Raising money was actually less important to the company’s viability than closing orders and collecting cash.Įven when the search for capital is successful, out-of-pocket costs can be surprisingly high. The founders had not been prepared to divert so much of their attention away from getting the operations up and running. We asked them what their sales would have been if they had spent the $100,000 seed money over the previous 12 months to generate their first customers. The entrepreneurs might have spent their time and money differently. The would-be founders had quit their good jobs, invested their nest eggs, and worked night and day for a venture that was failing before it even had a chance to get started. Eight months later, their seed money was spent, and every possible source of funding they could think of-including more than 25 venture capital firms and some investment bankers-had failed to deliver. The three partners put up $100,000 of their own hard-earned cash as seed money to develop a business plan, and they set out to raise another $750,000. One start-up began its search for venture capital when, after nearly ten years of acquiring the relevant experience and developing a track record in their industry niche, the founders sensed an opportunity to launch a company in a field related to telecommunications.
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The effects can cripple a struggling young business. And if the fund-raising effort ultimately fails, morale suffers and key people may even leave. As a result, sales flatten or drop off, cash collections slow, and profits dwindle. Customers sense neglect, however subtle and unintended employees and managers get less attention than they need and are accustomed to small problems are overlooked.
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Young companies can go broke while the founders are trying to get capital to fund the next growth spurt. All the while, the emotional and physical drain leaves little energy for running the business, and cash is flowing out rather than in. Getting a yes can easily take six months a no can take up to a year. The process is stressful and can drag on for months as interested investors engage in “due diligence” examinations of the founder and the proposed business. We have seen founders drop nearly everything else they were working on to find potential money sources and tell their story. In emerging companies, during the fund-raising cycle, managers commonly devote as much as half their time and most of their creative energy trying to raise outside capital. This is perhaps the least appreciated aspect of raising money. The lure of money leads founders to grossly underestimate the time, effort, and creative energy required to get the cash in the bank. The first of those steps is knowing the downside of the fund-raising process. Though they may be setting sail on dark waters and will always be at a disadvantage when negotiating with people who make deals every day, they can take steps to ensure that they get the capital they need, when they need it, on terms that do not sacrifice their future options.
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Unless the entrepreneur has thought them through and decided how to handle them ahead of time, he or she may end up with a poorly structured deal or an inefficient search for capital.Įntrepreneurs should not be afraid to seek the money they need. Every fund-raising strategy and every source of money implies certain out-of-pocket expenses and commitments of various kinds. They put together business plans and hired advisers. The founders of both these companies thought they were prepared for the fund-raising process. They started the paperwork and scheduled a road show for early November. The company wanted to keep growing and in 1987 decided it was time for an initial public offering.
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Texas Industrial (again, disguised) had grown from an idea to a $50-million-a-year leader in the industrial mowing-equipment business. He met a lawyer at a seminar for entrepreneurs who said he would take the company public in Vancouver or London and raise $2.5 million fast. Ten banks refused to extend his credit line and advised him to get more equity.
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After ten years of hard work and sleepless nights to get the company to $5 million in sales, the founder of Seattle Software (the disguised name of a real company) was convinced he could hit $11 million in the next three years.