12 secrets to raising capital

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12 Insider Secrets to Raising Capital

12 Insider Secrets to Raising Capital

Growthink’s 12 Insider Secrets to Raising Capital

Legal NoticesLegal NoticesLegal NoticesLegal Notices

All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic or mechanical including recording, photocopying or by any other information storage or retrieval system, without the written consent of the publisher. This publication is sold as an educational reference only. While all attempts have been made to verify information provided in this publication, neither the author nor the Publisher assumes any responsibility for errors, omissions or contrary interpretation of the subject matter herein. This publication is not intended for use as a source of legal or accounting advice. The Publisher wants to stress that the information contained herein may be subject to varying state and/or local laws or regulations. All users are advised to retain competent counsel to determine what state and/or local laws or regulations may apply to the user’s particular business. The purchaser or reader of this publication assumes responsibility for the use of these materials and information. The author and Publisher assume no responsibility or liability whatsoever on the behalf of any purchaser or reader of these materials. We expressly do not guarantee any results you may or may not get as a result of following our recommendations.

Growthink’s 12 Insider Secrets to Raising Capital

Table of ContentsTable of ContentsTable of ContentsTable of Contents

I. Introduction .................................................................................. 1

II. Types of Capital........................................................................... 2

III. Insider Secrets to Raising Capital ............................................. 5

Venture Capital Secrets.................................................................................... 5 Insider Secret #1 – Narrow Your List of Venture Capital Firms .............................................. 5

Insider Secret #2 – Never Send a Business Plan ................................................................... 7

Angel Capital Secrets ....................................................................................... 9 Insider Secret #3 – Find “Latent” Angel Investors................................................................... 9

Insider Secret #4 – Actively Find Angel Investors................................................................. 10

SBA/Bank Loan Secrets ................................................................................. 12 Insider Secret #5 – Seek out “Preferred Lenders” ................................................................ 12

Insider Secret #6 – Preparing Yourself to Get a Traditional Bank Loan ............................... 13

Creative/Alternative Financing Secrets........................................................... 14 Insider Secret #7 – Vendor Financing................................................................................... 14

Insider Secret #8 – Donations CAN Fund Your Business..................................................... 16

Grant Capital Secrets ..................................................................................... 17 Insider Secret #9 – Foundation Grants are NOT Available to For-Profit Businesses ........... 17

Insider Secret #10 – The Best Place to Find Grants for Your Business ............................... 18

Business Plan Secrets.................................................................................... 20 Insider Secret #11 – How to Establish Credibility in Your Business Plan............................. 20

Insider Secret #12 – Your Financial Model Must Be Incorporated Throughout Your Entire Business Plan........................................................................................................................ 22

Growthink’s 12 Insider Secrets to Raising Capital Page 1

I. Introduction

Capital, funding, or money (they all mean the same thing) is the fuel that

allows businesses to grow. Without capital, businesses fail. With capital,

early stage companies can begin to grow, and mature companies can

achieve even greater scale.

For early stage companies, particularly those with little or no track record

of success, the challenge is to find the capital they need.

Because the vast majority of businesses fail, banks, venture capital firms

and other lenders and investors are often highly skeptical and not willing

to part with their dollars unless significant conditions are met.

However, there are ways to attract this kind of capital, and there are tons

of capital sources that are largely overlooked by entrepreneurs

This report identifies the three core sources of funding available to

entrepreneurs and business owners looking to start or grow their

businesses, and then presents key insider secrets for successfully

raising these types of capital.


II. Types of Capital

For the entrepreneur or business owner seeking to fund their company,

there are three main pools of capital from which to draw:

1. Debt capital

2. Equity capital

3. Creative/alternative financing

Equity capital is the term used to describe the capital that is given to a

company in return for a portion of that company’s stock or equity. Angel

capital and venture capital are two key forms of equity capital.

Conversely, debt capital is the term used to describe the capital that is

given to a company in return for the company’s promise to repay the

capital over time with a fixed or variable interest rate. SBA loans and

traditional bank loans are two key forms of debt capital.

Debt capital is nearly always secured with collateral; for instance, if the

business owner does not re-pay their loan, they could possibly lose their

house or business equipment if they used it for collateral.

Creative or alternative finance is the term used to describe non-

traditional sources of capital, including capital that must be paid back,

capital which requires equity to be relinquished and/or capital that is

given to a company without any strings attached. There are many, many


forms of creative or alternative finance such as grants, vendor financing

and donation-financing.

