• Arijit Bhattacharyya

    Raising a lot of capital at an early stage is a road to success ?

    The majority of business owners are aware that there may be money available if the fundamentals of a business idea—the management team, market opportunities, operating systems, and controls—are sound. Finding the capital needed to expand a business can be a daunting task. However, the search for the money is equally threatening as it is exciting. Certain harsh realities that can seriously harm a business are incorporated into the process. Although they cannot be avoided, entrepreneurs can at least prepare for them by understanding them.

    Don't be afraid to ask for the money you need as an entrepreneur. They can take steps to ensure that they get the capital they need, when they need it, on terms that do not sacrifice their future options, despite the fact that they will always be at a disadvantage when negotiating with people who make deals every day. Understanding the drawbacks of the fundraising process is the first of these steps.

    The lure of money causes founders to grossly underestimate the time, effort, and creative energy required to get the money in the bank. Raising money is expensive. Perhaps the least well-known aspect of fundraising is this. During the fund-raising cycle of new businesses, managers often spend as much as half their time and the majority of their creative energy trying to raise capital from outside sources. We have witnessed founders abandon nearly all other projects in order to locate potential funding sources and tell their story.

    As interested investors conduct "due diligence" examinations of the founder and the proposed business, the procedure is stressful and can last for months. It can easily take six months to get a yes; A rejection could take up to a year. At the same time, cash is leaving rather than entering the business because of the emotional and physical strain. It is possible for young businesses to fail while their founders attempt to raise capital to support the subsequent growth phase.
    Performance is always affected. Customers feel neglected, no matter how subtle or unintentional; Managers and employees receive less attention than they typically receive; Small issues are ignored. As a result, profits decrease, cash collections slow, and sales stagnate or decline. Additionally, if the fundraising effort fails in the end, morale will suffer, and important employees may even leave. A struggling new business could be rendered bankrupt as a result.

    After nearly ten years of acquiring relevant experience and developing a track record in their industry niche, the founders of one start-up recognized an opportunity to launch a company in a telecommunications-related industry and began their search for venture capital. In order to develop a business plan, the three partners put up $100,000 as seed money and set out to raise another $750,000. Their seed money was gone eight months later, and they had exhausted every possible source of funding, including more than 25 venture capital firms and a few investment bankers. The potential founders had given up secure employment, invested their savings, and put in long hours for a business that was already failing before it could even begin.

    It's possible that the entrepreneurs used their time and money in different ways. We inquired about their sales if they had used the $100,000 seed money over the previous year to acquire their first clients. Their response? million dollars. The founders had not anticipated having to devote so much of their attention to starting the business. Actually, closing orders and collecting cash were more important to the company's survival than raising funds.

    Out-of-pocket expenses can be surprising high even when the search for capital is successful. The fees to lawyers, underwriters, accountants, printers, and regulators that come with going public can range anywhere from 15% to 20% of a smaller offering and can even reach 35% in some cases. Additionally, a public company faces additional costs following the issue, such as administration and legal fees, which rise with the requirement for more comprehensive reporting to comply with the SEC. Additionally, directors' fees and liability insurance premiums are likely to rise as well. These costs frequently amount to at least $100,000 annually.

    In a similar vein, in order to guarantee that the values of inventory and receivables are genuine, bank loans exceeding one million dollars may necessitate stringent audits and independent reviews. All of these expenses are borne by the recipient of the funds.
    Time and money constraints cannot be avoided. The tendency of entrepreneurs to underestimate these expenses and to fail to plan for them is something they can avoid.

    You Are Not Protected

    In order to persuade a financial backer to part with money, you need good sales skills and information. When you want money, you need to be ready to tell 5, 10, or even 50 different people about your marketing and competitive strategies, how much of the company you own, how you get paid, and whether or not you rely on a single brilliant technician or engineer. You also need to tell them about management's strengths and weaknesses. Additionally, you will be required to submit your personal and business financial statements.

