I used to fundraise; now I raise capital. This may seem like a semantic distinction, but in my experience, they are worlds apart. I was the executive director of a nonprofit organization until December 2010, when I left the nonprofit to build a for-profit iteration of the same organization.
That day I founded ThinkImpact, an entrepreneurship education program for college students and young professionals, to provide a scalable and income-generating component to my former non-profit. Knowing next to nothing about finance, I began a negotiation with my board to buy out the nonprofit’s intangible assets, including its intellectual property, brand, and website. I wanted to ensure the nonprofit could pay off its financial obligations and I could honorably start a new company with the same brand and core program.
Having no money to my name I had to figure out how to pay for these nonprofit assets, while also building a new company. I was getting hit from both sides: Relatively large startup expenses for “the buyout” and ongoing expenses including salaries, rent, and contracts that I absorbed as part of the transition. So began my lesson in raising capital for a startup.
I needed money and after hearing that plenty of people had sold equity to raise capital, I assumed I'd be able to do the same. I called upon a wealthy friend and asked if he would invest so I could make an initial cash purchase for the organization’s assets. He was open to it, but maintained, the terms had to be "right." I figured they would be, but I was mistaken.
When someone offers to give you money for an idea--an idea that comes with nothing but liabilities--you can’t expect to suddenly find yourself in pools of cash. What you can expect is to be told that your company is worthless. Rejecting that notion, I also turned down the initial investment and took on some initial debt (over $50,000 so far) to get through the worst part of the transition. I bought the assets through a negotiated three-part deal that included cash up front, a senior note payable (debt that takes priority) and finally, convertible debt that will eventually give the nonprofit (which is a going entity) a future position in the company. If the company is wildly successful--as I intend it to be--the nonprofit will be quite successful as well.
For all the negotiating, the debt and the buyout, I had yet to raise new capital to build the company. Reflecting on the lessons that I had learned about valuation and understanding the equity in the early stage of a company is usually not ideal, I took on convertible debt from two angel investors.
Now that we are on stronger footing I can offer a few key lessons for raising cash to get your business off the ground.
- Learn the real value of your enterprise. Get over yourself. Your idea alone is not worth $10 million. You have to make it worth that much. The only way to do that is to execute on your vision relentlessly. Prove something, then ask for outside investment.
- The early stage is about cash flow. Entrepreneurs need to understand raising capital is not about having tons of cash to staff the best and brightest, get an awesome office and then grow. Early stage cash is about keeping the doors open, and should really be done as cheaply as possible. Proof of revenue, existing contracts and a strong pipeline help make the case for an investor to buy in. If you can find smart ways to boost income to support cash flow, do it, raise less, then your valuation goes up.
- Never feel like you are in a desperate situation. Always explore options for escaping a financial disaster. Just because your cash is running out, or one sale seems like it will provide you the legitimacy you need as a company, remember there is always a plan B and C somewhere. If you feel squeezed, you have less negotiating power and you can lose sight of the many options that exist to you.
- Everything takes longer than expected. I was delusional at first, thinking I’d raise a couple hundred thousand in a month. Forget it. I had to prove my business, then wait three months to see any money come in. But we made it.
- Be honest about everything. Investors are entrusting you with their hard-earned cash. Don’t start on the wrong foot and sugar coat any liabilities or risks that the company is responsible for. Your problems will soon be the investor’s problems too. It’s your responsibility to disclose accurate and complete information.
[Image: Flickr user majorbonnet]