One reason entrepreneurs are so highly lauded is that they are asked to expose themselves to criticism, rejection and doubt in dosages that average mortals cannot bear. At no time is that more true than when an entrepreneur finds that he/she needs someone else’s money to start, maintain or expand the company.
In the spirit of knowledge transfer and sparing others when it's their turn to present themselves to investors, please feel free to share a specific learning point during the process of raising capital. For example, "I spent $1000 having someone help me put together a 50-page business plan and at my meeting with an angel investor, he asked me for something less than ten pages."
I just listed a few types of funding below for response reference point purposes.
Bootstrapping – This is a broad term that essentially means doing whatever you can to get the company up and running or to keep the company going. Types of bootstrapping include: • Funding from friends and family • Consulting on the side • Vendor and/or supplier special arrangements such as extended terms for payment, consignment, leasing • Bartering • Strategic partnerships with companies or people who do what you need done next • Capital management discipline and strategy
Private placement – Selling shares to individuals based on established deal terms. Federal and state laws govern all sales of securities so make sure you know what you are doing before you take on a private placement. If you want to get access to capital and not necessarily sell ownership in your company, you can try to issue convertible notes. This gives you cash and when the notes mature (are due to be paid back) you can pay them off in cash, with the interest, if you have it and not lose any ownership interest in your company.
Angels – These are individuals with a high net worth (typically falling under the “accredited investor” definition of the SEC’s Rule 501) who fill the gap between bootstrapping and being ready to approach venture capital groups. Motivation for investing can be as varied as the individual but this relationship tends to be more personal than the relationship you’ll expect with VC and PE money. Be very clear on what information the angel will receive and how much participation they will have – this relationship can become challenging.
Commercial banks – Typical debt financing that can include credit, term or revolving loans. As you know, banks tend to have an aversion to anything other than low-risk lending based on debt-to-equity ratios of 2-3 or lower. Asset-backed lenders – There are a number of companies that will loan you money based on the liquidation value of assets in your company. A common form of this type of lending is borrowing against your accounts receivable.
Private equity (PE) – This term is used to broadly group funds and investment companies that provide capital to private companies. Institutional investors (think pension funds or endowments) typically allot a portion of their portfolio to private equity vehicles to meet diversification requirements. Venture capital (VC) is a type of private equity. The single aim of investment by PE is to make as large a return on investment as possible. It isn’t uncommon for PE investment to take a controlling interest in your company.
Venture capital – A form of private equity, venture capital companies tend to invest in earlier stage companies with significant growth potential. Because the odds of getting a substantial return on investment (ROI) are not in the favor of the VC firm, they tend to want a controlling interest in your company to leverage their experience to get the most favorable odds of gaining the best possible ROI. In addition, it is not uncommon for VCs to sit on your board and exert management controls and reporting. I plan to put together another posting on VCs and what you need to know about them, in as much as such information can be distilled in a useful way.
There are several more options not mentioned here in detail, such as corporate venture capital, government agencies, community development funding, merchant banks, mezzanine funds, etc.