Change to meet your Needs

Friday, May 23, 2008

Raising funds for your business or dream projects?

It had been regularly haunting me for last couple of months, why few people can jump start a business and many people despite of having good business propositions fail in executing a successful business. Well, we all say them entrepreneurs. I was watching a job advertisement where the advertiser was also seeking the head of the business who needs to have the entrepreneur skills or business acumen. The question is why one is an employer and another is an employee, despite of the fact both are having business skills.

Well the answer is the person who is now an employer is having a tint of luck with some sourcing of funds. In both the cases hard work and perspirations are common though. Few uses it well with people management skills and gets success, few miss-utilize it by taking people for granted. So there are two variables a business minded person deals with funds and people. If people management skill we consider, both are having them equal, then the major difference which makes one an employee and other an employer is the requisite funds to run a business or even launch a new business. Both are taking risks. Now if we consider a case one has got tremendous people management skills but not having funds, can he be a business man? I guess, even if he tries, without having the source of solid funding he would fail eventually, where as a person who has not having that caliber to handle people, but having strong financial back-up, he can still hire a manager to manage the people and run the business.

So it’s all about money honey!!....”Funding” is the only variable which makes difference. This I’m saying from my experiences so far. Having very good business mind and ideas, I had seen many of my friends unable to jump start a business, at the same time some failed due to regular cash flow pressure. Whereas, seen also the other side of the coin, who don’t have any business acumen, just became a business man, due to the knowledge of the source of funding. Well…..we all know about Sabeer Bhatia and his hotmail acquisition by Microsoft. But very few are aware even Sabeer got his first seed stage funding from a Venture Capital named DFJ, which ultimately made him big. Here we’re only going to discuss about the private funding, not bank or other instrumental funding.

I started working in this aspect last few weeks back and started interacting with different VC's and Angel Funds in my network, and would like to share the knowledge with my readers.

Before even we think to start searching for a VC we need to be well prepared about few things e.g. you have to have a comprehensive business plan in place, with a complete executive summary, a summary of the proposal, a break down of the enterprise dynamics and the funding captures that will play within each silo of the enterprise, and its length of funding capture, that will allow the business to come to fruition. Very few VC’s fund the management consulting firms though, unless and until they’ve got some unique product or services.

These are minimalist, depending on the offering, you may be also required to even further break down of details ... not the least of which be sure that everything will be the risk analyzed and the competition that may or may-not already exist against your project / product / or offering. All what you are reading is correct when you are dealing with Conventional Banks or Financing and even the requisites could be stricter with due diligences etc. At the end of the road you have to spent a lot of money and invest time behind it. We’ll be only discussing here about the private non-institutional funding here.

There’re few angel funding available who can provide business loans successfully within 35 days and could be as fast as couple of weeks, in the terms of 5/10/15 years, no collateral, no lock out, interest only, non recourse funding. These are direct business loans who’re only interested for long term interests other than that they also evaluate the business risks. They don’t give business loans to all. They make a kind of escrow account arrangements where, you submit a refundable percentage of the total money transactions first, once they’re through and convinced with you project and agreed and signed the agreements. Then they start paying the amount in a staggered manner through that account and also they keep checking the interest receivables. At the end of the deal your advance is also returned. They never go for the equity of the business, but VC’s go for the equity.

Business plans are quite often do not match looking on a realistic approach of declining world economies. One fact of a question that has launched many books -- "once I'm ready to present, where can I find the professional investor?" It had also suggested to go for the professionals who prepare the business plans. If you engage specialists they charge 3-4% of the total funding, sometimes they charge in advance. I found one renowned professor from Stanford, who takes the money in advance and there’s no guaranty of funding. Very funny, I asked him a question, if a person can give you money in advance and engage with no guaranty of funds, then why he requires to find funding? Rather he would prefer to invest that money in his owned business.

In the Silicon Valley, it is an easy generalization to say that the CEO or Chairman is the leader of the fund raising effort. Since most entrepreneurs know few and no VCs or Angels, they need to seek introduction to appropriate parties. This follows the research stage of finding the funds, and the partner within the fund, that may be a match for your company. To seek introduction requires some creativity, but it is easily done through your attorney when you've hired a top tier firm to represent you such as Wilson Sansini or Fenwick & West. Angel Groups are organized collections of individuals. Angels are those who will invest in the very early stage companies, often too early for a VC. They may have strong ties to VCs. Again, your attorney or accounting firm may be able to introduce you. Also, a VC who likes you but feels you are too early for his fund may introduce you to an Angel group.

Once you've selected your targets, you need to determine that you are in their portfolio area without competing with any of their investments. You will also be able to discover which Partner is on the Board of these investments, as this Partner now is a prime target. Next you find the name of the CEO, and contact information for the CEO or company. Use different networks to reach him or her, to find out what it is like working with their investor, and hopefully learn the story of their funding.

If you are primarily the CTO, then consider either bringing on a CEO or at least a (E)VP of Corporate or Business Development. VC’s gives heavy weighting on the management profiles and the credibility of the members in the board. If your personal goal is to become a CEO, then you need a mentor for the process. This again can be an EVP, or it may be a member of your Board of Advisors working on a contract basis with your company with stock or options as their reward. (Make sure to cut a deal with them after the funds get released they get what you’ve negotiated to pay them).

