There is no substitute for experience, so align yourself with smart people who have it, and learn everything you can. You will still make mistakes—we all do, and it’s the way we learn, but don’t set yourself up for failure, and take advantage of the wisdom of those who have already made mistakes. Start to build a network of individuals with diverse backgrounds that can add value to your proposition. Know how much money you will need, and what the milestones are that you plan to hit with the money.
Angel money is most commonly raised for seed capital, or the first money in that you will need to start building a company that can attract other sources of capital. When friends and family are involved, be extremely careful not to set a pre-money above market. This can lead to a really messy situation and cram down in future rounds. VC—more detail to come PE—later stage private financing generally reserved for co’s with revenue >$10M Just like everything else, it depends on terms. Good for expansion phase, but generally have to have revenues. Non-dilutive
How much money you need to raise, and the developmental stage of your company, will determine which capital sources make sense for you.
In addition to identifying firms that are in your space, understand who the partner is within the firm who would be most appropriate for you. DO YOUR HOMEWORK! VC’s get hundreds of business plans every year, roughly one every day. There is a very low return for work spent on deals from “unknowns”, and generally they don’t make it very far. It’s always best to approach a fund through a contact that knows them well. There are many different types of brokers, some are useful, some are just plain expensive. Make sure you know which you are talking with. Brokers are good for one thing—their contacts/networks. MAKE SURE THEY HAVE THEM! Do reference checks. Many funds will not consider a deal in which they have to pay a broker, unless there is a very clear reason one was needed. No one likes to see 10% of start-up funding go out the door to someone who has not significantly contributed to the development of the company.
Again, VCs are very busy, and look at a number of new deals every week. Approach them with a very clear and concise two page (max) executive summary with the key points described before. Only send a full plan when the fund has stated an interest, and has requested more information. Make sure it has been well thought out (have your business advisors read it!!). There is no sense in having your highly confidential business plan floating around unless 1) you know who has it and 2) you know they are interested Don’t bother with a PPM. They are extremely expensive, and VC’s don’t bother with them. They may be appropriate for other funding sources (angels—less sophisticated, or when there is good reason to use a broker (when you’re going for an acquisition)), but it’s a waste of time and money if venture capital is what you’re after.
This is the most time consuming step in financing—make sure your parties have expressed clear interest before entering into this phase. While this is by no means an exhaustive list, these are pretty typical follow-up items any investor will want to see. Again, remember the onus is on the entrepreneur to make sure the investor receives the information they have asked for. Ask for clarification if you’re not sure what their concerns are. Identify what issues they have, and figure out how to resolve them.
How to Raise Money in Utah March 15, 2006 Heidi L. Huntsman