The Truth About Funding

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The Truth About Funding

Table of Contents

Introduction to Funding............................................................................1

Overview ...................................................................................................................1

The #1 Myth About Raising Money............................................................................2

Growthink’s Funding Pyramid™: Why Most Companies FAIL To Raise Money........3

How to Protect Your Business Ideas When Raising Money ......................................4

The Six Steps To Raising Money ..............................................................................5

Step 1: Developing Your Business Plan.................................................6

Overview ...................................................................................................................6

The 10 Sections of Your Business Plan ....................................................................7

Executive Summary...................................................................................................7

Company Analysis.....................................................................................................9

Industry Analysis .....................................................................................................10

Customer Analysis...................................................................................................13

Competitive Analysis ...............................................................................................15

Marketing Plan.........................................................................................................17

The Operations Plan................................................................................................20

Management Team .................................................................................................23

The Financial Plan...................................................................................................24

Appendix .................................................................................................................26

Step 2: Figuring Out the LEAST Amount of Money You Need To Achieve Milestones .................................................................................28

Why Risk Management is Important........................................................................28

Establishing Your Risk Mitigating Milestones ..........................................................29

Creating Your Milestone Chart & Funding Requirements........................................30

Step 3: Perfecting Your Pitch.................................................................32

The Importance of Your Pitch..................................................................................32

1) The High Concept Pitch ......................................................................................33

2) The PTS Pitch (Problem Then Solution Pitch).....................................................35

3) The Traditional Elevator Pitch Formula ...............................................................36

Step 4: Getting Involved in Your Affinity Network...............................38

Step 5: Getting Advisors ........................................................................41

Why You Need Advisors..........................................................................................41

The Truth About Funding

Action Plan for Getting Advisors..............................................................................42

Once You Get Advisors ...........................................................................................44

Step 6: Figuring Out MULTIPLE Forms of Money To Raise ...............45

Raise MULTIPLE Forms of Money..........................................................................45

The 3 Core Types of Capital....................................................................................46

Growthink’s Funding Pyramid™ - The 41 Best Sources of Business Funding .......49 1. Quick Loaners.........................................................................................................................50 2. Crowdfunding..........................................................................................................................53 3. Creative Funding ....................................................................................................................54 4. Social Lending ........................................................................................................................62 5. Financial Maneuvering............................................................................................................62 6. Bank Lines & Loans ................................................................................................................67 7. Strategic Financing .................................................................................................................72 8. Grants.....................................................................................................................................75 9. Individual Equity......................................................................................................................77 10. Institutional Equity.................................................................................................................79

Raising Individual & Institutional Equity ..............................................85

Introduction..............................................................................................................85

Raising Angel Funding ............................................................................................86 What Do Angel Investors Look Like?...........................................................................................86 Why Angel Investors Invest.........................................................................................................88 What Sectors Angels Invest In ....................................................................................................89 What Angel Investors Look For in a Company.............................................................................90 How to Find Individual Angel Investors........................................................................................91 Re-Cap: Action Plan for Raising Angel Capital ............................................................................95

Raising Venture Capital...........................................................................................96 What is Venture Capital? ............................................................................................................96 The 5 Key Stages of Equity Investments .....................................................................................97 Strategic/Corporate Investors....................................................................................................101 Private Equity Firms..................................................................................................................102 The Types of Companies That Venture Capital Firms Finance ..................................................103 Market Sectors Where Venture Capital Firms Focus .................................................................104 How Venture Capitalists Assess Companies .............................................................................105 Factors to Consider when Seeking a Venture Capital Firm........................................................106 How to Create Your List of Potential Venture Capital Firms.......................................................108 Identifying the Right Partner at a Venture Capital Firm ..............................................................109 The Three Ways to Contact Venture Capitalists ........................................................................110

Conclusion .............................................................................................118

The Truth About Funding Page 1

Introduction to Funding

Overview

Capital, funding, financing, or money (they all mean the same thing) is the fuel

that allows businesses to grow. Without capital, businesses fail. With capital,

early stage companies can begin to grow, and mature companies can achieve

even greater scale.

For early stage companies, particularly those with little or no track record of

success, the challenge is to find the capital they need.

Because the vast majority of new businesses fail, banks, venture capital firms

and other lenders and investors are often highly skeptical and not willing to part

with their dollars unless significant conditions are met.

However, there are ways to attract this kind of capital, and there are tons of

capital sources that are largely overlooked by entrepreneurs.

This guide will teach you about the types of funding that are available to your

business, and how to access them.


The #1 Myth About Raising Money

Before we continue, I want to dispel the #1 myth about raising money.

This myth is that someone, somewhere has a magical list of investors looking to

fund companies like yours. Or that there is some online network of angel

investors that are just waiting to meet you so they can fund you.

This is just NOT TRUE.

One of the main reasons why there is no magical investor list is due to the vast

number of businesses seeking funding. I mean if there was this magical list,

investors on that list would receive thousands of funding requests every day. And

there would be no way to weed through them all to figure out which ones to fund.

Sure, there are plenty of individuals and institutions that would love to fund your

venture. But you’ll have to proactively meet them and tell them about your

venture. But don’t worry, because in this guide I’ll show you how to do just that.


Growthink’s Funding Pyramid™: Why Most Companies FAIL To Raise Money

The image below is Growthink’s Funding Pyramid™. Later in this guide, I will go

through all of the funding sources that are available to your business, and explain

where each fits within the funding pyramid.

But the key point I need you to understand is that some funding sources, like

venture capital (which is a type of “institutional equity” capital), are very hard to

raise (they can be raised, and I will show you how to raise them; but they require

a significant amount of effort).

Conversely, other types of capital, like credit card financing (which I include in the

“quick loaners” category), are generally very easy to raise. And the reason why

most companies fail to raise money is they go after the wrong (and typically the

hardest to raise) sources of capital. The key, as you will learn later, is to start by

raising money at the bottom of the pyramid, and then work upward!


How to Protect Your Business Ideas When Raising Money

Many companies that are seeking investments have proprietary Intellectual

Property (IP) or proprietary ideas. The challenge that many ventures face,

however, is that most investors or lenders will not sign non-disclosure

agreements (NDAs), and NDAs are critical to maintaining the proprietary nature

of the IP.

However, this issue can be overcome using the following techniques:

1. Focus on the Benefits of, Markets for, and Applications of the IP: The investor

communication documents (e.g., business plan, slide presentation, etc.) should

not discuss the confidential aspects of the IP. Rather, the documents should

discuss the benefits of the IP, the customer need for the IP, the market size the

IP can attract, and the IP’s competitive differentiation and advantages.

2. Stage the divulgence of your IP: The process or raising several types of

money often starts as a “fishing expedition.” At your first point of communication,

the funding source is fishing to see if your venture might be of interest to them.

As you progress through the process (e.g., second meeting), they take it more

seriously. By they time the funding source is ready to conduct due diligence (to

spend more time and energy into really scrutinizing the investment opportunity),

they are extremely serious about funding your company.

Most funding sources aren’t in the business of stealing people’s ideas. However,

during your initial meeting, when funding sources might still be fishing, it is not a

good idea to reveal proprietary information (just focus on benefits). However,

when they get serious and start investing time into assessing your company, it


will be imperative for them to review your proprietary information in order to make

an informed decision regarding whether or not to fund your company.

The solution to your IP problem is thus to stage the divulgence of your IP. That

is, during the first contact, you reveal little (just the benefits of the IP). During

each point of contact, you divulge more and more information. When the funding

source reaches a point that they are really serious about funding your company,

they may sign a NDA and/or you may feel comfortable sharing more of your

proprietary information with them.

The Six Steps To Raising Money

There are six steps you need to follow to raise money:

1. Develop your business plan

2. Figure out the least amount of money you need to achieve milestones

3. Perfect your pitch

4. Get involved in your affinity network

5. Get advisors

6. Figure out MULTIPLE forms of money to raise

The following sections of this guide go through these six steps one by one.


Step 1: Developing Your Business Plan

Overview

A business plan is a roadmap for a growing company. It also serves to

communicate your company's value proposition to employees, advisors,

partners, customers and importantly investors and lenders.

Business plans are the vehicle by which companies “get in the door,” and are the

documents most heavily scrutinized by equity investors and bank lenders. It is

critical that your company develop a strong business plan if you seek financing

from these sources.

Importantly, even though funding sources like Crowdfunding do not explicitly

require you to create a business plan, you should develop your plan anyway.

That’s because your business plan will 1) force you to really think through the

business opportunity, 2) confirm that your venture is viable, 3) help you assess

your business’ game plan and 4) determine the financial resources you need.

The latter, determining the financial resources you need, is absolutely

critical as it will guide you in figuring out which funding sources to go

after.

The remainder of this section walks you through how to prepare a

comprehensive business plan. Note that your plan does not need to be as

thorough as this – this is the gold standard.

To develop your plan quickly and easily, use Growthink’s Ultimate Business Plan

Template which you can access here: http://www.growthink.com/products/business-plan-template


The 10 Sections of Your Business Plan

Your business plan should be organized into ten key sections as follows:

1. Executive Summary

2. Company Analysis

3. Industry Analysis

4. Customer Analysis

5. Competitive Analysis

6. Marketing Plan

7. Operations Plan

8. Management Team

9. Financial Plan

10. Appendix

Executive Summary

The Executive Summary precedes the full business plan. Its length should be

short, typically only one to two pages and certainly no longer than three pages.

This is because the Executive Summary is not meant to tell the whole story of the

business opportunity. Rather, the summary must simply stimulate and motivate

the lender to learn more about the company in the body of the plan.

The Executive Summary must include the following critical elements:

1. A concise explanation of the business

2. A description of the market size and market need for the business

3. A discussion of how the company is uniquely qualified to fulfill this need


In addition, a stand-alone Executive Summary should include summaries of each

essential elements of the business plan. This includes paragraphs addressing

each of the following:

• Customer Analysis: What specific customer segments the company is

targeting and their demographic profiles

• Competition: Whom the company's direct competitors are and the

company's key competitive advantages

• Marketing Plan: How the company will effectively penetrate its target

market

• Financial Plan: A summary of the financial projections of the company

• Management Team: Biographies of key management team and Board

members

The Executive Summary is the most critical element of the business plan. If it

does not grab the lender’s attention, the lender will neither read nor request the

full business plan. As such, spend time developing the best possible summary.

As mentioned above, having a concise explanation of your business is critical. In

fact, your Executive Summary must start with this explanation. In the “Perfecting

Your Pitch” section of this report, you will learn techniques for creating the pitch

that will best explain your business, and which you should include at the

beginning of your Executive Summary.


Company Analysis

The Company Analysis section of your business plan has three main goals, to

give a brief profile of your company, detail your past accomplishments and

specify your unique qualifications.

1. Company Profile

Start with a detailed profile of your company including your:

• Date of formation

• Legal structure (LLC vs. C-Corp., etc.)

• Office location(s)

• Business stage (start-up vs. undergoing R&D vs. serving customers, etc.)