    It is understandable that business owners feel uneasy when such closely guarded secrets are revealed. Even though the venture's confidentiality is respected by the majority of potential sources, inadvertent information leaks occasionally have negative effects. In one instance, a British startup team had created a brand-new automatic coin-counting device for large retailers and banks. The business plan was sound, and the product had a lot of promise. The business plan was shared with a potential investor who ultimately declined to participate when the lead investor was looking for coinvestors. Despite the fact that the deal went through, the business owners found out months later that a competitor had shared the business plan with the investor who had decided not to join.

    In another instance, a consultant was assisting an entrepreneur in selling his business to a company in the Midwest. The seller inquired about the buyer's personal financial situation while sitting in the office of a senior bank officer who was considering financing the purchase. The bank officer dialed the buyer's bank from a thousand miles away, connected with a lower-level assistant, and watched in awe as the clerk read the buyer's personal balance sheet line by line.

    When looking for capital, there is always a chance that information will end up in the wrong hands. This is one reason to make sure you really need the money and are getting it from reputable sources. By discussing the issue with the lead investor, avoiding sources that are close to competitors, and only speaking with reputable sources, you can minimize the risk. You should, in effect, conduct your own "due diligence" on the sources by speaking with reputable business owners and professionals who have dealt with them.

    Experts Can Blow It

    Decisions about how much money to raise, from which sources, in debt or equity, and on what terms all limit management and create obligations that must be met. Despite the fact that a growing business could be crippled by these commitments, managers are quick to delegate their fund-raising strategies to financial advisors. Sadly, not all advisors possess the same level of expertise. Naturally, the entrepreneur, not an outside expert, is the one who must deal with the results or die.

    A start-up spun out of a public fiber optics company was called Opti-Com, a fictitious name for a real company. The managers of the start-up were steadfast and trustworthy, despite not being regarded as superstars. They enlisted the assistance of a large, reputable accounting firm and a law firm to advise them, assist in the preparation of their business plan, and forge a fundraising strategy in order to achieve their goal of taking the company to $50 million in sales within five years (the "5-to-50 fantasy"). The resulting plan called for acquiring approximately 10% of the common stock for $750,000.

    The advisor advised the founders of Opti-Com to present the business plan to 16 mainstream, blue-ribbon venture capital firms in the Boston area; They had received 16 rejections four months later. Next, they were advised to visit New York to see venture capital firms of the same caliber because, contrary to conventional wisdom regarding money-raising, the others were "too close to home." The founders continued to fail a year later and were close to running out of money.

    The entrepreneurs at Opti-Com had the mistaken belief that the advisors were knowledgeable about the terrain and would achieve results. The business proposal was not a typical venture capital deal, but none of the smaller, more specialized venture capital funds, private investors, or strategic partners were included in the search. Additionally, the deal was three to four times overvalued, which undoubtedly put investors off.
    In the end, Opti-Com switched advisers. The company approached a small Massachusetts fund under different guidance to get risk capital for new businesses that were important to the economic revival of the state but not strong enough to attract conventional venture capital. This was a good match. At a price that was more in line with the market for start-up deals, Opti-Com got the money it needed: about 40 percent of the company, as opposed to the 10 percent that the founders had offered.

    The key is not to avoid using outside consultants, but to choose carefully. Choose people who are actively involved in raising capital for businesses at your stage of growth, in your industry or technology, and with similar capital requirements, as a general rule.

    Money Is Not the Same for Everyone Despite the fact that money drives your fundraising efforts, potential financial partners offer more than just money. You may undervalue yourself if you overlook factors like the partner's industry experience, contacts with potential suppliers or customers, and good reputation.

    Another important factor is frequently the investor's ability to respond quickly. Before the car phone business could be sold on the open market, one management group had four weeks to raise $150 million. It presented a summary plan to five prominent venture capital and LBO firms because it lacked the time to create a comprehensive plan.

    One of the businesses posed an intriguing inquiry: How do you prevent the theft of these phones? If you don't solve that problem, you won't be able to break into the market. The founders quickly came to the conclusion that pursuing this source was pointless. Evidently, the business was little known by the company: Car phones weren't stolen like CB radios at the time because they couldn't be used until they were installed and activated by a licensed person. There was not enough time for the business owners to wait for the investor to get up to speed.

