Raising money from investors

Please see my article this month, which came out today. It is about crafting a strategic business plan to guide your business.

http://www.sitepoint.com/article/business-plan-wont-sit-shelf

The article covers an internal business plan, not the type of business plan that raises money from angel investors.

Much of my work is with an investment banker who funds emerging companies via private placements, reverse mergers, and other creative financial techniques. From time to time we evaluate investments. When service firms come to us (e.g systems integrators, web development firms), we reject them. There really is no market at this level to invest in professional service businesses. That’s because — without proprietary technology — all we are investing in is a group of people who can leave at any time. Valuations are low, something like 1 X revenues, and so there are better ways to use investment capital.

Taking out a loan (e.g. with the SBA) is not such a great plan either, because of the paperwork and requirements. Sponsoring banks still require collateral, which means a personal guarantee and loan on your home. You are better off taking out a home equity loan, if you have the home and the equity (and any spouse agrees).

That leaves friends and family, which is always a risky proposition.

Or, you bootstrap your business and fund it internally, which to me is the best and most feasible option. It keeps you lean and mean, and you own 100% of your firm.

I’d like to hear from Sitepoint readers who have raised debt or equity for their business. Where did you go? Are you happy with the deal?

Please share your experience….

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  • JMorrow

    Into my sixth company, I’d say bootstrapping is definitely the way to go, even when capital is available. Not only does it keep your operations tight, but you are risking less money with the possibility of equal returns.

    Additionally, I *never* ask investors for money when I’m not 100% certain of profit. It’s more about commonsense than ethics. If I make investors money the first time, they will invest again and bring all of their friends. If I lose their money, they will never invest again, nor will any of their friends.

    The results? Where it used to be hard for me to raise $100,000 in a year, my team is now raising over $500,000 a month and climbing. The snowball effect is wonderful!

    Also, a word about the SBA: only use them if you are still employed and bringing a paycheck home. The paperwork and approval process typically takes several months, regardless of what they say in the beginning. The approval rate is also low, making the whole program rather risky in my opinion.

    Home equity loans: Not a bad idea for first timers. The bank won’t care what you are using the money for, so approval is usually fast and guaranteed, giving you money to pull your operation off the ground and start building a credible company for later rounds of funding.

    On the other hand, if you already have a great track record, never volunteer your own money, even if you get to keep more of the pie. As an entrepreneur, I use other people’s money (OPM) to buy other people’s time (OPT=employees) to create a company that makes me money without using my time or my money.

    I can duplicate the process over and over again, using my credibility to own smaller portions of three companies that run by themselves. Then, I can fart around on SitePoint (one of my favorite pastimes) without having to watch the clock… like I’m doing right now. :-)

  • http://www.realityedge.com.au mrsmiley

    I ended up borrowing some cash to get things started from a relative. True its a risky proposition, but the investor was aware of that. Even though she wasn’t really expecting the money back on time, she was shocked when I gave her the cheque with the money in it on the date promised in our agreement.

    IF you are going to use relatives, make sure that keep them up to date with what is going on, and let them know if you are not going to be able to return the money you borrowed as soon as you know that yourself.

  • http://www.treetech.com.pk momekh

    I freelance. I have not been able to come up with a company attitude as in to say that I am hiring people to work for me. I would say that bootstraping is the way to go, though it can be tricky to decide which parts of business are core and which are not…infrastructure is core but HR is not – stuff like that. That is good like everyone says; it keeps you lean. Too lean i guess.

  • Huntdawg

    I actually started my design firm about a year ago when both me and my wife were laid off from our jobs. It was a horrible thing to happen, or at least that’s what we thought at first. Then, I woke up the morning after I got laid off and decided, “This is it. This is my push. Let’s go make some money.”

    So I went out and got a couple of clients and worked from my house at first. Then after about three months, I was approached by one of my clients. He really liked the work I did for him and he wanted to hire me. But I told him that I didn’t want to give up on my dream and that I would possibly consider a partnership in the business.

    So I took on my partner and our agreement was that he would carry the business financially until it could pay for my salary.

    He ended only paying three month’s worth of salary for me (he was prepaired for a year to two years) and we’ve been self sustaining ever since, and we’ve had steady growth ever since. Plus he’s really good at sales, so it’s a perfect relationship. He goes out and gets the clients (something I was just mediocre at) and I manage everthing else.

    I guess this is all related because the company now is doing great, we have been in an office now for 9 months and we are gaining a client per week. We almost have too much business to keep up with. I’m about to hire my fifth employee to help with that.

    Partnering with the right person can make all of the difference in the world and in a way, help your business grow substantially. I know that my company wouldn’t be where it’s at without my partner. :-)

  • http://www.silentflute.co.uk worchyld

    What about grants and funds? If you ask, you get.