2. Past Accomplishments

Include a chart (or bullets) of your company's past accomplishments, including

descriptions and dates when:

• Prior funding rounds were received

• Products and services were launched

• Revenue milestones were reached (e.g., date when sales surpassed the

million dollar mark)

• Key partnerships were executed

• Key customer contracts were secured

• Key employees were hired

This information is critical to lenders as it indicates the company's ability to

execute upon a previous game plan. Attaining milestones is an excellent


indicator for potential lenders that their money will eventually be repaid and for

equity investors, that they will earn a return on their investment.

3. Unique Qualifications

Finally, detail why your company is uniquely qualified to succeed. This is often

referred to as the company's “unfair competitive advantage.” This advantage

could include a world-class management team, proprietary technology, proven

operational systems, key partnerships, long-term contracts with major customers,

as well as other successes-to-date.

Industry Analysis

The Industry Analysis section of your business plan describes the market in

which you will be completing, including the market size, dynamics and trends.

In developing their business plans, companies of all sizes face the challenge of

determining the size of their markets. To begin, companies must present the size

of their “relevant market” in their plans. The relevant market equals the

company's sales if it were to capture 100% of its specific niche of the market.

Conversely, stating that you were competing in the $1 trillion U.S. healthcare

market, for example, is a telltale sign of a poorly reasoned business plan, as

there is no company that could reap $1 trillion in healthcare sales. Defining and

communicating a credible relevant market size is far more powerful than

presenting generic industry figures.

The challenge that many firms face is their inability to size their relevant markets,

particularly if they are competing in new or rapidly evolving markets. On one

hand, the fact that the markets are new or evolving is the reason why there may

be a large opportunity to establish them and become the market leader.

Conversely, lenders, shareholders and senior management are often skeptical to


invest resources because, since the markets do not yet exist, the markets may

be too small, or not really exist at all.

Growthink has encountered the challenge of sizing emerging markets numerous

times and has developed a proprietary methodology to solve the problem. To

begin, it is critical to understand why traditional market sizing methodologies are

ill equipped to size emerging markets.

To illustrate, if a research firm were to use traditional methods to size a mature

market such as the coffee market in the United States, it would consider

demographic trends (e.g., aging baby boomers), psychographic trends (e.g.,

increased health consciousness), past sales trends and consumption rates, price

movements, competitor brand shares and new product development, and

channels/retailers among others.

However, conducting such an analysis for emerging markets presents a

challenge as several of these factors (e.g., past sales, demographics of the

customer when there are no current customers) don't exist because the markets

are presently untapped.

Use two approaches

The methodology required to size these new markets requires two approaches.

Each approach will yield a different approximation of the potential market size,

and often the figures will work together to provide a solid foundation for the

market's potential. Growthink calls the first approach “peeling back the onion.”

In this approach, we start with the generic market (e.g., the coffee market) that

that company is trying to penetrate, and remove pieces of that market that it will

not target. For instance, if the company created an ultra high-speed coffee maker

that retailed for $600, it would initially reduce the market size by factors such as


retail channels (e.g., mass marketers would not carry the product), demographic

factors (lower income customers would not purchase the product), etc. By

peeling back the generic market, you eventually will be left with only the relevant

portion of it.

The second methodology requires assessing the market from several angles to

approximate the potential market share, answering questions including:

• Competitors: who is competing for the customer that you will be serving;

what is in their product pipeline; once you release a product/service, how

long will it take them to enter the market, who else may enter the market,

etc.

• Customers: what are the demographics and psychographics of the

customers you will be targeting; what products are they currently using to

fulfill a similar need (substitute products); how are they currently

purchasing these products; what is their degree of loyalty to current

providers, etc.

• Market factors: what other factors exist that will influence the market size

-- government regulations; market consolidation in related markets, price

changes for raw materials, etc.

• Case Studies: what other markets have experienced with similar

transformations and what were the customer adoption rates in those

markets, etc.

While these methodologies are often more painstaking than traditional market

research techniques, they can be the difference in determining whether your

company has the next iPod or the next Edsel. Importantly, going through this

exercise will better determine the financial viability of your venture.


Customer Analysis

The Customer Analysis section of the business plan assesses the customer

segments that the company serves. In it, the company must:

1. Identify its target customers

2. Convey the needs of these customers

3. Show how its products and services satisfy these needs

Precisely Define Your Customers

The first step of the Customer Analysis is to define exactly which customers the

company is serving. This requires specificity. It is not adequate to say the

company is targeting small businesses, for example, because there are several

million of these types of customers. Rather, the plan must identify precisely the

customers it is serving, such as small businesses with 10 to 50 employees based

in large metropolitan cities on the West Coast.

Once the plan has clearly identified and defined the company's target customers,

it is necessary to explain the demographics of these customers. Questions to be

answered include:

1. How many potential customers fit the given definition and is this customer

base growing or decreasing?

2. What is the average revenues/income of these customers?

3. Where are these customers geographically based?


Detail the Needs of Your Customers & Show How You Satisfy Them

After explaining customer demographics, the plan must detail the needs of these

customers. Conveying customer needs could take the form of past actions (X%

have purchased a similar product in the past), future projections (when

interviewed, X% said that they would purchase product/service Y) and/or

implications (because X% use a product/service which our product/service

enhances/replaces, then X% need our product/service).

The business plan must also detail the drivers of customer decision-making.

Sample questions to answer include:

1. Do customers find price to be more important than the quality of the product

or service?

2. Are customers looking for the highest level of reliability, or will they have

their own support and just seek a basic level of service?

Show An Understanding of How Customers Make Decisions

There is one last critical step in the Customer Analysis -- showing an

understanding of the actual decision-making process. Examples of questions to

be answered here include:

1. Will the customer consult others in their organization/family before making a

decision?

2. Will the customer seek multiple bids?

3. Will the product/service require significant operational changes (e.g., will the

customer have to invest time to learn new technologies and will the


product/service cause other members within the organization to lose their

jobs? etc.)

It is essential to truly understand customers to develop a successful business

and marketing strategy. As such, sophisticated lenders require comprehensive

profiles of a company's target customers. By spending the time to research and

analyze your target customers, you will develop both enhance your business

strategy and funding success.

Competitive Analysis

When developing the competition section of your business plan, companies must

define competition correctly, select the appropriate competitors to analyze, and

explain its competitive advantages.

Who are your competitors?

To start, companies must align their definition of competition with lenders.

Lenders define competition as any service or product that a customer can use to

fulfill the same need(s) as the company fulfills. This includes firms that offer

similar products, substitute products and other customer options (such as

performing the service or building the product themselves). Under this broad

definition, any business plan that claims there are no competitors greatly

undermines the credibility of the management team.

In identifying competitors, companies often find themselves in a difficult position.

On one hand, they want to show that they are unique (even under the lender’s

broad definition) and list no or few competitors. However, this has a negative

connotation. If no or few companies are in a market space, it implies that there

may not be a large enough customer need to support the company's products

and/or services.


Direct and Indirect Competitors

Business plans must detail direct and, when applicable, indirect competitors.

Direct competitors are those that serve the same target market with similar

products and services. Indirect competitors are those that serve the same target

market with different products and services, or a different target market with

similar products and services.

After identifying competitors, the business plan must describe them. In doing so,

the plan must also objectively analyze each competitor's strengths and

weaknesses and the key drivers of competitive differentiation in the marketplace.

Perhaps most importantly, the competition section must describe the company's

competitive advantages over the other firms, and ideally how the company's

business model creates barriers to entry. “Barriers to entry” are reasons why

customers will not leave once acquired.

In summary, too many business plans want to show how unique their venture is

and, as such, list no or few competitors. However, this often has a negative

connotation. If no or few companies are in a market space, it implies that there

may not be a large enough customer need to support the venture's products

and/or services. In fact, when positioned properly, including successful and/or

public companies in a competitive space can be a positive sign since it implies

that the market size is big. It also gives lenders the assurance that if

management executes well, the venture has substantial profit and liquidity

potential.


Marketing Plan

The Marketing Plan section of the business plan demonstrates to lenders how a

company will penetrate the market with its products and services. The Marketing

Plan should include “the four P's” -- Product, Promotions, Price, and Place.

Products and/or Services

The first “P” stands for Product, but includes all products and services that the

company offers. This section of the business plan should detail all the features of

the products and services, how they work, their unique/proprietary attributes, etc.

For products that are patented and/or technical in nature, drawings and backup

materials should be presented in the Appendix.

Most growing companies offer certain products and services today but expect to

offer more in the future. It is important to mention both current and future

products/services here, but to focus primarily on the short-to-intermediate term

horizon.

Promotions

Promotions include each of the activities that induce a customer to buy the

company's products and services. Promotional activities could include

advertising, public relations (PR), free samples, discounts, direct mail,

telemarketing, partnerships, etc.

This section of the business plan discusses which promotions will be used and

how they will be used. For instance, if partnerships will be used to secure new

customers, the plan must explain which companies are partners, how they will be

able to provide new customers, how the partnership will work (from operational/

financial standpoints), etc.


This section must be as specific as possible, particularly as it relates to

discussing future promotions. To say that a company is going to generate PR in

trade magazines is simply too vague. Rather, the plan must explain the type of

article/feature that may be written about the firm and why, which specific trade

journals that will be targeted and/or the projected publication dates.

In discussing how the company will promote itself, it is important to discuss how

the company will position itself. This positioning statement details the attributes

that customers will assign to the company, its products and services. The choice

of promotional activities must support this positioning. For example, discounts

might not be consistent with a desire to be considered an upscale brand.

Price

This section of the plan should detail the price point(s) at which the company's

products and services will be sold. If the products/ services are sold as bundles,

these should be detailed in this section. Rationale for the pricing should be given

when applicable (e.g., why the company has chosen an initiation fee plus

monthly membership fees versus a one-time lifetime membership fee).

Place

The final “P” refers to “Place” or “Distribution” and explains how a company's

products and/or services will be delivered to customers. This section is crucial

because if customers cannot access products and services, they cannot

purchase them.

This section is especially critical for high-growth, capital-constrained companies.

Attaining profit-effective distribution channels is often the most vexing challenge


for these businesses. Examples of distribution methods include retail locations,

website, distributors, wholesalers, direct mail catalogs, etc.

Many companies have multiple distribution methods to deliver their products and

services to customers and each should be detailed here.

Detailing the “the four P's” in the marketing plan is critical in proving to lenders

that your company will be able to efficiently and effectively penetrate its market.

Partnerships

Forging partnerships to improve market penetration has become commonplace,

particularly for “new economy” businesses. And, most companies proudly

mention their many partnerships in their business plans.

It's the TERMS of the Partnership that Are Really Important

The fact is that, regardless of whom the partnership is with, partnerships by

themselves are meaningless. What are meaningful are the terms of the

partnership. For instance, while it sounds great to have a partnership with a

Fortune 500 company, the details of the partnership are what lenders find

important. For instance, lenders will look poorly upon a partnership in which the

Fortune 500 Company earns 90% commissions on customers it refers. On the

other hand, lenders would look favorably upon a more equitable partnership.

As such, be sure to detail the specifics of the partnerships. This includes factors

such as how the partnership will work, payment terms, contract length, minimum

and/or maximum guarantees, the type of customer leads expected from each

partner, timing of payments, etc. In addition, if partnerships are a key part of the

business plan, expect prudent lenders to interview the partners and scrutinize

partnership contracts.


