There are certain dynamics to raising capital via equity that all entrepreneurs must consider upfront in order to be successful. By getting to know them, you will greatly improve your odds and outcome.
First of all, make certain that you are truly funding-worthy. Investors are looking for ventures with an acceptable degree of proof of concept, a solid strategic vision, a smart business model, and a credible management team. They are assessing your ability to execute as promised, and the more pieces that you have in place, the more interesting you are relative to the alternative, competing uses for their investment dollars.
Secondly, disabuse yourself of the notion that you are raising funds for your company. Instead, think of what you are doing as taking on additional owners. Outside money comes with a new sharing of control, risk, and rewards. Remember, you are not being gifted, but invested in. Investors want great financial returns within a reasonable timeframe. This will be your new reality.
Thirdly, be aware that all parties are understandably interested in protecting themselves from downside risks while fully participating in upside returns. You need to understand both perspectives, and you need to understand leverage.
In any negotiation, it comes down to leverage. Leverage can be best understood by answering a simple question: “Who needs this deal more right now?” The answer drives valuation, terms negotiation, and closing processes. Be objective in assessing respective leverage, and then “play your hand” accordingly.
Knowing this, your goal is to create as much market demand as possible for your equity offering. Doing so will shift leverage toward you, and will result in financial and control terms more to your liking. Plus, despite the resulting loss in their leverage, investors prefer to participate in a high demand, even over-subscribed, round.
Fourthly, never forget opportunity cost. The time and distraction involved in pursuing outside funding will have adverse effects on the business you are trying to build. While you are prospecting, pitching, and negotiating with perspective investors, who is building your business? Who is increasing your sales pipeline? Who is taking care of your customers?
Everything you do has opportunity cost, so manage the fundraising process and its timeline in a manner that does not overly weaken your venture at a time it needs to be building up proof of concept momentum to further support a successful funding round.
And lastly, be smart by not trying to be the smartest guy in an admittedly unfamiliar room. You are not expected to be the expert in raising capital. Nor is your lawyer.
Instead tap into proven resources that already understand how to expertly manage this process. Experience, and the process sophistication that comes with it, will help you secure not just funding, but investors that will help you to further build the company.
Expertise will also help you to better understand and think through the implications of the financial and control aspects of the deal structure itself. And it will ensure that you strike a deal that is good for you, for your investors, and for the business that you now collectively own.
To summarize, ask yourself if your venture is truly ready to pursue funding via the sale of equity. Think through and fully understand the process and dynamics associated with closing a funding round. Tap into expertise as needed. Doing so will ensure that your new investors and you will have every opportunity to be successful together. And isn’t this what you really want?