The key differences between debt capital, equity capital and

creative/alternative financing are as follows:

Type of Capital

Term for person or institution who provides

capital

Capital provider gets

equity/shares of company

Company accepting

capital must repay loan

Company accepting capital must often put up collateral

Debt Lender No Yes Yes

Equity Investor Yes No No

Creative/ Alternative Financing

Depends Sometimes (but rarely)

Sometimes (but rarely)

Sometimes (but rarely)

Creative/alternative financing is clearly the best form of capital with

regards to the fact that oftentimes no equity is issued and the financing

does not have to be repaid.

With regards to debt and equity capital, at first glance, it seems that

equity capital is less risky to business owners. While that is true (since

there is no repayment and no collateral), equity capital is typically only

provided to companies meeting specific criteria (which will be discussed

later).

Also, with equity capital, the business owner foregoes a significant

portion of the value created if/when the company reaches a liquidity

event (e.g., has an initial public offering (IPO) or is sold to another

business).


However, it is our experience that a small piece of a big company is

better than a large piece of a small company and that if equity capital is

available to your company at reasonable terms, it is often a good

decision to accept it.


III. Insider Secrets to Raising Capital

Venture Capital Secrets

Insider Secret #1 – Narrow Your List of Venture Capital Firms

Venture capitalists don’t just invest in whatever companies they find

personally interesting. Each venture capital firm invests based on

particular characteristics, including:

• Market SectorMarket SectorMarket SectorMarket Sector: Many venture capital firms focus on specific

sectors such as healthcare, information technology (IT), wireless

technologies, etc. In most cases, even if you have a great

company, if you fall outside of the VC's sector preference, they'll

pass on the opportunity.

• Stage preferenceStage preferenceStage preferenceStage preference: VCs tend to focus on different stages of

ventures. For instance, some VCs prefer early stage ventures

where the risk is great, but so are the potential returns.

Conversely, some VCs focus on providing capital to firms to

bridge capital gaps before they go public.

• Geographic locationGeographic locationGeographic locationGeographic location: Most venture capital firms only invest

within 100 to 200 miles of their office(s). By investing close to

home, the firms are able to more actively get involved with and

add value to their portfolio companies.


Virtually all VCs have websites that make this information readily

available. Find investors that are a fit with your company for all three of

these areas. For instance, if you are a pre-revenue software company

based in Chicago, your best bet is to find a venture capital firm within

200 miles of Chicago that has experience funding pre-revenue software

companies.

If you don’t do this, 1) you will waste your time, and 2) you will risk “over-

shopping” your company. With regards to over-shopping, the venture

capital community is fairly tight-knit. That is, most VCs know each other.

They work together on deals, sit together on Boards, meet each other at

conferences, etc.

One risk factor that this presents is that if one investor passes on a deal,

it oftentimes frightens other investors, as they start thinking “if that VC

passed, he/she must have found something wrong with the deal.” As

such, you don’t want to present your company to VCs that will pass on

your deal because it wasn’t a fit for them, and not because your

company lacks merit.


Insider Secret #2 – Never Send a Business Plan

Do NOT send VCs your business plan in your initial contact.

You must realize that VCs are drowning in unsolicited business plans.

They are NOT going to read your business plan if you send it to them in

the initial email.

Actually, you shouldn’t even send an Executive Summary or a PowerPoint

in this first email. So what should you say in your email?

Instead of sending your business plan, give the VC “teaser” points about

your venture. What do I mean by “teaser” points? “Teaser” points are 5

to 6 bullets (200 words or less) about your venture with the key points of

it.

The goal of the teaser email is to:

• Create intrigue and excitement

• Show that the market size is big enough

• Show that the management team is unique

• Prove that the venture is capable of generating significant

revenues over time

• Create a sense of urgency (e.g., implying that you will get

financing within 90 days with or without them)


If the VC is interested, they will email you back to request an executive

summary, PowerPoint deck, or even your full business plan.

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Angel Capital Secrets

Insider Secret #3 – Find “Latent” Angel Investors

While the Small Business Administration and other organizations

estimate the number of active angel investors in the United States to be

250,000, the number of potential angel investors is much greater.

According to TNS Financial Services, there are 9.3 million households in

the United States with a net worth exceeding 1 million dollars. Three

million of these households, according to Merrill Lynch & Co. and

Capgemini Group, have investable assets of at least $1 million, excluding

their primary homes.

We consider this 9.3 million figure to be the best estimate of the number

of potential angel investors in the United States. The vast majority of

these individuals are “latent angels,” defined as individuals who have the

necessary net worth, but have not made an investment.

These individuals are often the best potential investors in a venture since

they have the funds, but aren’t bombarded with potential deals (unlike

angel groups and venture capitalists who are constantly bombarded).


Insider Secret #4 – Actively Find Angel Investors

Angel investors are not going to find you. You have to find them.

