So your company is doing well and has great growth potential, but the banks won’t loan you money to grow, you’ve exhausted your personal resources, and you’ve run out of friends and family willing and able to write checks to your company – what does that mean? It probably means it’s time to raise outside capital – perhaps angel or venture capital. Here are some considerations before raising outside capital and some of the key points you’ll likely be negotiating:
Dilution/Loss of Control:
First, consider whether you’re prepared to own less than 100% of your company, and if so, whether you’re also prepared to have less than 100% control over business decisions. If the answer to either of these questions is no, you should not raise outside capital.
Capital Need – Sources and Uses:
Second, carefully consider how much money you need and what exactly you’re going to do with it. The reason is twofold – first, no experienced investor will take you seriously unless you have a detailed and well thought out strategy; and second, the more you raise, the more ownership and upside you give up. Raise just what you need to execute your business plan (with the caveat that everything generally takes longer and costs more than planned).
Third, consider what qualities, skills, connections, experiences, etc. you would like your ideal investor to bring to the table. After all, a dollar is a dollar, but these other strategic offerings are what differentiate one investors’ dollars from another’s – and make them more valuable to you.
Valuation will be key. At the risk of stating the obvious, the higher the valuation you can justify, the lower the interest the outside investors receive for each dollar invested. And be prepared to justify your valuation – this company is your baby, not theirs. What you see as a cute dimple, they may see as an ugly scar. In the end, the value of the company becomes what you and your investor(s) agree it is. Make sure you’re prepared to make the strongest case for your valuation – and understand that to the investor, it’s just business.
Stay tuned for “Know the Basics – Part 2.”