How An Entrepreneur Should Collect Capital
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An entrepreneur should consider the growth their company will need to support future growth. Because the founder has the ability to raise money to support the growth, they must start developing an exit strategy.
There are many ways an entrepreneur can plan and implement a capital-raising process. I will discuss these five steps in this article.
1. Ask someone else
The first step to acquiring capital is having others trust and believe in you. The amount of capital raised usually will be based on the size and market cap of the company.
However, there are many ways to look for capital in this stage, and some require a lot of due diligence on the entrepreneur and investors.
GrowCrunch (a matchmaking company to help find and connect angel investors with entrepreneurs) connects startup founders with investors.
The company interviews entrepreneurs and matches them with the right investor, at the right stage of the company. However, the company, like many others, will usually start with the founder reaching out to investors on their own.
Another way to reach out to investors is to have a friend or family member or a CEO or CFO contact a close friend or family member with connections or a CEO or CFO. Once again, if done properly, you should be able to get the call back and a firm deal.
Additionally, the CEO of a Startup Angel Network will reach out to potential investors in their network. Startups within the network will pitch the entrepreneurs.
This technique allows the investor to pick and choose the deals they want to invest in, based on the need and the entrepreneurs pitch.
2. Research your investor
We have all heard the horror stories about entrepreneurs being duped by the investors they approach. In the beginning, many entrepreneurs make the mistake of not doing their due diligence.
They are focused on finding a great investor. Their first question is "What fund would you like to invest in?"
Once the deal is done, they don't look at the fund and their performance. The investor isn't necessarily being exploitative, it's the way the funding process works.
I have seen some people take on bad terms and invest, but they didn't do any research on the fund. These investors had the capital and didn't invest a dime, and the investor found them later and the capital came from that new fund.
That's when the startup had no way to change the terms and were stuck in a bad deal with a bad investor.
The entrepreneur must get detailed information about the fund and the investments. One way to do this is to attend the company's fund day, which is an event hosted by a fund and a few other investment firms that is typically free.
Typically the founder or CEO will share the company pitch and then, with the investors, will learn about the fund, how they work, who works at the firm and anything else you can learn about the investment firm.
After you get this information, write a thoughtful list of questions for your investor and do the research.
3. Reasonable terms
There is no need to ask for anything less than a reasonable deal. You're not looking for an expensive, no-risk investment.
The higher the risk of the deal, the higher the risk for the investor. It doesn't mean that the investor will give you bad investments, but there is more of a level playing field.
If you're going to take on that type of risk, you need to ensure that your deal is a fair deal, with a reasonable valuation and amount of equity for the investor.
When the valuation is too high, then you are either taking on too much risk or you're pricing yourself out of the market. If the equity valuation is too low, then the risk is not worth it.
At the same time, if the valuation is too high, it will likely be because of high-risk investors who are likely to take too much of the company's equity.
Asking for a reasonable valuation is an important part of the negotiation because the valuation gives you a sense of how much risk you're willing to take on.
If the investor asks for a very high valuation, you'll need to be a large investor or your company won't even be attractive to that fund.
However, if the valuation is reasonable, it doesn't make you look like you're putting yourself in high-risk.
4. Make your term and price competitive
If you want to get the most money for your company, you should be as aggressive as possible. In a conversation with one fund, the CEO raised the company's valuation to $5 million, even though he only had $1 million in equity in the company.
He was taking on a lot of risk in terms of the valuation and time because he was asking for more equity than the startup was even worth.
When you don't know where you're going to be in six months to a year, don't put yourself in a position where you're going to pay an arm and a leg for equity.
If the terms are competitive, you're not raising money from a bunch of billionaires. If the valuation is competitive, it will attract companies that are looking for money to scale their business.
You should always take on the terms that you are comfortable with and can still make the valuation work.
5. It's the entrepreneur's call
There is no right or wrong in negotiating terms, but it's important to know that it's the entrepreneur's decision. There is one piece of advice that can be helpful, though, and it comes from my friend Bill Sardi.
If you are faced with a deal where you are nervous about the terms, and there's a problem to solve, and you are afraid you won't be able to resolve it, ask your investors to speak to one another and come to a resolution.
If you keep going, your investors will know that you're not able to make the deal work.
The truth is that the company is running without you, and you are the one that's supposed to be the expert in business. The advice in the following two sections is not right for every situation, but it does give you an idea of what you can and cannot ask for.