Wednesday, August 10, 2011

Making Love to a Gorilla…or How to Raise Money

It’s hard to believe I have been in and around the technology financing area as a lawyer and investment banker for almost 27 years now. I sometimes think I have seen or heard it all. I have learned a lot about many things over the years, but one of the most important lessons I have learned is that raising money is like making love to a Gorilla—you don’t stop when you want to; you stop when the Gorilla wants to.

Each time I work with an entrepreneur—whether an experienced serial entrepreneur or an entrepreneurial virgin—the one thing they all want to know is the secret to raising money. Having been a lawyer, an investor, an investment banker, and an entrepreneur, I think I have some insight into the answer to that question.

First, identify investors. Now this might seem like an easy task, but it actually is not. In the 1980s and 1990s, the Minneapolis area was known for the large number of angel investors and small investment banks that could and would help early stage technology companies. The number of investment banks has shrunk to three and the number of angel investors has decreased as well. Since I moved back to Silicon Valley, I have met a large number of angel investors but they all seem to be investing less than they did before the 2008 recession.

So how do you find them? Network, network, and network. Ask people, especially your advisors, for referrals. Most angel investors treat referrals better than cold calls.

I often hear from entrepreneurs. They tell me, “My lawyer (or fill in the blank) is doing a great job!” Then they ask me if I can refer them to some investors. It actually has started to make me angry when a entrepreneur asks me this. I believe that what separates a competent corporate counsel from a great business lawyer is the ability to make introductions, to understand the business, and to use his or her experience to help the company with more than legal problems. Make sure you are getting everything you need. If you have to ask another lawyer or accountant to help with something, then maybe yours is not as good as you think.

Second, make sure that you have lowered the investment hurdle as much as possible. Picture the hunt for financing as being like jumping over a hurdle—any problem an investor may spot raises the hurdle and makes it harder for you to jump over. Make sure the corporate structure is right for investment. Sometimes the most important thing an effective advisor can do is to make you look “normal” to the investment community.

I often run into companies that are set up as limited liability companies. For a variety of reasons, many investors are not comfortable investing in LLCs. The lawyers representing these companies either did not know this or they gave bad advice. Also, I often see companies where they have not properly secured the intellectual property of the company. Employees and consultants have failed to execute proper assignment and confidentiality agreements. And make sure the valuation you are seeking is in line with the norms in the area and the industry. Again, your advisors may not be valuation experts, but if they are really skilled with this type of capital raising they should be able to tell you if what you’re proposing passes the smell test.

Finally, remember that, even if you have done everything right, at the end of the day the investors get to set the rules of an investment, including valuation. If the investors say that they get preferred stock or price-based anti-dilution or any other typical requirement, then you’ll have to accept their rules to get their money.

I have helped raise more money than I can remember. It always comes down to the Gorilla rule, so don’t forget it when you go out to raise money.

A Post by Frank Vargas, Guest Blogger

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