Planning for Raising Equity Capital

Raising equity capital is like painting a room. Most of the work is in the preparation, and when prepared correctly, the actual painting is quick and easy. This article, which appeared as a chapter in a book I wrote for Entrepreneur Media under agreement with it's authors Dwayne Moyers and Art Beroff, details common pitfalls and a step by step approach leading up to a request for the check.

David R. Evanson

Where’s the Money?, Fall, 1999

Most new business ideas are viable. Yet most new businesses fail. Many fail because the entrepreneur does not execute the idea properly. Others fail for want of capital. There are two primary reasons businesses fail to raise the capital they need.

• The entrepreneur pursues the wrong sources of capital
• The entrepreneur fails to adequately plan for their search for capital.

The dictum “Ready, Fire, Aim”, unfortunately, is a formula for disaster when it comes to raising money. Chiefly this is because, for most companies, there are in truth, very few viable investor candidates, and getting in front of one ill prepared — even though he or she is the [italicize the] one — dramatically increases the likelihood that they will pass on your deal.


Donzzt Forget: You must take the time and effort to plan your strategy. If you are starting a business, or raising money for one in its very early stages, you may only get one opportunity to raise money. Failure to raise capital may mean the failure of the business.

The following paragraphs offer an algorithm for planning and meeting with angel investors. But in truth, it applies to any equity investor including institutional venture capitalists, investment bankers and reverse merger candidates.

At the broad brush level the sequence of your tactics for raising equity capital are as follows.

• Business Planning. A big part of business planning means writing a business plan. This is fundamental to your search for reasons discussed below. But on a pragmatic level, you canzzt set appointments until would-be investors have had a chance to look over your business plan. (See Chapter 23 for strategies about writing a business plan.)
• Lead generation. You must find the kind of people who typically invest in early stage deals. Once you learn where they are, you must qualify them.
• Follow-up, follow-up, follow-up.
• Closing

Here are the planning steps to follow even before you make that first phone call to investors.

– Prepare a Business Plan. You must have a business plan for two very good reasons. First, if your initial contact with an investor is successful, he or she will request one. When an investor asks to see a plan, or even a plan summary, it needs to be on his or her desk the very next morning. At the very least it needs to go out first class mail, that day [italicize that day]. If there is a delay of say three to six weeks between the request for a plan and its arrival, you can pretty much kiss that investor good-bye.


Taking Action: Consider using off-the-shelf business plan software. These programs can stimulate your thinking by confronting you with the kinds of questions which an investor would ask


Second, investors ask a lot of questions. Seemingly, thatzzs all they do. And itzzs only by writing a business plan that you can possibly hope to answer the kinds of questions which an investor will ask with the kind of conviction and authority which will win the day. Remember, there is not an entrepreneur on the face of this earth who raised a single penny simply by writing a business plan. They raised money by presenting their plan, and using the thinking that went into its writing it to defend their ideas, strategies and tactics before investors. Flip ahead to the chapter titled Preparing a Business Plan which discusses how to write a business plan.


Shop Talk: Investors and entrepreneurs often talk about the “lead investor.” This is the person or institution that makes the most significant financial contribution to the deal. Also, because a large investment by one entity can often attract other dollars, the lead investor is the one which is found first [italicize first].

– Determine Your Sizzle. The business plan is the steak. Now what is the sizzle? What is the one-line answer to the first question the investor will ask: zzWhat does your business do?zz The response must be brief, understandable and memorable.

For instance, if your business resells deep discount travel packages for unused vacations at luxury resorts to Fortune 1000 consumer products companies to use as fulfillment premiums, donzzt say that. The investorzzs eyes will start to glaze over at the word “unused.” Say: We are the business that makes luxury travel affordable for 50 million middle income Americans. Then the investor will say zzI see,zz giving you the opportunity to say zzTravel in the U.S. is a $60 billion market annually. With a market this size, therezzs lots of niches, and we are operating in one of them which has little competition, and high margins . . . zz

Or, letzzs say that your business offers marketing services to physicians for elective surgical procedures, which helps them overcome the ceilings on fees imposed by HMOs and other third party payors. Donzzt say that right out of the box. Instead say, zzWe are the new breed of marketing agency that every physician in the U.S. now knows that he or she needs if they hope to survive the changes in medicine . . .zz

Statements such as these are your sizzle. They are succinct, memorable, and perhaps most importantly, repeatable. You want a sound bite which an investor can easily repeats to his or her fellow investors. Even Wall Street uses this trick. When venerable motorcycle maker Harley-Davidson went public, the pitch to investors was “Own a piece of an American icon.”

