Raising Capital: How to Improve Your Chances for Success

by Frank X. Dalton, CPA

"Your management team is not complete."

"If only you had a few more years in business."

"Thank you for the opportunity, but we are pursuing a few other deals at this time."

"Your company does not match our profile for investing."

"Very interesting, but we really don't invest in early-stage companies."

These are just a few of the responses you may hear if you are in the process of raising capital for your company. For a growing, entrepreneurial operation, they are probably all too familiar.

Today, there is more money available than ever to entrepreneurs. Even so, raising capital is serious business that requires persistence and a well-defined strategy. As a result of working with many companies of the years, I've observed that the ones who successfully raise capital share certain characteristics related to five key areas: the management team, the product, the market, the business plan, and the capital-raising process. The better you align your company to the following attributes, the better your chances are of raising capital:

Management Team

• Posesses experience and a blend of talents, especially in sales. (A common question you hear is, "Is there a killer closer in the house?")
• Has a successful track record and industry expertise.
• Possesses passion, persistence, and vision to succeed well beyond the financial rewards.
• Displays good listening skills. (Investors provide a lot of advice and the marketplace talks frequently.)
• Knows the competition.
• Has the ability to mange rapid growth and change.
• Executes plans timely and consistently

Product

• It works.
• It is unique.
• It is proprietary.
• It has, or will have, a well-defined need in the marketplace.
• It has the potential for multiple products.
• It's a "painkiller." (Customers lover products/solutions that "ease the pain."
• It can lay the foundation for a product line.

Market

• Identifiable customers with the potential for many more.
• Generates a recurring revenue-generating business model.
• Has the potential for rapid growth (25 to 45 percent per year).
• Defines where and how the product competes in the marketplace.
• Possesses killer competitive advantages.
• Offers multiple entry points: direct, OEM, VARs, and distributors.
• Provides an active environment for an exit strategy.
• Market share is critical. The ability to increase it in a large, fast-growing, dynamic market attracts investors because the potential for a successful exit increases dramatically with companies that are perceived as market leaders.

Business Plan

• Compelling but conservative enough to be believable.
• Shows the potential for rapid growth and knowledge of the industry.
• Demonstrates the potential to earn a superior rate of return with a clear exit strategy. (Target returns to investors should be in excess of 35 percent).
• Addresses key areas such as the management team, marketing, sales, competition, the business, and product development and growth.
• Shows realistic projections with detailed, comprehensive assumptions.
• Appears professional-looking, brief and to the point.
• Do not underestimate the importance of the plan. Many times the decision to proceed or not in funding is based on the result from the initial review of the business plan.

Capital-Raising Process

• Allow enough time to develop a strategy and to prepare for the process with a six to nine-month time frame.
• Be completely honest with investors. Fully explain weaknesses and hurdles.
• Realize that raising capital is a selling process. First impressions are crucial.
• Have reasonable valuation expectations.
• Network, then network some more. Try to get an introduction from a credible source.
• Demonstrate to investors that the company has real potential to be a winner, consistent with the investor's return parameters.
• Target your audience to your specific needs.

Above all, remember that raising capital takes longer than you think. Be patient, be persistent, and plan ahead.

There is a lot of money out there, but don't assume you will be successful. There are also a lot of deals. Work hard to match your company to the preceding attributes, and someday you may have all the capital you need.