Partnerships can be a major factor in the success of growing companies,

providing leads, sales, capital and/or other critical benefits. However, ventures

should be careful not to place too much emphasis on any one partner in their

business plan. Partnership agreements, like other legal agreements, can be

breached, and if the venture positions any one partner as critical to its success,

this will become a risk factor to lenders.

Explain the VALUE of Your Partnerships in Your Business Plan

Overall, partners can provide a great boost to growing ventures. Business plans

should not only discuss who the partners are, but detail the terms of the

partnerships and how they will benefit the company. Finally, the business plan

must not place too much emphasis on any one partner in order to convince

lenders that the business is capable of success even without it.

The Operations Plan

The Operations Plan is a critical component of any business plan as it presents

the Company's action plan for executing its vision. The Operations Plan must

detail

1. The processes that are performed to serve customers every day (short-term

processes) and

2. The overall business milestones that the company must attain to be

successful (long-term processes).


Everyday Processes (Short-Term Processes)

Every company has processes to provide its customers with products and

services. For instance, Wal-Mart has a unique distribution system to effectively

move products from its warehouses to its stores, and finally to its customers'

homes. Technology products manufacturers have processes to convert raw

materials into finished products. And service-oriented businesses have

processes to identify new areas of customer interest, to continually update

service features, etc.

The processes that a company uses to serve its customers are what transform a

business plan from concept to reality. Anyone can have a concept. And more

importantly, lenders do not invest in concepts -- they invest in reality. Reality is

proving that the management team can execute the concept better than anyone

else, and the Operations Plan is where the plan proves this by detailing key

operational processes.

Business Milestones (Long-Term Processes)

The second piece of the Operations Plan is proving that the team will execute the

long-term company vision. This is best presented as a chart. On the left side,

there should be a list of the key milestones that the Company must reach, and on

the right, the target date for achieving them. Sample milestones include expected

dates when:

• New products and services will be introduced to the marketplace

• Revenue milestones will be attained (e.g., date when sales will surpass


• Key partnerships will be executed

• Key customer contracts will be secured


• Key financial events will occur (future funding rounds, IPO, etc.)

• Key employees will be hired

Additional text should be used, where necessary, to support the projections laid

out in the chart.

The next section of this guide, “Figuring Out the LEAST Amount of Money

You Need To Achieve Your Milestones,” will provide more guidance on

determine the right milestones for your business.

The milestone projections presented in the Operations Plan must be consistent

with the projections in the Financial Plan. In both areas, it is important to be

aggressive but credible. Presenting a plan in which the company grows too

quickly will show the naiveté of the management team, while presenting too

conservative a growth plan will often fail to excite the potential lender who will

want to ensure that their capital will be repaid quickly.

• New products and services will be introduced to the marketplace

• Revenue milestones will be attained (e.g., date when sales will surpass


• Key partnerships will be executed

• Key customer contracts will be secured

• Key financial events will occur (future funding rounds, IPO, etc.)

• Key employees will be hired


Management Team

Even the best new concept or existing plan will fail if executed poorly. The

Management Team section of the business plan must prove to the lender why

the key company personnel are “eminently qualified” to execute on the business

model.

The Management Team section should include biographies of key team

members and detail their responsibilities. It is important that these biographies

are not merely resumes that include the educational backgrounds and previous

job titles and responsibilities of the team members. Rather, biographies should

highlight the most relevant past positions that the individuals have held and

specific successes in each. These successes could include launching and

growing new businesses or managing divisions of established companies.

Tailor team bios to your growth stage.

Team member biographies should be tailored to the company's growth stage. For

instance, a start-up company should emphasize its management's success

launching and growing companies. A more mature company should emphasize

how team members have successfully operated within the framework of larger

enterprises.

Depending upon the stage of the company, key functional areas may be missing

from the team. This is acceptable provided that the plan clearly defines the roles

that these individuals will play and identifies the key characteristics of the

individuals that will be hired. However, it is generally not favorable if personnel

are missing for ultra-critical roles. For example, a plan that is fundamentally a

marketing play should not seek financing without a stellar marketing team.


The Management Team section should also include biographies of the

company's Advisory Board and/or Board of Directors. While having well-known

advisors/board members adds credibility to the business plan, it is highly

effective to explain how these advisors will directly impact the company through

strategic advice and/or providing conduits to key clients, partners, suppliers, etc.

Prove yourselves.

In summary, the Management Team section of the business plan is an

opportunity to prove to lenders that your company has the necessary talent to

succeed. Rather than waste this opportunity by merely showing employee

resumes, which could be included in the Appendix, the section should be used to

explain precisely how the team is uniquely qualified to execute the venture in its

present state.

The Financial Plan

The Financial Plan section of your business plan must explain how the execution

of the company's vision will enable your company to repay the lender’s principal

and interest payments. As such, it is the section that lenders often spend the

most time scrutinizing. There are four key elements to include in this section:

1. Detailed Revenue Streams

The Financial Plan should verbally present the revenue model of the company

including each area in which the company derives revenue. These revenue

streams could include, among others:

• Sales of products/services

• Referral revenues

• Advertising sales


• Licensing/royalty/commission fees

• Data sales

2. The Pro-Forma Financial Statements

The Financial Plan must numerically detail the revenue model through past (if

applicable) and pro-forma (projected) Income Statements, Balance Sheets and

Cash Flow Statements. It is critical that the figures used in these statements flow

from the analyses in every other section of the business plan.

For instance, the relevant market size (Industry Analysis) should be reflected, as

should competitors' operating margins (Competitive Analysis), customer

acquisition costs (Marketing Plan), employee requirements (Operations Plan),

etc.

A summary of the financial projections should be presented in the text portion of

the plan, while full projections should appear in the Appendix. For existing

companies, the Financial Plan should note any significant deviations (e.g.,

increase in margins) between past and projected results.

3. Validating Assumptions and Projections

The Financial Plan must also detail the key assumptions such as penetration

rates, operating margins, headcount, etc. It is critical that these assumptions are

feasible. For instance, if the company is categorized as a networking

infrastructure firm, and the business plan projects 80% operating margins,

lenders will raise a red flag. This is because lenders can readily access the

operating margins of publicly-traded networking infrastructure firms and find that

none have operating margins this high.


A key point is that while every company is unique, each bears similarities to other

companies. Accessing and basing financial projections on those of similar firms

will greatly validate the realism and maturity of the financial projections.

4. Sources and Uses of Funds

The Financial Plan should detail the sources and uses of funds. The sources of

funds primarily include outside investments (e.g., equity investments, bank loans,

etc.) and operating revenues. Uses of funds could include expenses involved

with marketing, staffing, technology development, office space, etc.

It is critical that you don’t run out of money! As such, it is a good idea to be

conservative regarding your revenues and expenses.

To develop your financial projections quickly and easily, use Growthink’s Ultimate

Business Plan Template which you can access here:

http://www.growthink.com/products/business-plan-template

Appendix

The Appendix of your business plan is used to support the rest of the plan. Every

business plan should have a full set of financial projections in the Appendix, with

the summary of these financials in the Executive Summary and the Financial

Plan.

Other documentation that could appear in the Appendix include:

• Technology: Technical drawings, patent information, etc.


• Partnership and/or Customer Letters: Letters from partners and/or

customers stating their interest in working with the company can add

enormous credibility and validation.

• Expanded Competitor Reviews: Most companies have several direct and/or

indirect competitors. While the Competitive Analysis section of the plan

reviews the most direct competitors, adding a more thorough list and

description in the Appendix shows that management truly understands the

players in the market.

• Customer Lists: Including a list of key customers that the company is

serving in addition to their status and/or type or quantity of product/service

being offered.


Step 2: Figuring Out the LEAST Amount of Money You Need To Achieve Milestones

Why Risk Management is Important

I wish I could just say do this and that, and you’ll magically raise millions of

dollars for your venture. But unfortunately, that’s not how capital raising works.

One key reason for this is that most sources of money, like banks and

institutional equity investors (defined as institutions like venture capital firms,

private equity firms and corporations that invest) are essentially professional risk

managers. That is, they successfully invest or lend money by managing the risk

that the money will be repaid or not.

So, your job as the entrepreneur seeking capital is to reduce your risk profile to

the investor or lender.

For example, let’s say that two entrepreneurs want to open a new restaurant.

Which is the riskier investment?

• Entrepreneur A has put together a business plan for the new restaurant.

• Entrepreneur B has also put together a business plan for the restaurant.

And, he has also done the following: put together the menu, secured a

deal for leasing space, received a detailed contract with a design/build

firm, signed an employment agreement with the head chef, etc.

Clearly investing in Entrepreneur B is less risky. Because Entrepreneur B has

already has already accomplished some of his "risk mitigating milestones."


Establishing Your Risk Mitigating Milestones

A "risk mitigating milestone" is an event that when completed, makes your

company more likely to succeed. For example, for a restaurant, some of the "risk

mitigating milestones" would include:

• Finding the location

• Getting the permits and licenses

• Building out the restaurant

• Hiring and training the staff

• Opening the restaurant

• Reaching $20,000 in monthly sales

• Reaching $50,000 in monthly sales

As you can see, each time the restaurant achieves a milestone, the risk to the

investor or lender decreases significantly. And by the time the business reaches

its last milestone, it has virtually no risk of failure.

To give you another example, for a new software company, the “risk mitigating

milestones” may be:

• Designing a prototype

• Getting successful beta testing results

• Getting the product to a point where it is market-ready

• Getting customers to purchase the product

• Securing distribution partnerships

• Reaching monthly revenue milestones

The key point when it comes to raising money is this: you generally do

NOT raise ALL the money you need for your venture upfront. You merely

raise enough money to achieve your initial milestones. Then, you raise

more money later to accomplish more milestones.


Yes, you are always raising money to get your company to the next level. Even

Fortune 100 companies do this – they raise money by issuing more stock in

order to launch new initiatives.

Creating Your Milestone Chart & Funding Requirements

The key is to first create your detailed risk mitigating milestone chart. Not only is

this helpful for funding, but it will serve as a great “To Do” list for you and make

sure that you continue to achieve goals each day, week and month that progress

your business.

So create a detailed risk mitigating milestone chart right now (use the restaurant

and software examples above as guides – shoot for approximately six big

milestones to achieve in the next year, five milestones to achieve next year, and

so on for up to 5 years (so include two milestones to achieve in year 5). And

alongside the milestones, include the time (expected completion date) and

amount of funding you will need to attain them.

After you create your milestone chart, you need to determine the milestones that

you absolutely must accomplish with the initial funding. Ideally, these milestones

will get you to point where you are generating revenues. This is because the

ability to generate revenues significantly reduces the risk of your venture; as it

proves to lenders and investors that customers want what you are offering.

If however your venture will require millions of dollars in investment before

generating revenues, consider these options (because raising millions of dollars

for an unproven business is extremely challenging):

1. How can you modify your business plan and/or product and service

offerings to generate revenues sooner (maybe create/offer a lesser

product just to get a customer base and reduce risk)?


2. What else can you do to reduce risk (e.g., get letters of intent from

customers that they will buy your product when available, get letters of

intent from distributors that they will distribute your product, get industry

executives to agree to serve on your board to show that they believe your

venture will be successful, etc.).