Donzzt Forget: Investors are people too. In order to get a deal done, you must be able to move beyond the language of attorneys and accountants in your presentation, and provoke imagination and curiosity.


– Form an advisory board. Every industry has people who have succeeded. Reach out to these people and ask for their help in the form of serving on an advisory board. Therezzs a lot of psychology in why people readily agree to such a proposition. Many appreciate being recognized as a success. Others have that natural mentoring orientation which comes from being a successful businessperson. Some want to relive their previous success, while others would simply like to be part of a support system they wish they had when starting out.

But one of the true purposes of forming an advisory board, is to help generate leads. When you start asking advisory board members about sources of financing, you will find that many willingly open up their Rolodexzzs if they have been properly initiated. To a lesser extent, the purpose of forming an advisory board is to increase the comfort outside investors have with your team.

– Focus On Getting A “Lead” Investor. If you are raising equity capital privately, therezzs little likelihood that you will run into one sugar daddy who will cut a check for the entire deal. It could happen, but it probably wonzzt. More likely however, you will run into a lot of investors who will put in smaller amounts. These are helpful, but they should be found later. Initially, you need to focus all of your energy on finding the investor or investors who will take down 25% to 50% of your deal, and who by doing so, will provide a magnet for the smaller investors.

– Seek Legal Counsel. Soliciting capital may provoke several state and federal securities laws. You do not want to unwittingly run afoul of these laws, an act which may cause you to return capital which you worked so hard to raise. Even though many deals are exempt from state and federal securities laws, there can still be a host of requirements on notification, documentation, and the number of investors who can participate in the offering. Raising money is hard. Donzzt make it harder by unknowingly breaking the law.

– Prepare a Deal Summary. Technically, this should be the executive summary of your business plan. As mentioned in the chapter about business plans, the executive summary should be no longer than two pages, and must function as a stand alone document. This summary must describe: the company, the product or service, the market, competition, key personnel, funding required, use of proceeds, and a historical and projected financial snapshot. To stay within the one to two page length, you should write no more than one paragraph about each of these items.

– Get Referrals. If an investor is interested in learning more about your business after the first telephone call or meeting, he or she might want to talk to someone else such as a customer, a licensee, a franchisee, your accountant, attorney, or members of your advisory board or board of directors. Plan for this question by figuring out who should and will talk. That way, when an investor asks to speak with someone you can answer with a name and a phone number rather than by saying zzIzzll get back to you on that.zz Remember, you may never get the investor back on the telephone again. Whereas, if he or she is provided with an action step and takes it, the mating dance is still on track.

– Get Introductions. If your lead generation process turns up investors you do not know, then you must work ahead of time to get some kind of warm-body introductions. The best kinds are when someone calls ahead of you and warns you will call. When this happens, you will be able to have an initial telephone call with the investor nearly 100% of the time.

As a fallback, during the first conversation if you can say in your first breath zzOur mutual acquaintance Peggy Bennett suggested contacting you . . . zz then your chances of the call being successful, that is the investor agreeing to look at something you send them, increase dramatically.

Former employees, trade associations, accountants, lawyers, or the person who supplied you the lead in the first place, all represent viable candidates to prepare the investor for your initial contact.

– Meeting Venues. I you have something in your factory or office worth seeing, such as people actually doing something, or products being made, then you should always try to get the investor on your turf for the first meeting. However, if you work in a hovel or at home,, it may not be a good idea to let the investor to see your space. If this is the case plan ahead of time a variety of places you can meet where you know whatzzs going on, such as the office of your accountant, or attorney, or hotel lobbies which you have been in and which can accommodate an intimate conversation.

If you ever trace your lifezzs path in total, you may see that where you have ended up, is to a great extent, the result of chance meetings and random events. The same theory can apply to raising money. You just never know who you will meet who will put you in touch with the person who will be your investor.

Here are some real life examples of such serendipity:

A turkey restaurant owner looking to expand, gets a referral, of all places, from the person who supplied him with ham (clearly not a major vendor) to a franchise development consultant. After that, it was almost biblical in the chain of names that led to the almighty investment capital. The franchise developer, named Bloomenthal had a friend by the name of Levine, who had a friend by the name of Rosen, who had a friend by the name Erlich, who had a friend by the name of Freidman, who knew a merchant banker named Miller, who did the deal.


Taking Action: One technique that is sometimes used by companies raising money is the publication of a regular newsletter. This keeps investors and potential investors up on the company as it makes progress.


