Raising Funds for a Business

What an easy question, isn’t it? Think about it twice…

Everybody will tell you that “raising funds” is something like: “Getting money from third parties, in order to finance your business needs”.

And certainly it is, but you would never imagine how badly these funds are usually handled.

Hence, we’d like to propose another definition, just to emphasize some important points that are usually forgotten:

Raising funds is an activity whose main purpose is obtaining money from third parties in order to cover an identified investment need.

This last clarification, changes everything:

90% of the time, when raising funds, companies focus on how big can they get, what are the strategies to grow and yes, the investment they need in order to get that…

However, the most important part is precisely this last point:

• How the funds will be applied.
• Where will they be applied.
• In which time the investment will be recovered.
• Which is the plan in case the numbers are not the projected ones.
• etc.

This is important since once an average company gets the funds (if they get it) they start spending it without any criteria, and if the numbers experienced are not the projected ones… a catastrophe is coming.

In this section we want to give you advices for both:

• Raising funds with Banks, Venture Capital investment firms or potential business Partners.
• Not to getting lost in case you get those funds.

* Remember: we have been working for years in the Venture Capital Investment sector, so all we are about to explain comes from direct professional experience. We have asked for money dozens of times, and also lending it for different kind of projects.

* We are aware that this is a “dense” page, but trust us: all we are about to explain worth every single minute you’ll spend reading it. It is based on a broad experience in this precise matter so, whether you are planing to become an entrepreneur, or if you already own a business, don’t even hesitate. It is one of the most important things you need to know.

Being said that, let’s move on:

Basically, the funds raised can be divided into two main categories:

• Depending on whether you’ll have to return the money or not.

If you’ll have to return the money borrowed, you are asking for a loan so let’s give you some advice about it:

Here, some company owners always tell us something like:

– “Hey, but I am negotiating with a Venture Capital Company, not a bank!“

– “They are giving me a Funds for increasing my productivity“.

– “I’ve got a special boost-productivity-loan with low interest rate that…“

If you have to give back the money, you have a “credit”. Don’t get confused with all that fancy words Venture Capital Investment firms like so much.

A Loan is a double-edged sword:

• When properly used, it can be a reasonable way for increasing your business’s margins and sales, but if badly applied it would have been better not to get it.

We’ll explain you now:

• What to guarantee when asking for a Loan.
• What to do in case you get it.

There are 7 factors that you must ensure:

1. Have all your numbers clear.

• You must have all your margins, costs per products, raw material costs… absolutely controlled:
  • When asking for a Loan, you will have to justify which sales are you going to increase, to which clients and whether you’ll invest in a new machine that would improve your margins.
  • For this, you need to perfectly know all your costs and margins.
  • Check the “Costs” page if you haven’t done so yet. There we explain how calculating them.
• The worst thing you can do is simply saying: “we are going to expand our activity” when you actually are losing money in a small market.
  • If you lose money in a small market, you will lose much more money in a much bigger market.

2. Have a perfect Market knowledge.

• You must, not just demonstrate that you can sell certain products within a market, but that you perfectly know your customers’ needs and that is why they are purchasing your products.
  • When borrowing money, it is quiet common to employ it in order to expand your sales.
  • This implies to attract new clients.
  • You have to justify why all these new clients are going to purchase your product and why didn’t they do it before your business expansion plan.

3. Have the investments needed perfectly identified.

• If there is any investment required, you must have a realistic study that supports it.
  • Highlighting the margin improvement that you would experience.
  • Explaining how the labour cost would decrease.
• Again, you can’t ask for any amount of money, not exactly knowing how your margins would be with the new working procedure.

4. Give some reference data.

• About other companies that did what you are planning to do.
  • It is much better for the money lender to check with real data if what you are planning to do, has been done in the past successfully, than being said that nobody did it.
  • Usually is much better not to be the first person in trying something but be the third one.

5. Highlighting the team experience.

• The more experience you have on a certain subject, the better chances you’ll have when asking for a Loan.
  • If you have not broad experience, try finding someone that has.
  • Moreover, if you have nobody in your team with the right experience… We don’t know if getting a Loan would be a nice idea.

6. Have a monetary valuation of your project.

• In case your project fails, the greater the value of your project, the greater the security for the lender.
  • We recommend calling to a specialized auditor that put a value to all the work you have done so far.
  • You would get surprised how much your project can be worth despite having not a Real Estate property:
    • Your customers.
    • Whether you have a website with subscribers.
    • etc.
  • All of this has a value, so find how much is it.

7. Have a realistic money-returning plan.

• The Loan return must be contemplated in your Business projections.
  • You must ensure enough cash generation to cover your debt obligations, else… you know.
  • You should have a contingency plan in case your numbers don’t behave as you projected.
    • Offering extra-security to your creditors.
  • It is extremely important to support it with realistic data.
    • It is important not just for obtaining the Loan but for you not to commit any mistake and ask for money you won’t be able to return.

We can’t guarantee that fulfilling these factors the moneylender, whether it is a Bank or a Venture Capital company, will give you a loan.

But as we often say: if you don’t perfectly ensure them, be sure that you’ll hardly get it.

Congratulations, you finally received the Loan that will boost your business.

But before uncorking a champagne bottle, there are 4 things that you must take into account:

1. You owe this money to someone.

• Isn’t obvious?
  • However, you can’t imagine how often people forget about it.
  • From day 1, you have to think about how will you return this money as well as the associated interest.

2. Invest it, rather than spending it.

• When expanding your business, you need to “put the money” where it will make increase your margins and sales.
  • Forget about:
    • Increasing your salary.
    • Buying an office.
    • Buying a “company car”.
    • etc.

