How to raise capital
My name’s Matt Schubert, I’m the CEO of Hill City Ventures and 434 Marketing. I’m somewhat of a serial entrepreneur. I’ve had the opportunity to raise over $15 million in capital from a variety of sources. Some of them have been small, so raising as little as $10,000. Others have been large, raising as much as $10 million through venture capital sources. I’ve had the opportunity to see what it looks like to raise capital from friends and family, through more traditional bank lines, to raise capital through sub debt in growth stages, and raise capital from venture capitalists. Each of those is a little bit different and it’s really important as entrepreneurs that we understand the differences and that we’re prepared for the capital raising process. It can be a really frustrating process, and particularly so if we don’t know who to ask or what to ask. Even if you’ve done it quite a bit, you might get it wrong from time to time. I’ve heard no more than I’ve heard yes. I recently spoke with a debt lender, and after explaining our marketing business was asked “what type of hippie machinery and plant equipment do we own?” And while it’s a little bit funny now, it was frustrating at the time, and it can definitely be frustrating when our expectations don’t align with those of potential funders. I wanted to talk a little about what the capital raising process looks like based on the stage of your business. I think one of the things to remember is that a good rule of thumb when raising capital is that it’s always easier to get capital when you don’t need it. It’s very important that even if you’re at a point when you don’t need capital right now, that’s the perfect time to begin the planning process and begin working through the capital raise process. For many businesses, it can take as long as six months to go through the process, identify the sources of funding, prepare everything you need to prepare, get approved, and then get a loan funded, or equity funded depending on the case. That’s certainly not always the case. There are opportunities where it might happen in as little as 30 to 45 days, but they’re fewer and far between. If you’re an early stage business it’s important to plan for that longer time frame.
As you raise capital, one of the first considerations is determining whether equity or debt is most appropriate. As an early stage business, we most often will look at equity sources first because it’s an opportunity for others to share in the risk and in the future reward together with us. Or you may also look at other things like personal lending sources, so a home equity line of credit would be another early stage potential option for you. Certainly you will see and hear about those funding their businesses off of credit cards and so forth, but hopefully that’s very last resort for you. If you do go down the equity route, one of the really important things to remember is that you’re inviting a partner into your business, and it’s very likely to be a long-term partnership. Thinking about things like the character of the investor, the experience of that investor, what are they like to work with on a daily or regular basis, and how are they in the event of a crisis. Because one of the things that will happen as a small business is that things will not go according to plan no matter how well planned things are. So it’s really important that our partners that are investors are with us and are good to work with in both good times and in bad. It’s also really important as entrepreneurs as we enter into equity relationships or debt relationships that we only do so when we do have an appropriate plan to be able to raise the money, to be able to pay those dollars back, and that we’re willing to commit and stick to that in order to make it happen.
So the first step in acquiring financing or funding, whether that’s debt financing or equity financing, is to make sure that you have a good understanding of the financial picture of your business and you can communicate that to others. There are six specific things I would expect that you would have as a lender, but they’re also just things that are important to have to have a good understanding and clear picture of your business and what you’re trying to accomplish. The first is a profit loss statement. Very simply just answering the question sales minus expenses equals profit. Being able to articulate what that looks like. It’s really important as an entrepreneur that if you have someone else prepare that for you, that you understand it in great detail and you can communicate it to others. The second is a balance sheet. What does this look like for the business overall and being able to articulate other sources of debt or financing that may be currently in place. What does the capital structure look like and so forth. Third is a cash flow statement. It’s really important to demonstrate that you can manage cash effectively and that you understand what’s happening with cash flow within your business. That’ll be critical for being able to repay. You’ll need financing that comes into your business. The fourth is a proforma, which is a way of saying it’s important being able to forecast and let lenders or equity partners know what you expect the business to look like in the future, whether that’s a year from now, or if you’re raising equity, it’s likely to look at a 5 year period of time, and showing how you expect the business to change over time and what your assumptions for that are so that they can understand what they’re buying into.
So those are the first four pieces, the last two are really designed to describe and to communicate your business quickly. So the executive summary should be a 2-3 page document that just articulates who you are, what you do as a business, how you make money as a business. That’s the fifth piece. The sixth is identifying the use of proceeds. How do you anticipate using the dollars that come into the business? Why are you raising those dollars? Why are they needed? What will they be used for and how will they be paid back?
So those are the quick 6 things: profit and loss, balance sheet, a cash flow statement, a proforma, so future projections, an executive summary, and use of proceeds. Based on the stage of your business, the next step would be to create a list of likely sources of funding. It’s important to think about if you’re likely to raise equity and invite other partners or others into the business to share the risk with you, or are you going to raise or get a loan or look for a lending source of capital. In both instances it’s important to have a plan for how those things are going to be paid back. I wanted to talk a little about some of the sources that are available to us. Often as entrepreneurs we might think about friends and family or a bank, but we may not think about all the potential sources, and based on the type of business we have, our stage, one or more of these may be most appropriate for us.