This is a very tech-centric answer. But, it works for all kinds of startups in most industry segments, since there are VCs that focus on just about any business area. You just need to phrase the idea and the big problem that you are trying to solve with the right terminologies so that it meets the VC's investment area. For example, an agriculture company may be agribusiness, bioengineering or biotechnology, a distribution play, or a "Green" company that may be an opportunity in trading on the carbon-cap market.

While I'm looking for the right company to join, I did many consulting in different areas. Securing right funding for a needy company might be another interesting area on which I would love to work in future. The most important piece of advice I can give you about this process to remember that, you need to have your ducks in a row to get past the initial introduction. Anyone who tells you that they can "find" you capital, without being a direct investor, who has not examined your business plan in detail nor having performed any due diligence on your business assumptions, is likely going to waste your time and money. A good consultant will take you through the process of getting ready for the presentation through management consulting, not just presentation drafting. Yu may also check out The Indus Entrepreneurs at www.tie.org . This organization was founded in the Silicon Valley, but now has branches world wide, including India of course. They have a mentoring program and can be a great source for Angel and VC references.

9 comments:

Laban Johnson said...

one may have business acumen but not be in a financial or other position to take the risk of a new venture, and may settle for working for others for the time being. One may be a very high earning expert in one field of business but this does not mean them equipped to be the CEO+COO+CIO+CFO of their own business. There are fewer accountabilities when working for someone else.

Demetrios Mallios said...

Money....

Vinay Kumar said...

My definition of entrepreneur is person with ability to take risk (gambler) and having lady luck on his side. here are other sides of the issues but i firmally belive to take a bussiness decision one has to gether information at the cost of time and money. What ever you do in good value barter you can get 70 to 80 % level of info. If you want to waste more you can refine to 85%. In trying to know more you may miss the market wave. So now you have to decide whether to go for it or not to go.

Next money or raising fund is there are is only one source your Dad (or luck).

Richard Reilly said...

I agree with Demetrious alhpough instead of "Money" I suggest the correct answer is "Capitalism". Entreprenurs figh back by requiring equity participation by virtue of equity and/or options. However the dilemma for many is not having a controloing stake.

Michael Hick said...

Any country that has a virile, active and risk-taking capital market will help build an economy that will feed its people, build schools and hospitals, create universities and keep its people employed.

There is no shortage of entrepreneurs in the human race. There is no shortage of money.

It’s connecting the two and making it work which is the trick!

Darren White said...

In my life I have enjoyed start ups but found I was a very good starter but not a good finisher. I liked the excitement of starting it and handing it off to someone who liked running it. I have done it for 15 years. The older I get the less I like starting and the more I like finishing. I am making the transition from Entrepreneur back to the corporate world as both an educational issue, (to learn to be a finisher) and from a less risk perspective. When you have a company that is 200 people strong and your cash flow slows, you sweat it. When you work for a company that is 2000 strong, the stock holders sweat it. There is a big difference. Now the return on my work has dropped astronomically, but the stress level has improved significantly. It may not be forever but it feels good now. It is really hard when you see an opportunity that will provide better than a fifty percent return to walk away, but my wife says better to walk away and avoid the heart attack than to burn the candle at both ends as we age.

K Shankar said...

For estabishing and running a business Vision,courage, confidence, committment are required more than anything. One can always get advise from others. A person with enterpreunaral skills doesn't become one himself because of inability to take and face risks in life. Many first generation enterpreuners like Dhirubhai Ambani did not have big capital to start with but they had the burning platform to do that. That's more important. One must have the burning desire to do that.

Scott Clous said...

My dream projects are ones that people will want to engage in because they are clearly explained, and make financial sense from day one -- if risk is low, then so may be the rewards, but not always.

The old, old British model of loading up a ship to go trading and returning with a 100x the value can be replaced with trading with neighbors for smaller profits, more frequently -- say, hmm. Walmart?

But for individuals, finding people to support you in some types of projects is far more challenging -- hence, stock and the stock company, replaced patronage, and the royal monies, and so on down to today. We still see government grants, and borrowing from family.

Having seen that being an entrepreneur is possible is key for the courage to try it.

Videos are nice, but do you know many people who are doing it personally -- I know a number, and it can be, as one gentleman pointed out a scary thing with a small business, less than 250. You feel personal ownership, you have the responsibility--how sad it is that people don't always feel that same level of care for those under their leadership at 2000 employees? Or 200.000... How would our companies operate then... but I'm drifting.

Not every business is going to be successful. Big or small.

Honesty helps a whole lot -- Enron / Arthur Anderson -- vs. say McDonalds with years, decades of successful business. Not exciting, very hard work, highest rate of failure, food service types... and yet, we all gotta eat :)

markinsonmarshal said...

Hi Dibyendu,
It was a great informative experience reading this post.Seems you have done a very good survey about why? Only some of us are able to be entrepreneur and the rest remain employee.The Sabeer bhatiya and his hotmail story was a great thing.Event the video shared was awesome.Got to knew about the proper concepts of raising funds for our dream business and fulfil our aspirations.
change management

Subscribe via email

Enter your email address:

Delivered by FeedBurner