By setting up your milestones, you will figure out what you can accomplish for

less money. And the key is the less money you need to raise, the easier it

generally is to raise it (mainly because the easiest to raise money sources

in Growthink’s Funding Pyramid™ offer less dollars).

The other good news is that if you raise less money now, you will give up less

equity and incur less debt, which will eventually lead to more dollars in your

pocket.

Finally, when you eventually raise more money later (in a future funding round),

because you have already achieved numerous milestones, you will raise it easier

and secure better terms (e.g., higher valuation, lower interest rate, etc.).


Step 3: Perfecting Your Pitch

The Importance of Your Pitch

Any good public relations or advertising professional comes up with a pitch or an

angle when promoting something. For example, they won’t just shout out “try this

tube of toothpaste.”

Yet, that’s what most entrepreneurs do when raising capital. They just blurt it out

with zero marketing appeal.

So, importantly, you must realize that you are marketing your company to

investors and lenders. And all of your documentation and presentation materials

(e.g., your business plan, investor presentation, crowdfunding pitch, etc.) must

reflect this.

As any Marketing 101 course will tell you, you must speak to the benefits your

customers will receive. And no one cares until you give them a reason to care.

So you must give funding sources a reason to care. Going back to the toothpaste

example, marketers give customers a reason to care – for example, with our

toothpaste, you’ll get whiter teeth, fresher breath, or you won’t get cavities, etc.

Likewise to access funding your company, you need to focus on what’s in it for

the funding source. For lenders like banks, it’s confidence that they’ll get their

money back with interest. For professional equity investors, it’s confidence that

they’ll earn a healthy return on investment (ROI). With angel or individual

investors, it’s often a mixture of ROI and ego -- the cool feeling that they are in at

the ground level of an exciting venture.


Importantly, in order to get into a real conversation with any potential funding

source, you have to quickly (60 seconds or less) get them excited. Once they’re

excited, they’ll invest a critical resource in you – their time.

And if they don’t invest time in you, they’ll never invest dollars.

In order to quickly excite funding sources and get them to invest time in you, you

must perfect your pitch.

Your pitch, often called an “elevator pitch” is a short summary that is used to

quickly describe your business. It is typically less than 1 to 2 minutes, or the

amount of time you would have together with the investor in an elevator.

There are 3 key pitch “formulas” that you can use to develop your elevator pitch.

You ONLY need to develop one pitch. But try the three formulas below and go

with your favorite of the 3 pitches you develop.

1) The High Concept Pitch

A high concept pitch distills a company’s vision into a single sentence.

Hollywood has perfected the art of the high concept pitch:

• “It’s Jaws in space!” [Aliens]

• “A bus with a bomb!” [Speed]

Here are some high concept pitches for companies.

• “Friendster for dogs.” [Dogster]

• “Netflix for books” [Bookswim]

The high concept pitch is great in that it allows investors and others to quickly

understand what your company is doing. Bookswim’s “Netflix for books” is a

great example. When you hear “Netflix for books” most people instantly realize


that Bookswim rents books over the Internet. Not only does the high concept

pitch allow folks to quickly understand what the company is doing, but it allows

them to easily spread the word.

Investors will use the pitch when they tell their partners about your company.

Customers can use the pitch when they rave about your product. The press can

use the pitch when they cover your company. And so on.

So, come up with a high concept pitch for your company. Use the following

exercises to help:

1. What successful and well-known companies do you share similarities to?

Company #1 _______________________________________________

Company #2 _______________________________________________

2. How are you similar to those companies?

Company #1 _______________________________________________

Company #2 _______________________________________________

3. How do you differ?

Company #1 _______________________________________________

Company #2 _______________________________________________

4. What is the long version of how you are similar to or better than these companies (e.g., we are just like Netflix except that we rent books instead of DVDs)?

Company #1 _______________________________________________

Company #2 _______________________________________________

5. What is the condensed/concise version of how you are similar to one of these companies (e.g., Netflix for books)?

Company #1 _______________________________________________

Company #2 _______________________________________________


2) The PTS Pitch (Problem Then Solution Pitch)

The Problem Then Solution (PTS) Pitch is really easy to create. Just fill in the

blanks to this statement:

• Do you know how {insert problem here}, what I do is {insert solution here}

Here are some examples:

• Do you know how it's hard to stay on a diet; what I do is help people stay

on their diets by automatically sending them email reminders twice/day.

• Do you know how it seems really hard for entrepreneurs to raise money,

what I do is show entrepreneurs the right way to raise money so they can

start and grow outrageously successful businesses.

The PTS Pitch is extremely helpful in raising money as it allows investors to

understand the venture and its value proposition to customers.

For example, when I was raising venture capital for a company named XCom

Wireless, I initially had a very hard time. That’s because I was referring to the

company as an RF MEMS technology company – and few people knew what “RF

MEMS” was.

So I changed it to a PTS Pitch as follows:

• Do you know how in commercial and military communications you can’t

communicate at different frequencies with the same devices? What XCom

Wireless does is allow single devices to communicate at multiple

frequencies using our proprietary RF MEMS technology.

With the PTS Pitch, investors quickly got what the company was doing it, and

invested millions of dollars in it.


3) The Traditional Elevator Pitch Formula

If you had trouble creating your High Concept or PTS Pitch, complete the

following exercise to create a more traditional elevator pitch for your company.

1. What does your company do (start with phrases such as: we help, we provide, we manufacture, we offer, etc.)? _________________________

__________________________________________________________

__________________________________________________________

__________________________________________________________

2. Who does your company serve (who are your customers? teenagers? entrepreneurs, new parents, etc.)? ______________________________

__________________________________________________________

__________________________________________________________

__________________________________________________________

3. What key benefits do you offer your customers? (e.g., higher quality/more success, lower cost, more reliable, etc.)? _________________________

__________________________________________________________

__________________________________________________________

4. Why is your company better than competitors? (e.g., even faster, less expensive, etc.)? What information gives your firm more credibility (e.g., track record)?

__________________________________________________________

__________________________________________________________

__________________________________________________________

5. Is there a clear and clean business sector that your company fits into (e.g., restaurant, CPA firm, etc.)? ____________________________________

__________________________________________________________

__________________________________________________________


__________________________________________________________

6. Combine the key information from Questions 1-5 into a 35 word or less statement that describes your business. Say it aloud to make sure it sounds good and makes sense. Tell it to friends to make sure they “get” it. Tell it to employees to confirm that they can repeat it back to you. ______

__________________________________________________________

__________________________________________________________

__________________________________________________________

The following are examples of Elevator Pitches that might help you:

• Growthink is a consulting firm that helps entrepreneurs and business

owners more successfully start, build and sell their companies. Over

the past 10 years, we have helped thousands of entrepreneurs achieve

their goals.

• Rick’s Bridal sells high-end wedding gowns and accessories to brides

in New York City. For twenty years, Rick’s has served over 25,000

satisfied brides through our six locations.


Step 4: Getting Involved in Your Affinity Network When raising money for your company, you need all the support you can get.

Clearly someone who is willing to write you a large check is supporting you. But,

other folks can provide support too. Future customers may be willing to donate to

you, invest in you, loan you money, or pre-buy product/services from you.

But even if future customers are not willing to give you money today, they can

support you by spreading the word about you and/or simply saying that they like

what you’re doing. The latter gives investors confidence that you will have a

future customer base.

One key way to garner this support is to get involved with and tap your affinity

network. Your affinity network is the group of people who have or will have an

affinity for or natural interest and/or liking for your venture.

For example, if you’ve developed a new type of stethoscope, anything you can

do to get in front of large groups of doctors would be ideal. Doctors would clearly

“get” what you are doing more than other groups, and would be most prone to

donate to your cause or otherwise support you.

Or let’s say your venture targets the bird market. If so, you should be forming

relationships with bird lovers. If you target accounting firms, you should form

relationships with accountants. You get the point.

Once you identify the affinity network(s) that will have the most interest in

venture, you must join or get involved with them.


One way to get involved is via the traditional “offline” route. This involves joining

relevant associations, and attending relevant events and conferences.

Today, an even easier and faster way to get involved in your affinity network(s) is

using “online” methods.

Specifically, you should be going on social networks, forums and websites

serving your affinity network. Join the conversation. Become a valued member of

the community. And then tell other members about your venture (and eventually

tell them that you are raising money, and how they can contribute).

So, let’s say your venture targets accountants. Do this: Find out where

accountants congregate online. What accounting groups are there on LinkedIn?

Where can you find them on Facebook? What accounting forums can you join?

And once again, join the conversation. Become a trusted and valued member of

the community. And then let your new friends know about your venture –

something that will directly serve them – and how to support you.

Once again, their support of you can take many forms, such as:

• Cash now, via: (note that each of these funding sources are discussed

later in this guide)

o Equity investment

o Debt investment

o Crowdfunding donation

o Pre-sales of products/services

• Non-cash support. Willingness to

o Promote you to others (including customers and/or investors)

o Distribute your product/service

o Agree to become a future customer


Finally, if you need help finding these online networks, try the following:

• Do Google searches on “bird forums” and “bird social networks”

(substitute “bird” with word(s) that describe your venture)

• Search Facebook groups

• Search LinkedIn groups

Note that there are various federal and state laws governing raising money,

particularly equity funding, for your venture. So you should always use a lawyer

when raising equity financing.

Of particular importance is that when raising money from individual investors, you

cannot do mass advertising telling people about the funding opportunity. Rather,

in order to “pitch” folks on the investment opportunity in your company, you must

be able to demonstrate and document a "substantial and pre-existing

relationship" between yourself and each prospective investor.

As such, you can’t advertise an equity funding need on your affinity networks.

BUT, you CAN talk about your business and its needs, get people to come to

your own website to learn more about your company, and give you their contact

information/join your newsletter. Then you can use this initial relationship to

establish it more and follow-up to request an equity investment later.


Step 5: Getting Advisors

Why You Need Advisors

The next step in raising money is getting advisors.

Advisors are successful people that you respect, that agree to help your

company. Advisors are generally successful and/or retired executives, business

owners, service providers, professors, or others that could help your business.

Advisors generally will not cost you any money (you don’t pay them), although I

do recommend giving them stock options to incentivize them to contribute as

much as possible.

Getting Advisors is not a requirement for raising money, but they have multiple

benefits as follows:

• Practice: if you can’t successfully pitch an advisor to invest time in your

business, then you are not going to successfully pitch anyone to invest

money in your business. So, practice your pitch on prospective advisors

first, and use that practice to perfect it.

• Connections to capital: as successful individuals, advisors often have

the ability to invest directly in your company; and/or they tend to have

large, high quality networks of individuals that they can introduce you to.

• Credibility: having quality advisors gives your company instant credibility

in the eyes of lenders and investors. For example, if you started a new

hockey stick company, having Wayne Gretzky as an advisor would

certainly give you great credibility (and connections).


• Operational success: mentors and advisors are an entrepreneur’s “single

most controllable success factor” – Dr. Basil Peters (entrepreneur, angel

investor, VC). Having Advisors with whom you can discuss key business

matters as you grow your venture will help ensure you make the right

decisions, particularly if they have encountered and dealt with the same

challenges already in their careers.

