone who understands your goals, your business and can guide you through the process.
- Make sure the company owns its Intellectual Property. If you farmed out development work, make sure the contract clearly spells out that the company owns the work product. Same goes for founders, early employees or consultants. Any important IP must be clearly owned by the company or sirens will go off.
- Make sure that your house is in order. In addition to locking down IP, make sure your cap table is clean, you’ve properly structured the relationship among any co-founders, have appropriate vesting schedules in place and there are no potential red flags. Look at your company through a potential investor’s eyes and clean up anything that needs cleaning. In addition to making the overall process smoother, you’ll get bonus points for having your sh*t together.
- Know your company, your industry, your business plan and your financials. If someone is taking out their checkbook, they will want to know that you’ve done your homework. Be prepared.
- Be realistic about how long the process takes and plan accordingly. If you haven’t started prepping to raise capital yet, don’t count on having investor money in the door next month. It can take months (or longer) for new companies to raise capital especially if they aren’t located in a startup investor hotbed or lack close investor relationships. Usually the best answer to “When should I start raising capital?” is “Right now and pretty much don’t ever stop.” An important corollary to this is that a deal isn’t done until there’s a check in your bank account.
- Raising capital can feel like a full time job (and it pretty much is). While raising capital, someone (i.e. you) still needs to keep the day-to-day business running. This is no small feat considering the number of meetings, pitches, events and presentations it may take to get to your first term sheet. It’s important to be mentally and emotionally prepared for this grind; as glamorous as the concept of raising capital may seem from afar, it’s typically far from it. Get ready to work your ass off.
- To the extent possible, only deal with accredited investors (i.e. investors who meet certain net worth requirements). Dealing with non-accredited investors can create a web of disclosure and compliance issues and your company likely lacks the resources to properly address. That being said, if the choice is between dealing with non-accredited investors and going out of business, common sense dictates that you may have to take non-accredited money.
- Teach yourself the basics of startup investments and term sheets. While an experienced lawyer or adviser can help guide you through the process, you need to know enough to handle yourself in a one-on-one meeting or negotiation with a potential investor. There are a lot of great resources out there to help you understand term sheet basics. Use them to understand the more important economic and control terms. My favorite resource is Venture Deals: Be Smarter than Your Lawyer and Venture Capitalist by Brad Feld and Jason Mendelson. Well worth the time investment. Knowledge is power.
- The only real definition of “Valuation” is “whatever number an investor is willing to pay”. Projections are great, revenue is better but, at the end of the day, the free market decides how much your company is worth. Unless there are multiple interested parties, it can be difficult to drive a favorable deal with an investor (especially if the company needs money in the short term). Like an Ebay auction, the most effective way to get a better deal is to have multiple bidders.
- While a startup can’t always be super picky about who it raises money from, it’s still incredibly important to find the right “fit”. Getting the deal done is only the beginning and you will likely be in bed with your investors for a long time. Like any good relationship, there needs to be trust, communication and mutual respect (and not just dollars). The right investor can bring more than their checkbook to the table and serve as a valuable resource for the company. The wrong investor can be a nightmare regardless of the size of their bank account. Sometimes you need to trust your gut regardless of the business terms.
At the end of the day, the complicated process boils down to a few simple principles. Be prepared. Do your homework. Work your ass off. Have your sh*t together. Surround yourself with the right people including advisers and investors you trust. Make big things happen.
Best of luck.