Or consider this one. The president of a home-based care management company who had been raising money gets the opportunity to make a presentation before an angel investor group. There are some 80 investors in the room; a target rich environment. His company was met by the investors with all of the enthusiasm normally reserved for a blood test. But a funny thing happened. Prior to going “on stage” the entrepreneur was put in an anteroom with two other entrepreneurs scheduled to present that day. The entrepreneurs started comparing notes and swapping the names of investors they had met. Our health care entrepreneur diligently follows up on these leads, and among them finds his lead investor who commits $200,000 to his company.

Raising money is a lot like finding a job. You must network, network, network. Every person you meet, you need to ask for three more names. One entrepreneur who had diligently saved the business cards of every person he had met over the years sent each one a letter asking for their help in raising money or getting him in touch with investors. He got five investors this way, and a lot of encouragement for what he was doing.

If you are not such a pack rat, here are several paths you can take to start meeting investors. Many of these are described in greater detail in chapter 11, about angel investors.

• Venture capital forums

• Fund raising seminars

• Venture capital fairs

• Venture capital clubs

• Private capital networks (See Chapter 12)

• Ace-Net (See Chapter 12)

• Professional services firms such as accountants and attorneys.


A Good Deal: Several electronic matching services such as ACE-Net, among others, provide quick and direct access to angel investors. These matching services may not lead you directly to capital right away, but they clearly have the power to start you digging in the right vein. (See Chapter XX – The Internet & Other Electronic Matching Services)


Now itzzs time to dial for dollars. Prior to picking up the telephone you should have put together a business plan and (where possible) gotten some kind of entree to each of the investors you are going to approach. Now you must:

– Qualify The Investor. Your first task is to qualify your would-be investor. This must be done very early on in the process. After all, every investor has parameters and preferences, and if you donzzt fit within them, you should probably spend your time on other potential investors.

The investor will ask you very early on in your first conversation who you are and what your company does, to which you should respond, zzWe are the business that makes luxury travel affordable for 50 million middle income Americanszz
Then you might suggest some overall industry trends, but then youzzll need to pop the question: zzDo you typically invest in companies such as ours?zz If the person you are talking to doesnzzt invest in companies like yours itzzs time to gracefully bow out and move on. But remember, get three more names before you do.

– Answer Questions. If the investor has any interest, he or she will ask a lot of questions. This is where writing a good business plan pays off. Because youzzve thought every aspect of the business through, you should be able to manage these questions.

Itzzs important however to exude confidence and momentum in your answers. The investor is evaluating you from the moment the conversation begins. Equity investors are not like lenders in this regard. They are not relying o cash flows to get their investment back. They are instead relaying on you, the entrepreneur, to build value and keep selling the business to other investors until the point where it gets sold to the public or another corporation. The upshot is, if you canzzt be convincing to this investor, he or she is thinking you probably canzzt convince the next investor down the road, and that ultimately, their investment will remain trapped inside the company.

The reason you want to show momentum is because you want to leave the investor with the feeling that things are happening quickly; that if he or she invested, their money would go to productive use right away, and not sit around in limbo while you figure out the nuances of getting the business to its next stage of development.

– Get A Meeting. Your objective during the initial contact is to get a meeting with the investor. If your list of potential investors is well qualified, meetings will come easily. If not, then getting an investor to agree to a meeting will be more challenging.

Generally speaking, if the investor is interested in meeting, they will request more information, such as a business plan or business plan summary. Donzzt agree to sending it out without getting something in return. Specifically, you want the investor to agree to meeting on a certain date after they have reviewed the plan.

Now itzzs up to you to make sure your business plan arrives on the investorzzs desk the very next day. In addition, as practical, you want to include some kind of sample or tangible evidence of your product or service. If you sell imported, shelf stable food products, this is easy. If you manufacture waterbeds, this is more difficult. Even in difficult situations, itzzs worth considering creative solutions. Pictures, customer testimonials, video tapes among other items can sometimes help bring a product or service to life. Anyone can send a bunch of papers in the mail that pile up on someonezzs desk. But product or service samples get picked up, toyed with and considered.

– Managing Objections. Typically, seeking the first meeting is when you will run into the first wall of objections. zzThe product is not developed enough,zz zzThe distribution channel is too crowded,zz zzYour management team is too thin,zz zzIt doesnzzt appear that you have established technical feasibility.zz

If the investor is qualified to participate in your offering, then youzzve got to be tenacious at this point. Most of the time, when investors decline an opportunity, itzzs because they donzzt understand a certain aspect of the product, or the market or the technology, or your vision for the company. As a result, when an investor says no, they donzzt want to meet, youzzve got to ask them why, and then show them where their thinking is off.