    They quickly secured commitments from two investors with telecom industry experience they targeted. Another entrepreneur owned a novel, patented device that semiconductor manufacturers could use. He needed more money to get the product into production because he was running out of money from a previous round of venture capital. Since he was nearly two years behind on his business plan, his backers would not make any more investments.

    He looked for other options after the prominent venture capital firms turned him down. He made a list of potential customers for the device and approached venture capital firms that supported those businesses. They were supposed to be able to recognize the value of the technology and the business opportunity. The entrepreneur received three offers within three months from a list of twelve active investors in the customer's industry, and the financing was concluded quickly after.

    The Search Is Endless Cash-hungry and unwary entrepreneurs are quick to conclude that the deal is closed with the handshake, letter of intent, or executed terms sheet after months of hard work and difficult negotiations. They slack off on the street-smart caution they've shown up to this point and stop talking to people about other funding options. This could be a major error.

    Several venture capitalists, three or four strategic partners, and the source of a bridge capital loan were the subjects of simultaneous negotiations between an entrepreneur and one of his vice presidents. The company was down to 60 days of cash after about six months, and the potential backer who was most interested in the deal knew it.

    It offered a take-it-or-leave-it $10 million loan with a 12% interest rate and warrants to acquire 10% of the business. Despite the fact that the deal was more expensive than conventional venture capital, managers believed they had few other options because no other negotiations had progressed to that level.

    However, the business owners were able to conceal their weakness in negotiations. The founder of the company ensured that he scheduled a second meeting several hours later after each round of negotiations. He made it seem like there was more discussion elsewhere than there actually was. The founder left the investors in suspense regarding the strength of their position by stating that he needed to travel to Chicago to continue discussions with venture capitalist XYZ.

    In the end, the founder worked out a deal with the one interested investor on terms he was happy with. Since then, the company has gone public and established itself as a market leader.
    What a lot of other people don't know, the lead entrepreneur did: Even if an investor expresses serious interest, you must assume the deal will never close. Even though it might be tempting to give up trying to find money, keeping looking not only saves you time in the event that the deal does not work out and strengthens your position in negotiations.

    Lawyers Cannot Protect You.
    If you pay professionals to handle legal and accounting documents, why should you have to get involved in the nitty-gritty details? due to the fact that you are the one who must live with them. There are many different ways deals are structured. The terms, covenants, conditions, responsibilities, and rights of the parties to the transaction are outlined in the legal documentation.

    Naturally, the money sources are more familiar with the procedure than the entrepreneur who is going through it for the first or second time. They make deals every day. A company may be deprived of the flexibility it requires to respond to unanticipated circumstances as a result of covenants, and lawyers, despite their skill and diligence, cannot predict which conditions and terms the company will be unable to abide by.

    Take a look at Com-Comp, a small public company. The final documentation arrived after more than two months of difficult negotiations with its bank to convert a $1.5 million unsecured demand bank note into a one-year term note. One of the numerous covenants and conditions was tucked away in the agreement: In the event of any material events that have the potential to negatively impact the company's performance, this loan will be due immediately.
    The clause gave the bank, which was already antagonistic, a loaded gun because it was so open to interpretation. Any unanticipated occurrence could be used to cancel the loan, causing such unrest in an already troubled business that it probably would have had to file for bankruptcy. The terms were immediately apparent to the founders when they read the fine print, prompting a revision of the agreement.

    A company can reach new heights or, at the very least, get through a trying time with the help of private or institutional capital, whether it comes in the form of debt or equity. Small business owners shouldn't be afraid to use the many options for financing available to them.

    However, they should be ready to put in the time and money to conduct an in-depth and careful capital search. Raising funds is a time-consuming and costly process in and of itself. It cannot be done on the fly or delegated. It also carries inherent dangers.

    Entrepreneurs have a strong incentive to learn as much as they can about the process—even the things they are probably least interested in knowing—because even the most experienced businesspeople are at a disadvantage when negotiating with professionals.



    If you want to expand your business or looking for mentoring and investment support please be in touch.

    Arijit Bhattacharyya