Action Plan for Getting Advisors

The first step in getting Advisors is creating a big list of people you respect and

admire.

This same list will be used when soliciting individual investors. But I suggest

getting Advisors first due to the benefits listed above. In addition, it’s much easier

to get someone you admire to agree to an informational meeting than an

investment pitch (more on this below).

Start with these questions to create your big list:

• Who do you know from work that you respect?

• Who do you know that might be in an organization with you that you

respect?

• Who does your lawyer or accountant know?

• Who do your best friends know?

• Who does your family know?

• Who do your relatives know?

• Who do you know from local stores and restaurants?

• Who do you know in your online LinkedIn.com and Facebook.com

accounts and/or who have you met in your Affinity Networks?

• Whose business cards do you already have?


• Who do you respect in your industry?

• Who has achieved what you want to achieve?

Once you create this initial list, expand your list with targeted searches. For

example, if you have a venture in the aerospace industry, go on Google and

search on “retired Boeing executive” or search “retired executive” or “retired

business owner” or just “business owner” in your local newspaper.

Likewise, you can do Yellow Pages searches to find local business owners, use

multiple websites to find Executives & Board members of local companies, look

at the “portfolio” pages of local venture capital firms to find the CEOs of venture

backed companies.

You can also go to SCORE.org to use their free Advisor service that will link you

with a current or retired executive to advise you.

Once you have your list in hand, rank the Advisors from best (you would most

like to have) to worst, and start going after your best ones first.

When going after these advisors, you want to set up “informational interviews” --

these are much less threatening than “investment meetings” and as such, you

will have a much higher success rate in getting the meeting.

Call and/or send the prospective Advisor an email and tell them something to the

extent of the following (which is a template that I have modified and used

successfully on many occasions):

Dear [Name], I am the founder of a new company called XYZ Company.


Based on your success as [fill in what they have done], I was hoping to sit down with you for a few minutes to ask you some questions about my venture and get your thoughts. Could you meet for a few minutes on [insert date]? We could meet at [place] where I’d be happy to buy you a cup of coffee while we spoke if it’s more convenient. Please let me know if this time/place works for you. Regards, [Your Name]

Once You Get Advisors

Once you get your first Advisor, it typically gets easier as you can tell other

prospective advisors that your Advisory Board already consists of that member.

Ideally you can create an Advisory Board of 3 to 8 members, but even just one

Advisor will be very helpful.

After you start establishing rapport with your Advisors (for about one month), you

will make them aware of you key issue at hand – raising money. See who they

know and are comfortable referring to you. Oftentimes it is best to do this in a

group setting (e.g., a Board of Advisors meeting), as it will yield the biggest group

of possible investor prospects (as each Advisor may open up their network more

when they see the other Advisors doing so). From this discussion, the Advisors

themselves may show a willingness to invest; if not, feel free to directly ask if

they are willing to invest themselves.

Finally, with regards to compensation, my preference is to give Advisors options

to purchase 0.5% of your company at a nominal price vesting equally over a 5

year period (meaning they get 0.1% per year for 5 years if you keep them as an

advisor for 5 years; if not, they only get options for the time they served).


Step 6: Figuring Out MULTIPLE Forms of Money To Raise

Raise MULTIPLE Forms of Money

The key to raising money is to figure out all of the sources that might be available

to you, and then go after multiple sources.

While each type of capital has its upsides and downsides, your company will

most likely be able to benefit from numerous types of capital.

In fact, most successful businesses utilize multiple sources of financing.

This answer often leads to questions such as why would you finance your

business with credit cards that have 15% interest rates?

There are two answers for this. First of all, I wouldn’t finance a business

solely with credit cards if I had options like business loans available to me at a

lower interest rate or customer or vendor financing. However, credit card

financing is extremely easy to get and extremely flexible in that it’s accessible

at a moment’s notice.

Secondly, when I’m launching or growing a business, I’m doing it because I

believe it has great growth and profit potential. Enough so, that I would expect

to receive at least a 100% return on each dollar invested. As such, paying

15% interest is somewhat of a pittance.


This section is organized as follows:

• To begin, I will walk you through the 3 core types of capital that are

available to your business.

• Next, I will take you through Growthink’s Funding Pyramid™ so can learn

the 41 primary source of business funding and understand which are most

appropriate for you.

• In the final section of this guide, I will give you step-by-step guidance on

how to raise individual and institutional equity; the two hardest types of

money to raise. The other sources are more straightforward and are

covered in this section.

The 3 Core Types of Capital

For the entrepreneur or business owner seeking to fund their company, there are

three main pools of capital from which to draw:

1. Debt capital

2. Equity capital

3. Creative/alternative financing

Equity capital is the term used to describe the capital that is given to a company

in return for a portion of that company’s stock or equity.

Conversely, debt capital is the term used to describe the capital that is given to a

company in return for the company’s promise to repay the capital over time with

a fixed or variable interest rate.


Debt capital is nearly always secured with collateral; for instance, if the business

owner does not re-pay their loan, they could possibly lose their house or

business equipment if they used it for collateral.

Creative (or alternative) finance is the term used to describe non-traditional

sources of capital, including capital that must be paid back, capital which requires

equity to be relinquished and/or capital that is given to a company without any

strings attached.

The key differences between debt capital, equity capital and creative/alternative

financing are as follows:

Type of

Capital

Term for person

or institution

who provides

capital

Capital provider

gets

equity/shares of

company

Company

accepting

capital must

repay loan

Company

accepting capital

must often put up

collateral

Debt Lender No Yes Yes

Equity Investor Yes No No

Creative/

Alternative

Financing

Depends Sometimes

(but rarely)

Sometimes (but

rarely)

Sometimes

(but rarely)

Creative/alternative financing is clearly the best form of capital with regards to the

fact that oftentimes no equity is issued and the financing does not have to be

repaid.

With regards to debt and equity capital, at first glance, it seems that equity capital

is less risky to business owners. While that is true (since there is no repayment

and no collateral), equity capital is typically only provided to companies meeting

specific criteria (which will be discussed later).


Also, with equity capital, the business owner foregoes a significant portion of the

value created if/when the company reaches a liquidity event (e.g., has an initial

public offering (IPO) or is sold to another business).

However, it is our experience that a small piece of a big company is better than a

large piece of a small company and that if equity capital is available to your

company at reasonable terms, it is often a good decision to accept it.

Finally, in our overview of capital, it is important to mention a hybrid of debt and

equity known as a convertible note. Convertible notes are loans which are made

to a company at a fixed rate of interest which can either be redeemed for cash

(like traditional debt capital) OR can be converted into stock (equity) at a

predetermined date or within a certain period.

Convertible notes are a preferred financing instrument for friends and family and

some angel investments since they allow investment without the difficult process

of determining the price of each of the company’s shares.


Growthink’s Funding Pyramid™ - The 41 Best Sources of Business Funding

Below is an image of Growthink’s Funding Pyramid™. The key point of the

pyramid is to show that some funding sources like venture capital (which is a

type of “institutional equity” capital) are very hard to raise, while other forms of

capital like credit card financing (which I include in the “quick loaners” category)

are generally very easy to raise.

And importantly, the reason why most companies fail to raise money is they

go after the wrong (and typically the hardest to raise) sources of funding!

.

To raise money for your venture, you want to start from the bottom of the

pyramid and raise the easier money. Then, you use that money to achieve

your initial risk mitigating milestones. This opens up more funding sources,


particularly the bigger funding sources at the top of the pyramid. (Note that the

easier funding sources are typically for smaller amounts like $10,000 or $50,000,

while the more challenging funding sources are for large amounts such as

$500,000, $5 million or $50 million).

Note that funding is generally raised in “rounds”; with a certain amount of money

being raised in each round. You don’t raise all the money you’ll ever need for

your business on Day 1 or in your first round. Rather you raise some money and

use it to achieve your initial milestones. Then you raise more money and achieve

more milestones. And so on.

To reiterate, the funding sources near the top of the pyramid are not only

challenging to achieve, but virtually impossible if you haven’t achieved any

milestones. So, don’t waste your time on them initially. Rather, raise the lesser

dollar amount and easier sources of money to achieve your initial milestones

first. And then work your way up the pyramid to raise money and grow your

business.

Below are the 10 funding sections (representing 41 funding sources) in

Growthink’s Funding Pyramid™.

1. Quick Loaners

“Quick loaners” include credit cards and charge cards. They are at the bottom of

the pyramid, since they are the easiest form of funding to raise. In fact, I have

seen entrepreneurs access over $100,000 in credit card funding within months.

Note that an entrepreneur or business owner’s personal credit rating is the best

judge of whether he or she has a track record of paying back loans. As such,

when applying for credit or charge cards (which are essentially loans), expect a


thorough examination of your credit history. If your credit history is weak, start

repairing it before you seek any type of debt capital.

Credit Cards

Credit cards are the easiest way to get capital for your company. While the

process of gaining credit can be relatively simple, it’s important to be careful with

credit cards as interest rates are generally very high.

There are many examples of successful companies which have been funded by

credit cards. For example, Google founders Page and Brin maxed out their credit

cards for computers and office equipment, building Google's first data center in

Larry's dorm.

Likewise, Under Armour founder, Kevin Plank, accumulated over $40,000 in

credit card debt spread across five cards in order to fund his company.

Unless your business is one in which cash comes in soon after an expense (e.g.,

a consulting firm which pays its consultants for a month before getting paid by

the client in month two), than you need to be careful with credit card financing.

Likewise, credit cards are often good to fund short-term cash crises; for example,

if you can’t fund payroll since you are waiting for a customer check to arrive

and/or clear.

One credit card option, albeit risky, is to play the “revolving credit card game.”

This works as follows: the business owner obtains a low or no-interest credit

card. They then use the credit from this card during the low or no-interest grace

period (often 90 to 180 days).


Once that period ends, the owner gets a new low or no-interest credit card. They

use this new card to pay off the balance on the first card. And so on and so on.

This process allows the business owner to have access to a fair amount of funds

with a zero or low interest rate. However, if the owner can’t pay off the debt at

some point, they will face the consequences.

Charge Cards

Charge cards are similar to credit cards, except that the full balance must be paid

in its entirety at the end of every 30 day cycle. Charge cards are great to

purchase furniture, equipment and other items.

Charge cards often do not have a spending limit, and thus allow the entrepreneur

or business owner great flexibility. However, they should be used with the same

careful discretion as credit cards.

After all, you will be held accountable for those expenses at the end of the

month. Once again, if you have a business that recoups costs quickly (e.g.,

spend $100K in advertising and reap $120K in new revenues within 30 days),

credit charge cards can be a great source of capital.

Note that stores and manufacturers from which you can purchase business

supplies and equipment, like Office Depot and Dell, offer both revolving credit

cards and full-balance-due charge cards which can be used to help finance your

business.

Likewise, other vendors often offer financing options that can be structured like

credit cards or charge cards. This topic, vendor financing, is discussed more

later.


2. Crowdfunding

Perhaps the best creative/alterative form of money for your business is

Crowdfunding. Crowdfunding is a breakthrough way for entrepreneurs and

nonprofits to raise capital for their projects, businesses, or organizations by

gaining the support of a “crowd” or a large group of people, to give them money.

