From the age of 17, when I launched my business, till today I have probably been involved in 10 or 12 different fundraising situations. Most of these have been for different deals and some of them for the same venture.
I have to say they have always been the most tiring and disheartening, if not the most boring, experiences I can remember. Initially I only ever raised funds when I needed the money and that, I have since learnt, is the biggest mistake. No one wants to lend or invest in your business when you need the money and, when raising money in desperation, you will always make the biggest mistakes.
When to raise monies
Raise funds when you and your business do not need the money and you will always raise more at a better price and have more people interested. Why? I really don't know. I am only sharing my experiences!
If you are starting your business then raise funds at the beginning without spending any of your money. This is what people in the VC and Private Equity world call 'seed capital'. Nobody pays much attention to the money you have already invested and would rather see that money put in by you when they invest their money. This is known as 'hurt money'. In relative terms, they want to see that the money you will put in will hurt you just as much as the amount they put in will hurt them should the venture go wrong. So it is best to find the seed capital before you invest your own money.
However, I have always been fortunate enough to have just about enough money to get the venture off the ground and then have gone out to raise more money afterwards (and this has more often than not caused me big problems - running out of cash is dangerous).
I have seen that when you raise monies on the premise that you are looking to the future and either looking to expand the business or invest in diversifying the venture, but you add the fact that "I really don't need the money at the moment to continue running the business successfully in its current position", it seems to attract a much more positive response from everyone.
In a way it demonstrates you are a planner, you are well prepared for the future, and you are looking at the long term vision for the business rather than just firefighting or living in the present without ambition. If you look at raising money when it is clearly not needed to keep the business in the healthy position it is in today then you will find that you have much more time to consider your options, I know this sounds simple but believe me it took me years, if not more than half my business life, to figure this out.
Who to raise money from
Someone who understands your business or understands you better than others. Simply put, go and raise money from someone who is already in the industry, is in a related industry, or someone who has already been successful in the industry. Or go and raise money from people who know you. They may not know the industry but may be able to understand you.
This is known as "peer-2-peer lending" or going to friends and family.
I have found that regardless of whereabouts in the world, if the investor or lender has some knowledge of your industry they are much better and easier to speak to than someone who may be local. Whilst the local investor has the money, they may not have a clue about what you are trying to do with your business and more importantly, do not have the desire to understand - they just want to make a return on the money they invest or lend.
When I was in the retail business I found the best people to speak to about investing or lending me money for the business were my suppliers. They not only knew the industry well but had two advantages for lending me money:
- They were able to sell me more goods and further their own business
- They would have another channel to market if I failed and they took over the business
In 1998 I needed to raise monies to expand the business and found that after spending weeks and months trying to raise additional funding that it was a supplier of mine that agreed to lend me the money for my business. He understood what I was trying to achieve more than any bank or conventional investor and was able to not only provide the capital I needed, as a loan for a short period of time, but more importantly was able to give me invaluable advice - after all he now had a vested interest.
This happened again to me a few years later but this time it wasn't to grow the business but to try and rescue the business from a grave situation. This time it wasn't a supplier or someone who knew the industry that help me with the capital raising but someone who knew me and understood me rather than knowing much about the industry.
In both situations luckily the outcome was successful but like anything I must be clear that when someone invests or lends your business money, there is always risk as without risk there is never reward.
Always try to find an alternative before trying to raise money
If you are trying to raise money for a start-up business then I would recommend considering other methods of obtaining whatever you need without having to pay for it:
- The traditional bartering system sometimes works in business and if you have a service or product that could help someone in their business why not consider bartering your service/product for theirs?
- Offering a supplier a long-term supplier contract with some upside reward of slightly higher prices for extending longer credit terms or perhaps a percentage of the sale price you achieve when you sell the goods.
- Offering your customer a reduced price and some security perhaps in the form of equity for paying you in advance or without any payment terms works. I have seen many examples of this and recently heard of a very famous hospitality business owner in London who used future clients' monies to build his business. His clients enjoyed massive discounts for paying upfront and the business is now an exceptional success.
- Looking at a joint venture partnership with another business or entrepreneur in a complimentary business where both of you have mutual clients or mutual suppliers and could enhance each other's businesses. I once needed to raise money to purchase goods from a supplier who would not manufacture the goods until the money was paid or deposited with my bank. The amount was significant and I could not raise the monies. I found a company in another country who, for a percentage of the profits I would make from the sale of the goods guaranteed to my supplier (who they dealt with too), would pay the supplier if I failed to. They also asked me for some equity security in my business if I failed to pay them back. They were based in another country so there was no direct competition and they had a win-win situation. They would either make money from the deal as I had committed to give them a percentage of the profits or else they would gain a stake in a similar business and a foothold into the UK.