What You Need to Know About Raising Capital

Welcome to this week’s installment on raising capital! Head over to our Youtube channel and take a look at this article from Harvard Business Review learn more.

In this week’s post about raising capital for your small business, we found a very old article to discuss, from the Harvard Business Review, written in 1989. We dug it up, read it, and are just astonished at how relevant it still is, so we’d talk about that and share it with you today.

Here’s the first thing you need to know, but might not want to know, about raising capital raising. Capital costs a lot of money. You are essentially in the business of advertising your company as the product for investors to buy, and marketing costs a lot of money up front. You’ve got to create marketing assets. You’ve got to spend money to distribute the ad, and then you hope to get the attention of the people that you’re seeking. It’s not as expensive on the legal and professional side today as it was when this article was written, because it used to be the attorneys would never more or less control the process. Not so much anymore. So the first thing to know is marketing costs a lot of money.

While you’re doing this, you need to understand you’re not going to have any privacy. You’re opening yourselves up to the investing public. They’re going to ask a lot of personal and private questions, which are for the most part relevant to the process, but it could make you uncomfortable, so be prepared for that.

Be careful when you hire an expert. Experts can blow it. There’s a term for people in the capital raising business, usually for a little bit larger raises, called a placement agent. That’s where the issuer hires this investment banker, so to speak, whose job is to go contact investors on your behalf, present your deal to them, and go out and try to connect you. Sometimes they’re called finders. It really depends upon the level of service. Sometimes these guys can blow it if they don’t understand your deal. If your deal’s complex, especially if you’re a software company, nobody will be able to explain your company as well as you, so be careful on who you hire and supervise them when you have hired them.

Next, money isn’t all the same. You might have a really excited investor who wants to lead or, in some situations, wants to do it all. Investors can be a problem if they decide that they want to be so active that they’re going to be disrupting your business and operations. Sometimes that money is not worth it. Sometimes you get that when they’re just a small investor, and so you have to discipline them. Or if you’re lucky enough, you prevent them from investing on the front end altogether. So money is not all the same.

Keep in mind that the search is endless, and once you’re in the world of raising capital, it is a world that’s hard to break out of. Make sure that you’ve got the proper executive leadership so that the company can continue to run while you’re raising capital, and when you’re lucky enough to complete your raise, and that’s all the money you need at least for the time, then you can literally shut it down, but sometimes the search goes on and on and on.

Last point is lawyers cannot protect you from things that you do or say on the trail. You can put all the risk factors in the world in there, but if you are using misleading statements or just foolishly making promises that you cannot keep, there’s no protection from that. That will go down as securities fraud, and you’ll end up paying for that.

If you’re in the process of getting ready to raise capital, we do help companies as an independent financial executive. We can help you dot the i’s and cross the t’s. Book some time with us whenever you want to talk!

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