3. Don’t invest it all immediately.

• Invest it step by step, checking if you obtain the results expected.
  • Sometimes, you may experience worse-than-expected results and in that case it would be better to vary your initial plan.
  • On the other hand, other times, you may experience much better results than expected, so you may not need all the money borrowed.

4. Stick to the “money-returning” plan.

• This is another thing that we insist constantly, not only in small businesses, but also in big ones. The most repetitive phrases we have ever heard are:
  • “I am not generating the cash I expected, but if I borrow a little more, I will surely be able to…”
  • “This bad situation can only be solved with more money”.
• If you are not generating a lot of cash, try to design a proper plan next time. But now, start returning your loan.

When writing these lines we are aware of how obvious all these points are, but trust us: even with big prestigious companies, we have had unbelievable bad experiences.

Now we have to talk about other kind of fundraising: the one where you don’t have to give the money back.

Don’t be afraid. It sounds complicated and strange, but it is really easy to understand.

This financing option is nothing but looking for someone that could become your new partner by injecting money into your company.

And being a partner is much riskier for the moneylender since it means that he has no legal right of having his money back:

• He “bought” a portion of your company so if he wanted his money back he should sell it to a third party.

* Notice that we are talking about “capitalist” partners, not technical-partners that contribute with their knowledge.

Sometimes, if Venture Capital firms thinks your company could become a big profitable business, they could offer:

• Becoming a partner.
• Part a Loan, part partnership.
• A Loan that could become a company percentage under certain circumstances.

So again:

It doesn’t matter how you call it:

– “Public Investment Fund for innovative projects“.

– “Boosting capital – new-word-to-be-put-in-here“.

– “Business Angel -Fairy-tooth Santa-Klaus“.

If they become part of the company, they are “capitalist” partners.

When looking for a new partner, you have to take care about the previous 7 points explained (when getting a Loan) but especially; you must ensure these additional 4 factors:

1. Highlight your market growth potential.

• Being a partner is much riskier than lending some money, since you don’t have the right to having it back, so you must demonstrate that the market you are in, is worth by itself.
  • A safe, legally protected two-digit increasing market would be the best-case scenario.
  • This is why there has been so much money invested in “pointless” internet-based companies, because the market was interesting.

2. Ensure enough Cash generation for paying dividends.

• Since the partner is not receiving any “interest” for his investment you must put “something sweet” on the table.
  • Offer him a dividend policy linked to the results obtained, so you don’t jeopardize the company cash generation.

3. Guarantee that the project will increase its value as soon as possible.

• This will show to your partner that he’ll be able to sell his position for a higher price than his initial investment.
  • It is very difficult to sell the percentage of a company that is not having good results so you better transmit confidence about yours.

4. Offer him/her “exit clauses”.

• These clauses should protect your partner in case it is you the one that wants to get out of the company.
• Also should allow him to freely sell his/her percentage whenever he wants to.

There are much other factors to take into account but these 4 are absolutely indispensable no matter your sector or economic activity.

* If you would like us to explain other particular factors, please tell us.

Now, there is one thing that may be worrying you… what is better; ask for a Loan or looking for a partner?

Of course, it depends completely on the project analyzed, your financial needs, whether your project is experiencing the results you projected… and even how the overall economy is behaving.

Hence, we’ll propose a brief “pros and cons” regarding each kind of fundraising method:

Pros 

• You maintain the control of your company.
• You have much more control and flexibility about all the decisions taken.
• The negotiations for obtaining a Loan are relatively quick.
• In case you outperform your expected results you can easily return the money borrowed.

Cons

• If you don’t obtain the results expected, you may go bankrupt since you have the legal obligation of returning this money back.
• If you don’t have enough discipline and experience, you may not invest the money properly.
• If the interest rates increase significantly you may face an increase in your financing costs (although nowadays, it doesn’t look like it is going to happen… by now).

Pros 

• You don’t have to give back the money so; your results won’t be yearly “skimmed” by interests.
• Your new partner can share his managing experience so the overall project may become a more professionalized one.
• This partner may open new doors to you regarding financing alternatives (if they have good relations with some banks they may introduce them your project).
• Likewise, they may introduce your project to new potential clients they know (it is very common to try increasing the value of a recently-purchased company by introducing its services to other companies you have relations with).

Cons

• You may lose the control of your company; sometimes these “capitalist partners” ask for more than 51% of the companies they invest into.
• You would have to give constant explanations to your new partners.
• The reaction speed would decrease substantially since you’d have to agree in all the important decisions taken.

As you can appreciate, depending on your situation, what is your project about… you should choose one fundraising option or another.

There is not a single easy answer.

Fundraising is an important activity when a company wants to grow in size and profitability.

There are two main options when looking for funds:

Asking for a Loan:

• When asking for a loan you should take special care about:

1. Have all your numbers clear.
2. Have a perfect Market knowledge.
3. Have the investments needed perfectly identified.
4. Give some reference data.
5. Highlighting the team experience.
6. Have a monetary valuation of your project.
7. Have a realistic money-returning plan.

Looking for a “capitalist” partner:

• In case you decide to look for a “capitalist” partner, you must:

1. Highlight your market growth potential.
2. Ensure enough Cash generation for paying dividends.
3. Guarantee that the project will increase its value as soon as possible.
4. Offer him/her “exit clauses”.

Each option has different pros and cons and depending on the project analyzed one could be better than other.

Before you decide which one would suit better your project, prepare your numbers, your needs and future projections. Only by perfectly knowing these aspects you’ll be able to make the proper decision.