One great way to find angels is through active networking. Networking

(e.g., attending events, constantly expanding your network by asking for

more introductions from your existing contacts) works extremely well, but

does take time and diligence - so you must stick with it.

Here’s a quick lesson regarding how Google raised its angel round of

capital. Founder's Larry Page and Sergey Brin told their ideas to others in

hopes that they would get great advice and connections. And sure

enough, it worked. Page and Brin discussed their concept with their

computer science professor David R. Cheriton. Cheriton then introduced

them to his friend Andy Bechtolsheim.

Bechtolsheim then wrote Google a check for $100,000.

You can also find angel investors through focused prospecting. For

example, understanding that many angel investors are retired

executives, you can find them by doing via searches on Google.

For example if you were seeking angel investors for an aviation company,

doing Google searches on “retired Boeing executive” and “former Boeing

executive” will produce names of potential angels.


Likewise, you can find the names of executives and Board members of

local companies, contact them and see if they are interested in investing

in your company.

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SBA/Bank Loan Secrets

Insider Secret #5 – Seek out “Preferred Lenders”

The United States government WANTS you to succeed. And as a result,

they lend money to entrepreneurs and small business owners through its

Small Business Administration (SBA).

If you are seeking an SBA loan, seek out “Preferred Lenders.” While

Preferred Lenders comprise only 2% of SBA lenders, they make 20% of

total SBA loans.

Preferred Lenders have received special designation from the SBA as

being the most successful lenders. With this designation, they are

allowed to make their own decisions regarding whom to loan money to,

without consulting the SBA first. This means that their loan processing

times are the shortest and you can get your money sooner. In fact,

Preferred Lenders can often write you a funding check within 24 to 48

hours!


Insider Secret #6 – Preparing Yourself to Get a Traditional Bank Loan

Traditional bank loans have very low interest rates and are often perfect

for entrepreneurs and business owners. The challenge is getting these

loans.

One insider tip for getting these loans is to establishing a history with

your bank before you really need the loan.

Banks (like equity investors) like to invest in business owners with which

they have a pre-existing relationship. This relationship breeds trust and

confidence that the business owner will spend their money wisely.

As such, it’s a good idea to establish a credit history with your bank six to

twelve months BEFORE you need the loan. Even if you simply take out a

$5,000 loan and show that you are able to make payments each month

for a year, your business will be more likely to receive the larger loan you

seek later.

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Creative/Alternative Financing Secrets

Insider Secret #7 – Vendor Financing

Vendor financing is often a great, yet highly under-utilized, source of

business funding. As the name implies, vendor financing occurs when a

company receives funding from one of its vendors or suppliers.

Vendor financing is actually one of the most popular forms of debt

financing for companies. Vendor debt financing is often known as “trade

credit,” and is when a vendor sells you a product or service and you don’t

have to pay right away, but rather the debt either needs to be paid in full

within a certain period or periodic payments with interest are required.

However, sometimes vendors provide both interest-free or equity-based

financing for the following reasons:

• To gain a built-in customer base. By funding your business, you

will buy more, and they will sell more, (now or in the future) of

their products and/or services.

• Loyalty: you will be more loyal to the vendor.

• Learning/market research: the vendor will have you as a closer

customer and will learn ways from you to improve their products

and services.

• Equity upside, if they make an equity investment and your

company has a significant liquidity event in the future.


One famous example of vendor financing is that early on, shoe maker

Kenneth Cole sought out a struggling Italian shoe manufacturer knowing

that they needed clients and would probably be wiling to offer financing.

The Italian shoe manufacturer funded the then fledgling company.


Insider Secret #8 – Donations CAN Fund Your Business

Believe it or not, donations have been used to fund many companies

including for-profit ventures.

The most notable of donation-funded ventures is perhaps Wikipedia

which has raised several million dollars in donations to date.

In the for-profit space, an example of donation-funded is Peter Cooper,

founder of FeedDigest. In 2004, Cooper added a PayPal button to his

website and asked users of his website to donate money.

His visitors subsequently donated enough money to allow him to grow.

Soon after, an angel investor wrote him a check for $100,000.

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Grant Capital Secrets

Insider Secret #9 – Foundation Grants are NOT Available to For-Profit Businesses

There are many private and public foundations and philanthropy

programs for funding projects that improve quality of life, or allow people

to work towards achieving goals they would otherwise not be able to

pursue without assistance.

However, with few exceptions, the grants offered by private or public

foundations are NOT available to for-profit businesses. So, do NOT waste

your time looking at these grants.

However, the U.S. government, along with state, and local governments

DO fund for-profit ventures through grants.