So certainly it’s important as you create that list to think about a wide variety of groups. Local banks come to mind. They’re very good when you have assets that you can leverage for the lending, whether that’s land or plants or equipment. Also for things like home equity loans if that’s an option for you. However it’s often very difficult as an early stage business to go to a bank and expect to be able to receive a loan when we have few assets. We have to look for other potential sources. Another common source in an early stage is friends and family lending, and being able to have friends or family come together to be able to help provide a loan to us because they know us best and they trust us. As you do that, one of the things I would encourage you to do is even if they’re family, make sure that you do it in writing to be able to communicate expectations very appropriately. Really treat it as if it was a business loan in terms of paying it back and the care that you take with that. The second thing is that I would encourage you to look at online sources. They make it very easy now to be able to take multiple friends and family in order to diversify the risk, and for a percentage of the loan, they will help prepare loan documents and take care of the closing of the loan and so forth, particularly if it’s for a significant amount of money. One of the other things that’s become increasingly popular is being able to leverage your building and get friends and family to participate and get more capital than they may be able to provide. Newer groups like Able Lending out of Austin, Texas, provide the opportunity to lower your rate for a business loan when you can show that you have other friends and family participating. It also helps to be able to organize the entire process and ensure that you have the same set of terms for everyone that’s participating. Other sources that could be important could be the small business administration, understanding who the SBA lenders are in your local area. They provide essentially subsidized lending for small businesses to encourage growth. It’s also important to think about and talk with the local Economic Development authority in your area. They can be a great source for who the local lenders are. They can be a good source of introductions to those. And often times, they can be a good source of helping you understand alternative types of funding as well. Some of the types of businesses we have worked with have found that they have been able to get grant funding through the federal government source through the SBIR – small business innovation research grant. Those are tremendous opportunities because the grant does not need to be repaid. It’s a grant that is provided to encourage small business innovation, research, and commercialization, and often times they have follow on funding opportunities. Those are things to consider as well as you look at the potential areas where you can gain access to capital. Additionally, with the recent changes in law that now allow non-accredited investors to be able to participate in lending, there are more and more crowdfunding sources. They’re available in two forms. There are crowdfunding sources that provide loans to entrepreneurs and small business. There are crowdfunding sources that allow you to post about your business and about your project and enable you to create a pool of smaller investors that provide equity in early stages businesses. Those are newer forms of capital that are important to think about and may be able to help you find capital at a stage when it can be very difficult otherwise.
As you prepare and as you make your list and as you go out to begin to engage with funders, make sure that you do your research and understand who those funders are, what types of businesses they’re likely to fund, and that there’s good alignment there so you can limit frustration on your side and use their time well. Other things that are really important to do are to seek counsel from others that aren’t involved in the funding process – to review with them if this makes sense. Am I putting myself in an area of too much risk? Is this a good deal or not? Remember to get outside counsel as you go through that process.
As you seek funding, it’s important to be prepared, to understand who you’re going to be meeting with, what your ask is, and to have everything that you need to be able to complete that process ready from the start. It’s also important to be persistent. You’re very likely to hear a no along the way, and you may hear no multiple times. It’s really important not to be discouraged and just to continue pushing forward. It’s a good rule of thumb as an entrepreneur anyway because if there’s one thing you have to have is grit – to be able to stick to it when times get tough. That’s a safety for those who are investing in us or putting money into our business from a lending standpoint. Finally, be prepared to have a little patience. Remember to start early as you go through the process because it may take some time to be able to raise capital.
I hope this is helpful for you. I wish you well. If you’re in the Lynchburg area and you’re in that process, we’d love to talk with you. I’m sure that you’ll find as we have, that Lynchburg is a great place to live and work and do business. With growing local colleges, it’s a great place to grow a workforce. Have a great day.
About Matt Schubert
Matt has been recognized as a technology innovator and enjoys advising early and growth stage SaaS companies. Matt is a business builder, with experience founding, growing and leading multiple SaaS businesses. He raised more than 10M in Venture Capital and, more importantly, delivered significant returns for investors. He has built multiple high growth sales teams and enjoys team building and selling enterprise class SaaS solutions that create demonstrable value. He is currently the CEO at Selective Wealth Management.
|Date Added||June 29, 2016|
In this video, Matt Schubert discusses different capital building tactics that entrepreneurs can employ. He also provides helpful tips, including:
- How to get started
- The materials you need to prepare before meeting with investors
- Potential funding sources based on your company's growth stage
- And more!