Crowdfunding is grass roots funding where dozens, hundreds or thousands of

people donate $10, $20, $50, $100 or $200 (or more) at a time to your new

venture.

Crowdfunding, when done the way we recommend (because it is most effectively

raised this way), is reward-based donations. That is, you give donors rewards for

contributing. These rewards may range from a simple thank you, to giving $50

donors a defined number of your products in the future, to naming a product after

a $1,000 donor.

How much money can you raise? Our recommended range for Crowdfunding

raises is between $2,000 and $25,000, although we’ve seen companies raise

$50,000 and even $200,000 with this method.

Crowdfunding typically requires 90 days to raise. There is some work involved in

setting up your Crowdfunding account and creating your video and other

Crowdfunding materials.

Growthink offers a complete course on raising money via Crowdfunding. The

course is available at http://www.crowdfundingformula.com.


3. Creative Funding

Below are numerous “creative” sources of funding that have been used to fund

thousands of ventures. Many of these funding sources are not very competitive

and thus this funding source falls near the bottom of the pyramid.

Some of these funding sources could apply to you; others will not. Go through

and figure out which sources you can tap.

Competitions and Awards

Competitions and awards are also great sources of free capital from which great

companies have been born.

For instance, Mike Cassidy, CEO of Stylus Innovation, won $125,000 at MIT’s

business plan competition and went on to sell the company to Artisoft for $13

million.

Another example of competition and award financing is the $50,000 prize won by

personal finance application Mint after being selected as the best presenting

company at a TechCrunch event.

Seek out and apply to business plan competitions and other competitions and

awards.

Donations

Believe it or not, donations have been used to fund many companies including

for-profit ventures.


The most notable of donation-funded ventures is perhaps Wikipedia which has

raised several million dollars in donations to date.

In the for-profit space, an example of donation-funded is Peter Cooper, founder

of FeedDigest. In 2004, Cooper added a PayPal button to his website and asked

users of his website to donate money.

His visitors subsequently donated enough money to allow him to grow. Soon

after, an angel investor wrote him a check for $100,000.

These donations differ from Crowdfunding, discussed above, which is generally

rewards-based donations (you are giving rewards to people who donate).

Partner Buy-In

Finding a business partner is often a great way to finance your business,

particularly if the partner has his own or access to capital.

One concern that entrepreneurs have (rightfully) is that if they partner with

someone and that person puts in the initial funding, that the partner will own

more of the company then they do. This is in fact typically the case.

To overcome this, you can earn “sweat equity” in your business prior to taking on

the partner. “Sweat equity” is a term used to describe the contribution made to a

project by people who contribute their time and effort, and not their money.

You can earn “sweat equity” by completing a lot of the non-capital-intensive work

such as coming up with the business idea, researching the market, and

developing the business plan.


At this point, your business has a lot more value (than if it were still solely an

idea) and then you can seek a partner. The partner then buys-in to the business.

That is, they write a check to the business in order to get a meaningful equity

stake and partner position.

Consulting

Several companies who are in the midst of developing products for long-term

growth, generate short-term revenues to fund their companies by offering

consulting.

This consulting not only brings in revenue, but oftentimes also creates

relationships with customers that will purchase their products in the future.

An added benefit of this type of financing is that the consulting often reveals

information on customer needs which leads to better product and service

development.

Pre-Sales

Pre-sales or advanced sales is another Creative/Alternative financing technique.

It technically falls into the genre of customer financing since in this technique,

prospective customers provide the money to fund your business.

With pre-sales, potential customers pay you before you deliver your products to

them. In some cases, potential customers may pay you before you even develop

your product.

Such was the case with Scott Mitchell, President and CEO of Learning

Productions, a corporate training and "eLearning" company. Mitchell presented


his learning software idea to a Fortune 500 company called Avnet, knowing that

Avnet needed a product like the one he was set on developing.

Avnet liked his presentation enough so that they gave him a big sales order (for

when the product was developed) and more than a million dollars in financial

support to build his business.

Seller Financing

One way to start a business is to buy an existing business. Existing businesses

often have many benefits such as an established customer base and existing

employees.

If you want to buy a business, a great source of financing is seller financing.

Depending upon the business, the seller may be willing to finance the majority of

the purchase price. In this case, you will make periodic payments to the previous

owner much like you pay off a bank loan.

Buying a Business Out of Bankruptcy

Buying a business out of bankruptcy is another way to own a business for little

out-of-pocket cash.

This is particularly true if the business you buy has a lot of assets which you don’t

need. You can then purchase the business and sell off the assets in order to fund

the purchase.

Note that buying a business out of bankruptcy is relatively complex, so you need

to understand all the steps of this process.


Selling Assets

An asset sale is another way to finance your business.

In an asset sale you sell un-needed assets to the highest bidder. These assets

could be both business and personal assets.

Oftentimes entrepreneurs sell these assets via eBay and other online auction

sites and classified ads, or via a physical “garage sale.”

Leasing Equipment

Many businesses require expensive equipment, and most businesses require

office equipment such as computers and copy machines (and desks and cubicles

too).

Rather than laying out cash for this equipment, you should consider leasing.

Leasing reduces your need for cash to start/grow your business and allows you

to use the cash you have for other items.

Using A Second Job

Second jobs are great ways to finance your own business.

Sure, it’s not ideal to have to divert your focus and energy from your business

into something else, but an entrepreneur must be willing to do whatever is

needed to finance their business.


As an entrepreneur, you need to have the 24/7 mentality, and a second job often

requires significant work hours towards achieving success.

According to an April 2009 survey by the American Express Open Small

Business Monitor, 18% of small business owners surveyed said they are working

a second job to help finance their business.

So, you won’t be alone if you finance your business with a second job.

Buying Real Estate

If you are starting a brick and mortar business, perhaps a restaurant or dry

cleaning business, it might be easier to get financing to purchase the building in

which you want to locate business vs. financing to start/grow the business.

Real estate has a lower risk profile than a business startup. This oftentimes make

it easier to finance your business this way.

Landlord Financing

Over time, you will pay a lot of money to your business’ landlord. And, oftentimes

you will have to pay a lot of money to contractors to build out your office or

storefront to your specifications.

As much as possible, you should ask your landlord to finance these expenses.

To begin, the landlord should finance as much of the build-out as possible. In

addition, you can often negotiate up to 6 to 12 months of free rent on a 5 to 7

year lease.


Finally, it is often a good idea to make your landlord an equity holder in your

business (and ideally they pay for this equity). If a situation arises when you are

unable to pay rent, the equity-holding landlord will generally be much more

lenient.

Sub-Leasing Your Space

Typically you will get a better lease rate, on a per-square-foot basis, if you lease

a larger amount of office or storefront space.

And, if you eventually expect to grow the company and use the full space, it

might be a good idea to get the larger space now, rather then getting a smaller

space and having to go through the hassle of moving later.

One good idea is to get the larger space and rent out a portion of it (i.e., sub-

lease it) to a tenant that pays a higher per-square-foot cost.

Buying Equipment & Supplies with Equity

If you have limited funds, the worst case scenario is to have to pay cash for

equipment and supplies. The next best alternative is to lease equipment as

specified earlier.

The best alternative is often to purchase equipment and supplies with the equity

of your company.

That is, to get your suppliers to forego cash revenues from the sale of these

items to you in return for equity in your business.


While giving up too much equity in your business will limit your upside (since

when you eventually exit the business you will not get as much of the proceeds)

typically, the more people that are committed to the success of your business the

better. So, getting more equity holders is generally a good thing.

Sponsors/Advertisers

Most businesses lend themselves to potential sponsors or advertisers to bring in

revenues to help fund and grow the business.

For example, many Internet businesses have sponsors that visitors can click on

and go to their sites. Likewise, many restaurants have placemats with local

advertisers on it.

The key is to figure out what other products, services or businesses your

customers use or need that don’t directly compete with your own business, and

them solicit them as sponsors or advertisers.

Bartering

Your business will inevitable produce a product or service and/or offer real value

to your customers. And, even if your product or service is not yet developed, you

have know-how that is valuable to some one else.

When you seek services or products to help grow your business, don’t be afraid

to try to barter. That is, you give away your products, services and/or know-how

for someone else’s products, services and/or know-how that you need.


4. Social Lending

Social or Peer-to-peer (P2P) lending is when one individual lends money to

another individual without an intermediary such as a bank.

Prosper Loans Marketplace (www.prosper.com) claims to be America's largest

peer-to-peer lending marketplace. In the network, private lenders will actually bid

on your interest rate, plus the right to give you a loan.

LendingClub.com is another peer-to-peer lender that acts in the same way as

Prosper.

Social lending is debt that has to be repaid, but because there are tens of

thousand of potential individual lenders, you can often raise it easier and at a

more competitive rate than bank loans.

Also, lenders that you meet through social lending can be encouraged to become

angel investors in your company.

5. Financial Maneuvering

Financial Maneuvering is a category of financing that involves financing

techniques to provide funding to your venture.

These techniques are discussed below. Funding through some of these

techniques can be accomplished extremely quickly and easily, but only if you

qualify.


Factoring

Factoring is the sale of accounts receivable invoices to a third party. The third

party pays the company right away, and then assumes the obligation of collecting

the invoice.

For instance, if your company sold a product to another company for $50K and

you are still waiting to receive the $50K check, a factor might buy that receivable

from you. The factor might pay you $45K now, earning $5K for taking the risk that

the buyer won’t pay and for having to wait to be paid.

The good news for companies is that factors can often quickly get funds to your

business. However, they are often a very expensive way to finance accounts

receivables.

Factoring companies determine their fees based on factors such as the total

amount of the invoice and the length of time until the invoice is due.

For a small invoice such as $1,000 which is due in 30 days, a factor will charge

on average 5%. So, you would receive $950 and the factor would receive $50.

While factoring fees go down based on increasing the size of the invoice, note

that in this example, the annual interest rate of factoring is 60% making it very

expensive.

Money in Your 401K, IRA, or Life Insurance Policy

There are many instances where you can invest the money that you have earned

in your 401K account, individual retirement account (IRA) or life insurance policy

into your business.


You should consult your accountant, tax advisor and/or lawyer, before doing this

to avoid any financial penalties, and to determine the best way to set this up

(e.g., establishing a corporation and investing from your personal funds into the

corporation).

Reverse Mergers

Reverse mergers, also known as reverse takeovers or reverse IPOs, occur when

a private company buys a public company and then merges with it.

Typically, the public company is a non-operating or “shell” corporation that is

listed on a small stock exchange such as the Toronto Stock Exchange, or on the

Over the Counter Bulletin Board securities market (OTCBB).

The publicly traded corporation is called a "shell" company because the only

thing that exists of the original company is its organizational structure.

Shareholders of the previously private company receive a majority of the shares

of the public company and control of its board of directors.

Reverse mergers can be accomplished quickly (often within weeks) and at a

small fraction of the cost of an initial public offering (IPO).

Once the private company is public, it can gains the benefits of a public security

such as:

• Increased liquidity of shares of the company

• Higher share price and, as a result, higher overall company valuation

• More access to the capital through future stock offerings and the ability for

new shareholders to invest quickly and easily online

• The ability to use company stock to purchase other companies


• The ability to use company stock to attract and/or retain employees

The key fees associated with a reverse merger are legal fees and the cost of

purchasing the public shell company. Typically, these fees will total $100,000 to

$125,000.