– Prepare a Formal Presentation. You cannot meet with an investor without having a formal presentation prepared. It may not get used, but better to need not have, because if you need it and donzzt have it, youzzre sunk. Remember, the investor is evaluating your ability to keep selling the company because itzzs how he or she will eventually get their return. If you show incompetence in this arena, even if the company shows a lot of promise, it spells trouble for your capital formation efforts.


The 20 minute pitch is standard operating procedure; you must be able to tell your story in this period of time. The underpinning of the presentation is your business plan. Thus in the time allotted you must cover the major sections of the plan. Overall your are trying to answer these questions in the investorzzs mind:

• What is the company and its strengths?
• How has it performed?
• Where is it going?
• How is it going to get there?
• What does it mean to me if they succeed?

Whether you are meeting with one investor or a roomful, the best strategy is to walk them through a set of 10 to 15 slides, which punctuate your remarks.


– Conducting The Initial Meeting. There are two very straight forward objectives for the first meeting. First, get the investor to like you. Second, get a second meeting. Entrepreneurs must have two objectives for their initial meeting with the investor. First, get the investor to like you. Second, get the investor to commit to doing some kind of action step.

You must get the investor to like you for a very simple reason. If he or she doesnzzt, therezzs very little chance that the deal you are proposing will ever happen. Unlike a lender, who bases his or her decision on credit quality exclusively, an equity investor is looking for some sort of personal chemistry, at least for earlier stage offerings. Without some baseline affinity for the entrepreneur and what he or se is doing, there is no basis for an investment. Also remember, that an equity investor can get romanced by business ideas and people, itzzs unlikely a lender would change their lending criteria a single iota simply because he or she happened to like the entrepreneur.

But you must do more than simply have the investor like you. The meeting must close with some sort of action step on the part of the investor.


Getting other people to like you is the subject of another self-help book. But here are the concepts outlined in Part Two of perhaps the greatest book on the subject ever written on the subject How to Win Friends (Simon & Schuster) and Influence People, by Dale Carnegie. Read them over several times before you meet with a prospective investor.

• Become genuinely interested in other people.
• Smile.
• Remember that a personzzs name is to that person is the sweetest and most important sound in any language.
• Be a good listener. Encourage others to talk about themselves.
• Talk in terms of the other personzzs interests.
• Make the other person feel important — and do it sincerely.



Taking Action: Here are five steps to suggest the investor take after the close of the initial meeting. Have the investor:

1. Read your business plan (assuming they have only read a summary to date).
2. Try your product or service.
3. Speak with one of your references.
4. Have his or her attorney or accountant call you.
5. Call someone he or she has worked with in the past that understands your industry.


Finally, keep in mind that just like the initial telephone conversation, you want to avoid ceding control of the process to the investor. Therefore, try to make the action steps conditional upon a second, and hopefully closing meeting. For instance: So you agree to try our product for two weeks, and then meet with me to discuss your thoughts.zz

If things have gone according to plan, the date for the second meeting should have been set during the first. But if not, getting this second meeting might take some effort, and a bit of follow-up.

Regardless, the second meeting is deal time. And even if itzzs not deal time, itzzs certainly the time to separate out the investors who are not worth your time to pursue any longer.

You must pop the question in a way that gets the investor involved in the decision making process. Also, you must pop it in a way that forces the investor to declare their interest or lack there of. Here is, in sample dialog form, how to do it:

Entrepreneur: We have met twice. I appreciate the time you have taken to understand my company. Now that you know a little more, and you clearly have some experience in these matters, I want to ask you an important question.
How much capital do you think we should be raising?

Investor: Well, to tell you the truth, Izzm glad you asked that. Because I have studied your plan, and I think that you are going to need much more than the $500,000 you are looking for. I think you need $750,000. Not right away, but shortly after you commence marketing — which according to this plan could happen at the end of this year.

Entrepreneur: Itzzs comments like that let me know Izzve chosen the right course of action by seeking out hands on investors, who can provide not just capital but input. Ok, of that amount, $750,000, how much can you commit to?

Gotcha! At this point the investor has very few courses of action. He or she can suggest a material amount, a small amount, or no amount. If, the answer is none, you can say good-bye to that investor and move on. If itzzs a small amount, you can solidify this investorzzs interest by telling them you are looking for a lead investor and asking them if they will commit the dollars they just suggested when this investor is found. Most will say yes. If the answer is a large amount, then you have accomplished your objective of fining a lead investor.

Getting from a yes to actual dollars in the bank, is beyond the scope of this work. However, if you have gotten this far in the fund raising process, you should have had at least some experience with an attorney who has significant experience in securities law. You will now need their counsel in drawing up the necessary subscription documentation, or understanding the securities laws exemptions you are taking advantage of.

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