Within the federal government, there are 26 grant-making agencies.


Insider Secret #10 – The Best Place to Find Grants for Your Business

The first step in locating the appropriate grant for your company is

answering the following question: What industry does my business

serve?

The answer to this question will tell you where to begin your search for a

grant.

Let’s use an example business called Wendy’s Windfarm to walk through

the process. Wendy’s Windfarm serves the Energy industry and the first

place to begin a search is the Federal Governments Grant Website –

www.grants.gov.

Once there you can click on the Menu Option entitled “Find Grant

Opportunities.” Once you have clicked on that, you can choose to search

by category – this is where you recognition of industry comes in handy –

click on “Energy.”

Once you click that link, you are able to view the date that the grant

ends, the name of the opportunity, and the agency distributing the grant.

Likewise, to find the grants that are available to you and your business,

you can conduct an Advanced Search. Using the Wendy’s Windfarm

example, you would select the following:


1. Funding Activity Category: “Energy”

2. Search By Eligibility: “Small Business”

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and what to do once you have won your grant.and what to do once you have won your grant.and what to do once you have won your grant.and what to do once you have won your grant.


Business Plan Secrets

Insider Secret #11 – How to Establish Credibility in Your Business Plan

Your business plan is your roadmap for growing your company. It also

serves to communicate your company’s value proposition to your

employees, advisors, partners, customers and investors. Business plans

are the vehicle by which you “get in the door,” and are the documents

most heavily scrutinized by investors and lenders.

To establish credibility, it is critical that your business plan does not

overestimate market sizes, underestimate competition, or project results

over-aggressively. Rather, your plan must present a realistic game plan

for achieving success, including:

• Highlighting past accomplishments: The best indicator of future

success is your company’s past track record. The business plans of

previously funded companies must show what milestones they

have achieved with those funds. New companies must show how

the past successes of the management team will enable the

company to overcome expected challenges.

• Understanding and defining the “relevant market”: Improper sizing

of your company’s target market is a telltale sign of a poorly

reasoned business plan. For example, though the U.S. healthcare

market is a trillion dollar market, there is no company that could

reap $1 trillion in healthcare sales. Rather, a more meaningful


metric is the relevant market size, which equals the company’s

sales if it were to capture 100% of its specific niche of the market.

Defining and communicating a credible relevant market size is far

more powerful than presenting generic industry figures.

• Understanding and catering to customer needs: Investors,

partners and lenders have a laser sharp focus on the relationship

between a company and its customers. In your business plan, you

must clearly communicate how your products and services meet

specific customers’ wants and needs, and identify which target

markets most exemplify these needs. Your business plan must

also outline an easy to follow and credible roadmap of how your

company plans to penetrate your market.

• Proving barriers to entry: Your business plan must include

strategies that demonstrate that your company can and will build

long-term barriers around your customers. Claiming a first mover

advantage is simply not compelling enough.

• Developing realistic financial assumptions: Many investors,

partners and lenders skip straight to the financial section of the

business plan. It is critical that the assumptions and projections in

this section be realistic. Plans that show penetration, operating

margin and revenues per employee figures that are poorly

reasoned, internally inconsistent, or simply unrealistic greatly

damage the credibility of your entire business plan. In contrast,

sober, well-reasoned financial assumptions and projections

communicate operational maturity and credibility.


Insider Secret #12 – Your Financial Model Must Be Incorporated Throughout Your Entire Business Plan

The Financial Plan and projections section of your business plan explains

how the execution of your company’s vision will reap great financial

rewards for the investor or partner and/or give the lender confidence

that they will eventually be paid back. As such, it is the section that they

often spend the most time scrutinizing.

Among other things, the Financial Plan must numerically detail the

revenue model through past (if applicable) and pro-forma (projected)

Income Statements, Balance Sheets and Cash Flow Statements.

It is critical that the figures used in these statements flow from the

analyses in every other section of the business planevery other section of the business planevery other section of the business planevery other section of the business plan. For instance, the

relevant market size (Industry Analysis) should be reflected, as should

competitors’ operating margins (Competitive Analysis), customer

acquisition costs (Marketing Plan), employee requirements (Operations

Plan), etc.

Integrating your financials with the rest of your business plan gives

investors and lenders a greater confidence and understanding of your

business and your ability to successfully execute on the opportunity.

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exactly how to exactly how to exactly how to exactly how to create an expert business plan that raises capital and create an expert business plan that raises capital and create an expert business plan that raises capital and create an expert business plan that raises capital and

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12 secrets to raising capital

Business

insider secrets

capital publisher

angel capital secrets

venture capital secrets

grant capital secrets

business plan secrets

types of capital

information storage