Direct Public Offering (DPO)

A direct public offering (DPO) is when a company raises capital by selling its

shares directly to its own customers, employees, suppliers, distributors and other

individuals.

DPOs are much less expensive than traditional underwritten offerings (e.g., IPO).

In addition, they have less restrictions.

Companies conducting a DPO must still be in full compliance with local securities

laws, including completing the following documents:

1. A prospectus to its prospective and existing shareholders

2. Financial reports available for public consumption

3. Accurate and updated stock information available for public consumption

4. Audited financial statements

Investment Clubs

An investment club is a group of individuals who meet on a regular basis for the

purpose of investing money.


Typically investment clubs invest in public stocks. However, occasionally, these

clubs will provide funding to a privately held company.

To find local investment clubs:

• Check out the classified sections in local newspapers

• Do this search online: “[name of your town/city] investments club”

• Ask your local bank if they know about local investment clubs

Employee Stock Ownership Plans (ESOPs)

An employee stock ownership plan (ESOP) is when the company offers shares

of the company’s stock to employees.

ESOPs are a great tool for motivating your employees. That is, if all employees

have equity in the company, they will all be highly motivated to have the

company succeed (so their equity is worth a lot). In fact, most venture capitalists

insist that the companies that they fund have ESOPs.

ESOPs also help you finance your company since you can oftentimes pay your

employees LESS than market rates in cash, by compensating them partially with

equity.

In fact, these are often the best employees; the ones that believe in your

company so much that they prefer long-term equity versus short-term cash.


6. Bank Lines & Loans

Bank lines and loans are a great source of business capital that can be acquired

fairly quickly. They are forms of debt, so they will have to be paid back with

interest.

As mentioned earlier, an entrepreneur or business owner’s personal credit rating

is the best judge of whether he or she has a track record of paying back loans.

As such, when applying for any of the below debt capital sources, expect a

thorough examination of your credit history. If your credit history is weak, start

repairing it before you seek debt capital.

To access these types of capital, go to your local banks and see what they have

available for you. For a comprehensive guide to raising bank lines and loans, see

Growthink’s Step by Step Guide to Raising Capital From Banks and SBA

Lenders (http://www.growthink.com/products/loanguide).

Home Equity Loans

A Home Equity Loan is a loan that is secured by the home in which the business

owner lives.

Home equity loans can often provide a substantial amount of capital to the

business.

Unlike credit cards, the interest rates for home equity loans are much more

reasonable. In fact, average home equity loan rates are currently only half of

average credit card rates.

In addition, home equity loans are often tax-deductible.


However, because they are secured, these loans place substantial risk on the

business owner. Specifically, the business owner’s house become collateral for

the loan, and if the owner defaults on the loan, their house becomes the property

of the bank.

Similarly to credit card financing, Home Equity Loans make sense if the business

owner expects a return on their dollars in a short period of time, perhaps within

180 to 365 days.

Lines of Credit

A business line of credit is an amount of cash that a bank or other financial

institution makes available to you.

For instance, if your company is accepted for a $100K line of credit, you have

access to the full $100K of capital, but you only pay interest on the precise

amount that you actually borrow.

So for example, if you have a $100K line of credit but are only using half of it, you

only pay interest on $50K and not the full $100K. It’s similar to a credit limit on

your credit card. You have access to funding up to your limit, in this case $100K,

but only pay interest on the actually amount of funding that you use.

An additional benefit of lines of capital is that you are generally allowed to use

them for anything your business desires, such as for working capital, advertising,

etc., while many other types of loans have specific parameters such as requiring

you to use the funding for capital expenditures such as purchasing equipment.


Banks are the most common place to get lines of credit. In determining which

companies to offer lines of credit, banks often examine your business’ financial

records and tax returns for the last 2 or 3 years.

Lines of credits can be made with and without collateral and are known

accordingly as secured and unsecured lines of credit. Secured lines of credit can

have interest rates as low as the prime rate. Unsecured lines of credit typically

have interest rates ranging from prime plus 1.5% to prime plus 10% depending

on the credit history of the borrower.

Bank Loans

Bank loans are similar to lines of credit, except that you pay interest and are

given all of the capital at once.

So, with a $100K line of credit, you have access to the full $100K, but don’t have

to use it, that is, you can simply not access the funds from your bank, and you

don’t pay anything for the funding you don’t use.

But, with a $100K bank loan, the bank or other financial institution gives you

$100K to deposit into your business’ bank account and you pay interest on all

$100K whether you use it or it simply sits in your bank account.

These traditional bank loans are great source of inexpensive capital, but only for

specific types of businesses, mostly mature businesses.

With regards to rates, with good solid credit, business loans are made at the

prime rate. With weaker credit, slight premiums are assessed.


These loans are typically only available to mature businesses because bank

loans typically require extensive documentation in order to be approved. And

often this documentation includes the past three years of your business’

operating results. Obviously, if your business is a startup or less than three years

old, you thus don’t qualify.

Also most traditional business loans must be secured with either business assets

such as land, property, equipment or inventory, or personal collateral such as the

business owner’s home.

As such, newer businesses should seek SBA loans, which are detailed in the

next section.

If you are seeking a Bank Loan, subsequent sections of this report will walk you

through the process and allow you to quickly and easily raise loans for your

business.

SBA Loans

A U.S. Small Business Administration (SBA) Loan is a loan made to a company

by a local bank or other SBA partner institution. Banks like making SBA loans

since the U.S. Small Business Administration guarantees a large portion of the

loan, making their investment less risky (i.e., if the business fails to repay the

loan, the SBA pays the lending bank up to 90% of the loan amount).

The SBA still requires banks to adhere to traditional commercial loan

underwriting principals including collateralizing the loans and requiring personal

guarantees from the business owners who receive the loans.


But, the SBA’s guarantee enables banks to loan more money, offer longer terms,

and approve more loans for earlier stage businesses than it otherwise would.

Sizes and Use of Loans: The maximum SBA Guarantee to the bank or partner

institution is limited to $750,000. However SBA loan sizes can vary a lot, from as

little as $5,000 to as much as $2 million.

SBA loans can be used by your business only to do one of the following:

• To purchase land or buildings, to cover new construction as well as

expansion or conversion of existing facilities;

• To acquire equipment, machinery, furniture, fixtures, supplies, or

materials;

• For long term working capital including the payment of accounts payable

and/or for the purchase of inventory;

• To refinance existing business indebtedness which is not already

structured with reasonable terms and conditions;

• For short term working capital needs including: seasonal financing,

contract performance, construction financing, export production, and for

financing against existing inventory and receivable under special

conditions; or

• To purchase an existing business.

SBA loans vary dramatically based on the type of SBA loan program offered

such as 7a loans or 504 loans.

If you are seeking an SBA Loan, subsequent sections of this report will walk you

through the process and allow you to quickly and easily raise loans for your

business.


7. Strategic Financing

The following forms of funding are known as “strategic financing” since there is

value to these deals beyond just the dollars raised.

Strategic financing is a great form of capital. It is widely available and can be

accessed fairly quickly, but it does often require a bit of negotiation on your part.

Customer Financing

Customer financing can provide a promising source of funding for your company.

With customer financing, current or potential customers provide capital that can

then be used to develop or produce products and/or otherwise fund your growth.

There are several reasons why customers might provide funding for your

business:

• They know you

• They believe in your vision

• They see the potential upside in fronting you capital now

o Preferred customer status

o Future price discounts

o Equity upside in your business (i.e., if your business is sold or goes

public, they will reap great financial benefits)

o The ability to influence your business decision (possibly to create

products that are good for them)

One example of customer financing is Australia’s Blowfly Beer. To fund early

operations, the company sold equity to its customers.


Not only did this provide the capital that the company needed, but it provided the

company with market research, a customer base, and great word of mouth

advertising (people are much more likely to support and promote products in

which they invested).

Vendor Financing

Just like customer financing, vendor financing is often a great source of capital.

As the name implies, vendor financing occurs when a company receives capital

from one of its vendors or suppliers.

Vendor financing is actually one of the most popular forms of debt financing for

companies. Vendor debt financing is often known as “trade credit,” and is when a

vendor sells you a product or service and you don’t have to pay right away, but

rather the debt either needs to be paid in full within a certain period or periodic

payments with interest are required.

However, sometimes vendors provide both interest-free or equity-based

financing for the following reasons:

• To gain a built-in customer base. By funding your business, you will buy

more, and they will sell more, (now or in the future) of their products

and/or services.

• Loyalty: you will be more loyal to the vendor.

• Learning/market research: the vendor will have you as a closer customer

and will learn ways from you to improve their products and services.

• Equity upside, if they make an equity investment and your company has a

significant liquidity event in the future.


One famous example of vendor financing is that early on, shoe maker Kenneth

Cole sought out a struggling Italian shoe manufacturer knowing that they needed

clients and would probably be wiling to offer financing.

The Italian shoe manufacturer funded the then fledgling company.

Franchising Your Business

When you franchise your business, you are essentially selling your business

concept to others.

These others, or franchisees, pay you for the right to use your brand, your

supplies and/or your system. Franchisees typically pay you an upfront fee and

ongoing fees (typically a percentage of their revenues).

As such, franchisees can provide you with funding to launch your own initiatives

(e.g., more company owned stores).

Franchising is easier once you have an established/proven business (since

franchisees are more attracted to this), but franchising has been used by

companies who solely had concepts and not established businesses.

Licensing Rights to Your Product or Service

If your product or service eventually makes it big, there is significant value to a

retailer or distributor to have exclusive rights to selling it.

As such, you may be able to sell these licensing rights for advance payment

which you can use to fund your business. Ideally you limit the licensing rights to a

finite period of time to not limit your company’s future potential.


8. Grants

Grants are often a great way to fund your company’s growth and typically are

essentially free cash. That is, these sources provide capital that you are not

required to pay back and do not require you to give up equity. However, like

everything is there is work involved in getting this type of capital.

The primary source of grants is the federal, state and local government, but

many foundations also provide grants. However, while the government offers

grants to both for-profit and non-profit organizations, foundations nearly

exclusively fund non-profit organizations.

The Small Business Innovation Research (SBIR) Program and Small Business

Technology Transfer (STTR) Program grants combine to award $2 billion to

small, for-profit high-tech businesses each year.

Like strategic investments, grants are often made to fund ventures that could

enhance the organization’s cause.

For example, in 2008, the National Cancer Institute provided a $107,000 grant to

Imaging Biometrics, a provider of advanced visualization and analytical software

solutions, to develop a tool to improve breast cancer diagnosis.

Likewise in 1999, Maxygen, Inc. received a multi-million dollar grant from the

U.S. Government’s Defense Advanced Research Agency, known as DARPA, to

develop aerosol-based vaccines to protect against a broad spectrum of

pathogens. Subsequently Maxygen has gone public.


With regards to government grants, there are 26 federal grant-making agencies

such as the Department of Homeland Security, the National Endowment for the

Arts and the Department of Defense.

