Blog | Entrepreneurship
Raising Capital: The Entrepreneur’s Ultimate Guide
If you’ve done your homework, you know that being able to invest is not about how much cash you have.
August 18, 2022
You have an opportunity to purchase an old, but classic, 10-room boutique hotel that is about to go into foreclosure. But there’s something missing. Is it the cash?
You have a small business you want to start or an existing business you want to grow; yet you need an injection of money to take you to that next level. You call a few people as potential investors, but how do you persuade them to invest in you and your business?
One of the keys to success as an entrepreneur is your ability to raise capital. And it's often said that the key to raising capital is a person's ability to sell.
The question is, "What are you selling?"
The four factors to raising capital
Raising capital, also known as OPM—Other People’s Money, is a must-do in the world of investing. It’s also one of the most intimidating parts of starting out as an investor.
So it always helps to have a little guidance along the way. In my experience, there are four key factors to know and address before you go out asking for capital. If you can clearly and confidently address each of these four issues, then the odds of securing funding are in your favor.
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Project
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Partners
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Financing
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Management
Address these four points clearly and confidently and your investors are likely to buy in. If you can show a prospective lender or investor that you have command over these four pieces of the puzzle, then selling will not be an issue, and you will attract more money than you thought possible.
Let's take a closer look at these four factors, and some of the questions investors and lenders will be asking.
Project
Investors and lenders need to easily understand what you’re asking them to give money for. Keep it simple. Keep it concise. Keep it real.
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What is the project that the lender or investor is providing you capital for?
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If it's your business, then what exactly is your business?
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What makes your business different from others in your industry?
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What will make it successful?
Explain both the positive and negative aspects of the investment. Why is it unique and what are the advantages of your investment for the investor?
Partners
Put yourself in the investor's shoes for some perspective. Whose music project would you be more likely to invest in—Paul McCartney's or Mike Tyson's? Whose new skincare company would you back—Mary Kay's or Lindsay Lohan's? It's not rocket science. It's common business sense. The experience that the partners bring to the table, and how comfortable the investor is with their level of expertise, are what will drive any investor's decision.
Questions that need to be answered:
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Who are the key partners behind the project?
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Who is putting the deal together?
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What experience do the partners have?
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What is their track record?
By answering the above, you make the investor(s) feel comfortable and confident working with your team.
Financing
Show the real numbers. This is obviously a bit trickier for a startup company because most of the revenue numbers will be projected numbers, not actual numbers. This is where previous experience can help to overcome that obstacle. Show the investor, as accurately as you can, how the project, be it a business or an investment, will make money. Be realistic. As an investor, I do not want to see the best-case scenario. I want to see the most realistic numbers, including the problems and roadblocks ahead. Every business and investment project has problems. Pretending that yours won't makes you look like an amateur.
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How much money are you raising in total?
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Where is the money coming from?
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Is the money being raised from private parties, traditional lenders, pension funds, or government programs?
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What are the terms? For example, let's say I'm being approached for the down payment on an apartment building. I'm told the other 80 percent is coming from a top lending institution. What would be more attractive to me as an investor—are you borrowing the 80 percent at a lower interest rate that must be refinanced in two years, or getting the 80 percent at a slightly higher fixed rate for 25 years? The first option presents more unknowns down the road while the second scenario has fewer potential surprises.
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How are you going to use the money being raised?
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What are the funds being allocated to? One hint: If it's ever suggested that some of the money raised is to pay you, as the owner of the business, or the deal, then my door is closed. If you want a paycheck, get a job.
And, of course, you must answer these two key questions for your potential investor: How soon until I get my initial investment back? What is the return on my money?
Remember, investors want to know the truth and avoid surprises whenever possible.
Management
It's said, "Money follows management." I agree. However, your case is so much stronger when you address all four components, not just management.
Investors want to know who's running the day-to-day operations. This is key to the ongoing success of any venture.
If you are starting your own business or if you're raising money to grow your existing business, then the partners and the management team may be the same people. That's not a problem at all, as long as the investor has confidence in the experience and expertise of the team.
No more excuses
The phrase “I don’t have the cash to invest,” is no longer a sufficient excuse. I hear it all the time from women who don’t have a financial education. But now that you’ve been given the four main factors to raising capital, all you have to do is get started.
Keep your pitch to these four factors and help your investors feel confident that you can deliver what you say you can. Then, deliver on your promises and watch your cash flow grow!
Original publish date:
October 30, 2014