Friday, March 8, 2013

Thoughts on Raising Capital

I was recently going through some old articles and cleaning out my office (it still needs a lot of love), when I found this article in a hard print copy of the Minneapolis/St. Paul Business Journal. I read almost nothing anymore that I can’t access online, but I don’t mind reading the Minneapolis/St. Paul Business Journal in hard copy form. It’s small enough that it’s easy to read on the bus (my preferred mode of commuting), and I usually get through it very quickly (there’s something very satisfying about finishing the paper, recycling it, and then crossing it off of my “to do” list).

Apart from the paper in which it was published, I like this article because it highlights that there is more than one way to raise capital and fund operating costs for startups. As a lawyer for entrepreneurs, I get asked frequently about how to raise capital. The short answer is that it’s hard, and it depends on your circumstances and what you need. Articles like this reinforce that raising capital isn’t always easy, but there are many ways to do it. For example, bootstrapping won’t work for every business, as some businesses are just too capital intensive to fund through founder resources and working capital. But, for the right business, bootstrapping is an ideal way to build value to the enterprise without diluting the founder’s (or founders’) ownership, especially if it doesn’t come at the risk of stifling growth.

I thought a couple of interesting things from this article were worth noting. Luke Shimp, the owner of Red Cow, who obtained SBA funding to help launch his restaurant business, describes the importance of having a business plan. Having a good business plan is certainly important for businesses that intend to obtain debt financing from a sophisticated financial institution. I also think the process of developing a business plan is important for entrepreneurs, whether or not you are seeking debt capital. It forces you to think through issues, such as go-to-market strategy, operating capital requirements, customer acquisition timing and costs, management skills, and other critical business factors in a way that you aren’t required to do if you aren’t trying to articulate them on a piece (or several pieces) of paper. 

But, as my colleague and fellow entreVIEW author, Dan Tenenbaum, noted in a prior post, investors (as opposed to lenders) don’t really want to review a full blown business plan anymore. Investors expect that you’ll know the answers to the questions that might otherwise be described in your business plan, but they are not interested in reading through a lengthy plan. For companies looking to raise equity capital, I find that they have much more success using a short pitch deck to help identify potential investors. While the business plan is a useful tool for developing your actual business, it may not be quite as useful for attracting investor capital as it once was.

The story about Interrad, which raised money from several angel investors, offers an insight into a possible problem with raising money from too many investors. If you need to raise capital, and small investors are the only sources that are interested in your opportunity, then that’s who you will likely partner with. It would be silly to set some artificial number of investors that you won’t exceed. If you need the money, then you take it wherever you can get it. 

But having lots of small investors can be a distraction and divert the CEO’s time. While the Interrad CEO doesn’t seem to complain about the quarterly communications he has with his shareholder base, it undoubtedly takes time to prepare those communications (and answer phone calls) that could be used adding other value to the company. The more investors you have, the more people you need to answer to. If your investors don’t have a lot of resources, the investment they made in your business could be very important to them. As noted in this prior post (also by Mr. Tenenbaum), having proactive and frequent shareholder communications, as the Interrad CEO does, is a good way to maintain positive relationships with your investors. Of course, successfully growing your business is an even better way to maintain positive relationships with your investors.

The Code 42 piece highlights the importance of running a lean operation. It also highlights the importance of identifying the right partners to take on as investors. The right investors bring more value than just the checks they write. They also bring connections and industry expertise that can be invaluable to helping your business grow. They should be vested in the success of your business, as they ultimately stand to benefit from that success.

All these stories highlight that there are many ways to raise capital and fund operating capital needs for early stage businesses. However you decide to fund your business, know that it takes hard work, patience and discipline (and a little luck) to get it done. If you are willing to put in the work, and can be patient and disciplined throughout the process, your chances of success will be significantly increased.

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