I like Nathan’s response. And I would add:
A startup should start planning how to raise capital, the day the idea to create a company occurs to them. How:
1) create the pitch docs (bus plan, PPM, exec sum, elevator pitch, demos etc).
2) More importantly the entrepreneur needs to do a thorough SWOT analysis (e.g. in depth analysis of strengths, Weaknesses, Opportunities, Threats). There should not be a single question or challenge that you can’t answer with facts and figures.
3) Assemble a top-notch team to give you credibility with sophisticated investors
4) until you can complete #’s 2 & 3, restrict you funding efforts to FFF (friends, family & fools).
5) After completing 2 &3, Angel investors are a good source.
6) When risk is low (proof of profit & upside potential) and you need $2MM+, VC’s are an option
7) Finally and most importantly, you need to develop the right networking skills to put you in contact with the right investors.
If you want immediate personal help, reply privately and we’ll set up a teleconference to tailor a program to your needs.
If you’d like to start the journey on the right and most successful way to raise capital, join us at:
http://www.RaisePrivateCapital.com

Hello Earl,

One of the issues that should be brought up in your article, is the issue of transitioning from bootstrapping business to product/service business.

For example, JB Metrics has been around for five years, we have bootstrapped the business by doing custom application development work for clients, however that is essentially a bespoke systems development and integration business. We have spent the last five years also developing a wide range of cloud computing applications (all from our profits and personal investments). So even though our revenue has more than doubled each year and we passed the million mark a year ago, our net profit has been nil (all reinvested in product R&D) and only now are we launching our products (after having reference site customers already on board using our products in production).

The problem is our track record is in our bootstrapping business, not the products we are looking to globally launch now. The other challenge is to transition from the bootstrapping business (and usually its up close and personal relationship with the end client, to the mass production and global market where we will no longer deal with the end customer, rather with reseller partners and system integrators). So even though we have been in business for five years with a successful track record, the bootstrapping we did is not exactly in the same line of work as what we are moving into, hence the investors are having difficulty placing a valuation on the company. The current valuation would be on the bootstrapping business, the fact that all profits were reinvested in what is seen essentially as a different business model, makes the valuation more challenging, that the money will go toward the new business model of which there is limited existing business (in essence only the reference site customers – a total of eight customers) makes it hard for them to place a valuation on the new business model.

There are three scenarios that need to be covered in the article to make it complete:

1) Those that cannot use bootstrapping to fund the seed stage
2) Those whose bootstrapping can fund the seed stage but is not what the main business is going to be in (in otherwords the bootstrapping business was temporary for providing seed funding)
3) Those whose bootstrapping can fund the seed stage and is what their business will continue to remain as it gets into the next stage

I am sure you can come up with easier (less verbose) descriptions, but I hope that helps flesh out the article. Otherwise a good article.

James

This a good article, but it tends to presume that all companies can bootstrap – and in this day and age of Internet or iPhone based companies it is easy to see how that is the case.

But there are a number of companies and business models that seem to require funding for the R&D stage (hardware, biotech, cleantech, etc) where this model is not true – thus it is hard to work on revenue and customer base when you are talking 2+ years of development that needs serious funding.

That said, many of the ideas presented should be used by early-stage companies where possible.

I believe immediately. But is only in terms of what I call, ” starting the clock.” Getting funding realistically could take a very long time. You may need to dedicate as much time, money and effort to get the money than you could ever imagine. Go to VC conferences, angel meetings/panels, meet people. Tell them your name, company, idea and that when your ready you will approach them. Pre-qualify the investors if they are right for you, your company, etc. and vice versa. When you come back later with follow through, that will build credibility. It takes a long and intense effort to raise money. Especially in this economic environment. In all probability, you will start out with your own , ” skin in the game,” or ” friends, family and fools ,” to get off the ground. The bare minimum you need is a summary, plan, financial projections and a world class team. Hopefully you have a disruptive idea or technology, not a, ” me too,” company. Preferably, you get started, up and running and already have revenues. This is really what investors, especially VC’s want most. Most investors are followers, not leaders. Does your company / idea have Patented IP? Is it a huge growing market? Can your company be a billion dollar company? To you have choke points and unfair competitive advantages? Is your idea, technology, business model truly revolutionary and disruptive?
The time and effort to truly get funding is almost an infinite time commitment and a gargantuan effort. Good luck all! I have been raising money for 27 years, over a quarter of a century and it has not gotten easier, it is more difficult today. Good luck all!

Dr. Smith’s article and it’s views are so sound and heartening to hear. I believe if more companies solidified their core business and established stability … then gaining investors would be much easier. I do think that the similar due diligence needed for the money chase is needed to keep an organization on track and focused. I feel this same mania to achieve the money chase is similar to the acquisition need. I have seen repeatedly where organizations think acquisitions are the answer to business stability without proving first they can drive the business with it’s core structure, processes and teams.

Thanks Dave.

I read an article in which the author asked Dave Thomas (the founder of Wendy’s) what is the most important word of advice he would give to young entrepreneurs. Mr. Thomas responded “A Business Plan – you need a very solid Business Plan.”

The author then asked if Dave Thomas had one when he started out, to which he responded “No”.

He then went on to illustrate how sometimes Great business growth can happen without a Business plan. He said sometimes the best plan is NO PLAN AT ALL!!

Paul S. Germo

Before the money chase they need to develop a good business plan and thorough break-even analysis for the first year of operations so that they know how much money they will have to chase for.

A company should not look after profesional venture capital if still doesn’t have:

1- an “ALPHA test”, that is to say, a “first prototype”, whatever form this prototype may have

and

2- a “BETA test”, that is to say, a “first market test”, testing the product and the business in a reduced regional marketplace, and thus, leaving no doubts that there is somebody willing to pay for the product.

ALPHA is fed by F&F (family and friends, I do not include like others “fools”), and BETA is fed by the so called “Angels”. If a start up can show a good “success & failures table” after performing a BETA test, then it’s possible to think in making a pofessional fund raising.

Those of you that read in Spanish, could read my paper on this matters:

http://www.fgroup.com.ar/images/83518.pdf

Happy New Year!!!

Gerardo

Thank you for sharing this information, I will most definitely make use of it sharing this with my clients, if you don’t mind me doing so?
Wishing you enough!