Mistakes to Avoid in Raising Money for Your Start-up Business

In the hundreds of business financing proposals I have reviewed in representing start-ups, investment banking firms and public companies, several principals that make for the greater likelihood of a successful presentation for the raise of needed funds are evident.

The written and oral presentations of successful early stage funding proposals usually result from a well-organized, brief (one or two pages) executive summary, backed up by market research, projections and comparatives indexed for easy reference. Another typical indicator for success in raising funds is a company representative able to respond intelligently to objections or issues raised by angel investors, their advisors and by investment bankers. Here are some suggestions based on my experience in advising these entities:

• Have a Written Presentation in Addition to Your Verbal Pitch:  Too often, the entrepreneur gets ahead of himself or herself, and approaches potential investors before having done the most basic of preliminary work, which should include: (i) visualizing the market and the team needed to bring the business concept/product/service to market, (ii) calculating the amount of funding and the time needed to effect a reasonable plan of reaching cash flow positive status, and (iii) a valuation of the business acceptable to the entrepreneur, while remaining aware of the likelihood of negotiations on valuation or alternate equity structures that investors may suggest.
• Be Prepared for Questions and Objections:  Too often, the entrepreneur gets ahead of himself or herself, and approaches potential investors before having done the most basic of preliminary work such as what was described above. Many efforts at funding fail because of unrealistic valuations sought by entrepreneurs.  The recent headline valuations obtained by tech companies with no profits have created unrealistic expectations of some entrepreneurs.
• How Much Are You Proposing to Raise: Be able to justify the amount you are seeking to raise. This includes explaining your rationales for the specific uses of proceeds.  A “good” listing of uses of proceeds for a start-up or development stage company could include building a production model, purchase of inventory, hiring management or sales personnel, creating a model store or doing targeted marketing of the service or product.  Things to avoid in your listing of uses of proceeds include substantial market research (you would ordinarily be expected to have done much of this prior to seeking outside funding), working capital (while listing a small percentage of funding for this purpose, ascribing a majority of the funding to working capital gives the impression you don’t know enough about the business) or settling litigation (if you already are in a fight, investors will usually want to wait until that is resolved). Almost universally rejected, are payments of back salary or repayments of loans, especially to founders, but really any repayment of loans is looked upon as unconstructive uses for the new moneys.
• Promote Your Human Capital: Investors want to rely on grade A management.  I represented a complete start-up biotech company that was able to convince marquee investors to provide significant funding just on the resumes of management and the stated goal of developing drugs targeted at a substantial market need. Investors want to see more than just a product or service idea; management is key for raising funds, even at the start-up stage, but certainly at the development stage and beyond.
• Be Prepared To Show the Work Already Done. Investors want to see that you are prepared to hit the ground running with the new funds, which means you need to be prepared to show your market research, your due diligence, your pro forma financials and more.
• If You Are Doing a Demonstration, Make Sure Everything Is Working: This ought to be obvious, but I have seen it happen that the product doesn’t work properly at the presentation, or the electronics or film presentation is marred by technical ineptness. Get their early. Run tests of equipment. Make sure you have everything and everyone you need for the demonstration or presentation.
• End Game Strategy. Keep in mind that you are competing for funding, and investors are usually not in the game for societal good. Most investors want to be told that your plan is to achieve cash flow positive in a realistic timeline, with achievable milestones along the way, particularly if additional fundraising is contemplated. In addition to a realistic exit strategy, and a timeline for their exit that is not the 10 to 15 years that a biotech company may require to achieve sales, investors prefer to see a return of at least ten times their investment if the investment is in a start-up.  The projections in this regard can vary depending on where your company is in the start-up, development, launch or mature stages, as well as the structure of the equity and/or debt offered. For example, a company that has or can reasonably project revenue, or can provided collateral, and proposes to devote a portion of projected revenue to return on investment, can make a very different proposal, with far less lofty investment return estimates.  This is particularly true where the investment return includes periodic interest or dividend payments to investors.

Keep in mind the time limitations and the competition for investors’ attention and funding. Clarity and brevity are key values for your initial funding presentations. You ought to have at hand for presenting and for e-mailing, a one or two page executive summary that sets forth: (i) how much you are looking to raise; (ii) what the raise will be spent on; (iii) the projected results of that spend; (iv) a description of management; and (v) your exit strategy.  To the extent that you also can deliver or e-mail the back-up materials discussed above, that will also likely prove important to raising the funding needed for your business.

If you have any questions about the issues discussed or would like to discuss your company’s proposed funding strategies, please contact me or the Scarinci Hollenbeck attorney with whom you work.