Growthink offers a detailed guide to getting grants entitled “Growthink’s Step-By-

Step Guide to Raising Capital from Grants”. You can access that guide here:

http://www.growthink.com/products/grantguide

Key resources that you can access immediately to find government grants

include:

• http://www.grants.gov/

• https://www.cfda.gov/


9. Individual Equity

As you should recall, equity capital only earns a return when there is a liquidity

event (e.g., the company has an initial public offering (IPO) or is sold to another

business).

Individual equity transactions are ones whereby an individual, be it a friend,

family member or other individual investing on their own behalf (and “angel”

investors”) invests in your company.

Note that sometimes individuals make debt investments (loans) into new

ventures too.

Friends and Family

Your friends and family are the most frequent starting point for an entrepreneur

or business owner seeking initial equity funding for their company.

Your friends and family are the people that know you best, and will often put

money behind the venture because they have trust in you and your vision.

Capital investments at this stage usually fall between $5,000 and $100,000,

though investments near that upper ceiling are more frequently considered

“Angel” investments.

Note that not all friends and family investments are equity investments.

Sometimes friends and family members make loans as well, or the investments

are done as convertible notes.


Angel Investors

The term “Angel investor” is defined as a private investor who offers financial

backing to an entrepreneurial venture in return for equity in the venture

(sometimes angels also give loans).

These angels are typically current or former entrepreneurs, successful

executives, venture capitalists, or otherwise wealthy individuals.

With regards to venture capitalists, sometimes venture capitalists see deals that

are not a good fit for their venture capital funds but which they personally like,

and thus may invest in personally.

Angel investors typically provide more capital than friends and family but less

than venture capital firms. Specifically, angel financing amounts typically range

from $50,000 to $500,000.

For this money, angel investors usually gain 10% to 35% of the equity of the

company.

Many, but not all angel investors are accredited investors, which are investors

which either have a net worth in excess of $1 million or have annual income of

$200,000 or more or $300,000 or more when including their spouses.

Accreditation is important because if you do not register your capital raise with

the appropriate state and federal agencies, your investors must be accredited. If

all of your investors are accredited, then you do not need to register your

securities offering.

The “Raising Angel Funding” section of this report below takes you through the

process of raising angel capital.


10. Institutional Equity

Institutional equity transactions are ones whereby a professional investment

organization such as a venture capital firm, corporation or private equity firm

invests in your company. Because angel investment groups function in a similar

way to a professional investment organization, they are included in this category.

The positive with institutional equity investors is that they can write very large

checks. Venture capital firms routinely write $1 million, $5 million, $10 million,

$25 million and even $50 million checks. And private equity firms have doled out

checks exceeding $1 billion. However, raising institutional equity is the most

challenging form of funding to raise.

Because equity capital only earns a return when there is a liquidity event (e.g.,

the company has an initial public offering (IPO) or is sold to another business),

the criteria for these investments differ from debt investments.

Specifically, investors will generally only invest in equity when they believe that

the company has great potential to achieve a liquidity event that enables the

investors to earn a significant return on their investment. The following factors

imply that a company has this potential.

The first criteria is scale or the potential for the company to achieve significant

annual revenues, typically in excess of $50 million to $100 million within a 5 to 7

year period.

The second criteria is barriers to entry. Barriers to entry are those things that

make it difficult for another firm to compete against you such as patents or

proprietary technology, a unique location, and long-term customer contracts.


The third criteria is having a strong management team.

The next criteria is that equity investors need to feel confident of your exit

strategy, mainly that the chances are good of eventually having another firm

purchase you or your firm going public.

Finally, institutional equity investors tend to want to invest in local companies.

While geography doesn’t necessarily impact exit potential, investors often like to

invest in companies that are within 200 miles so that they can visit them often

and participate in Board and other meetings.

Note that the showing a strong management team and being local are also

extremely important to raising debt capital. While the other factors, such as

showing barriers to entry, are still important to debt lenders, they are even more

important to equity investors.

Below is an explanation of the key types of institutional equity. The “Raising

Venture Capital” section of this report (at the end) takes you through the process

of raising institutional equity.

Angel Investor Networks

A growing trend is the organization of angels into angel groups or networks of 10

to 150 accredited investors

This pooling of resources facilitates combined research as well as pooled capital.

Specifically, when angel investors invest together, they have more resources with

which to research whether the deal is good or bad for them, and they can provide

more capital to entrepreneurs.


While there were only around 10 of these groups in 1996, there were over 300

just 10 years later. These groups, however, account for only 10,000 of the

approximately 250,000 active angel investors in the United States.

As such, if angel investors are right for you, you should seek both individual

angels and angel groups. There are more individual angels from which to

choose, but the groups typically do more deals and have more capital to put into

each deal. Typically, an angel group will invest from $100,000 to $1,000,000 in a

venture.

The angel investor section of this report takes you through the entire process of

raising angel capital; from understanding exactly how to find angel investors, to

presenting your company to them like a pro, to structuring the deal terms so the

angel funding hits your bank account without delay. The guide also includes a

database of approximately 150 top angel investment groups across the United

States.

Venture Capital Firms

A venture capital firm is a financial institution that focuses on providing capital, in

the form of equity, to companies who offer them the prospects of significant

growth.

The partners and associates at venture capital firms are known as venture

capitalists. The term “VC” or “VCs” applies to both venture capital firms and

venture capitalists.

Unlike angel investors, VCs are professional institutions that invest other

people’s money. VC firms raise capital for their own funds from sources which


primarily include pension funds, financial and insurance companies, endowments

and foundations, individuals and families, and corporations.

The VCs are then charged with finding high growth companies, making

investments in them at favorable terms, guiding and nurturing them, and enacting

a liquidity event.

Because they are utilizing other people’s money, and are judged and

compensated by the performance of their investments, venture capitalists are

extremely rigorous in their investment decision-making process.

Note that as mentioned earlier, VCs tend to invest in companies with significant

market potential of $50 million, $100 million or more.

This is because even with all their relevant experience, the average venture

capital firm will lose money on half the companies they invest in and only break

even on a third.

Where they make their money is on the 17% (approximate) of companies that

they invest in that see explosive growth and provide remarkable returns of 10

times to 100 times or more on their investment.

If you are seeking venture capital, the venture capital section of this report will

teach you our proven, 7-step method for raising venture capital and growing a

successful business.


Strategic/Corporate Investors

Strategic investors are generally corporations (but they can also be individuals or

small, local businesses) that invest in early stage companies in order to 1) earn

financial returns and 2) partially control ventures that could effect or “disrupt”, that

is cause a significant change to, their market(s) in the future.

Strategic investors can offer capital in amounts ranging from a few hundred

thousand dollars or less to several million dollars.

Some corporations, like Intel (via Intel Capital) and Siemens (via Siemens

Venture Capital), have formal venture capital arms that actively seek and invest

in emerging companies.

These corporations are ideal to contact should you have a venture in their market

space(s), since if they like your concept they could provide value well beyond

their capital contributions such as strategic advice, industry connections, and

distribution assistance.

Note that most corporations, even if they don’t have formal venture capital arms,

do fund emerging ventures if they are properly presented to them, specifically if

the venture’s management team clearly shows how their venture could impact

the industry and/or help the corporation further its mission.

For example, if you have a product or technology that enables a corporation to

gain competitive advantage and thus increase profits, they might be extremely

receptive to providing funding.


If you are seeking strategic/corporate investors, the venture capital section of this

report will teach you our proven, 7-step method for raising this capital and

growing a successful business.

Private Equity Firms

As the name implies, private equity (PE) is the process of investing in private

companies (those that are not listed on a public exchange) in return for shares of

those companies.

There are several subsets of private equity including:

1. Venture capital (which we have just discussed), which focuses on

investing in privately-held, young, fast growing companies

2. Buyout investing

3. Recapitalizations, and

4. Mezzanine investing

While venture capital is technically a subset of private equity, it is generally

treated separately and the term “private equity” is generally thought of as buyout

and mezzanine investing, both of which focus on investments in mature

companies.

Private equity deal sizes are generally very large. While some deal range in the

millions of dollars, private equity deals often reach hundreds of millions if not

billions of dollars.

From a risk/return perspective, private equity falls in between debt capital, which

is low risk/low return, and venture capital, which is high risk/high return investing.


Raising Individual & Institutional Equity

Introduction

Individual & Institutional Equity are the two top sections of Growthink’s Funding

Pyramid™. That means they are the hardest to attain.

To reiterate the definitions of these two funding sources:

1. Individual equity transactions are ones whereby an individual, be it

a friend, family member or other individual investing on their own

behalf (and “angel” investors”) invests in your company.

2. Institutional equity transactions are ones whereby a professional

investment organization such as a venture capital firm, corporation

or private equity firm invests in your company. Because angel

investment groups function in a similar way to a professional

investment organization, they are included in this category.

While these funding sources are challenging to attain, they have significant

positive aspects to them:

1. The often represent lots of money. For example, raising an angel round of

funding (a type of Individual Equity) can often provide you with $500,000

or more. And Venture Capital (a type of Institutional Equity) fundings can

exceed $10 million.

2. Individual & Institutional Equity financings often have strategic value in

that the investors are often successful business people that have know-

how and connections which can help you grow the business.


3. Because these are equity transactions, you can invest all the proceeds of

the fundings into your business and don’t have to make periodic interest

and principle payments.

A final note is that individual equity transactions are MUCH easier to attain then

institutional equity transactions. This is mainly because:

1. Institutional investors receive TONS of potential deals to fund, so there is

much more competition.

2. Institutional investors have strict criteria they must follow with their

investments. These criteria were established when they sought investors

to invest in their funds.

Growthink has developed two comprehensive guides on raising Individual &

Institutional Equity, called Growthink’s Step-By-Step Guide to Raising Venture

Capital (http://www.growthink.com/products/venture-capital-guide) and

Growthink’s Step-By-Step Guide to Raising Capital from Angel Investors

(http://www.growthink.com/products/guide-to-angel-investors).

Below are key points from these guides to help you in raising funding from these

sources.

Raising Angel Funding

Read this section to learn how to raise angel funding.

What Do Angel Investors Look Like?

The Center for Venture Research at the University of New Hampshire, which

researches angel investments, has found that the average angel investor is 47


years old with an annual income of $90,000, a net worth of $750,000, is college

educated, has been self employed and invests $37,000 per venture.

While the Small Business Administration and other organizations estimate the

number of active angel investors in the United States to be 250,000, the number

of potential angel investors is much greater. According to TNS Financial

Services, there are 9.3 million households in the United States with a net worth

exceeding 1 million dollars. Three million of these households, according to

Merrill Lynch & Co. and Capgemini Group, have investable assets of at least $1

million, excluding their primary homes.

We consider this 9.3 million figure to be the best estimate of the number of

potential angel investors in the United States. The vast majority of these

individuals are “latent angels,” defined as individuals who have the necessary net

worth, but have not made an investment. These individuals are often the best

potential investors in a venture since they have the funds, but aren’t bombarded

with potential deals (unlike angel groups and venture capitalists who are

constantly bombarded).

Most active angel investors are current or former entrepreneurs, successful

executives, or otherwise wealthy individuals. Note that sometimes a venture

capitalist will see a deal that is not a good fit for their venture capital funds but

which they personally like, and thus may invest personally as an angel investor.

Because, as discussed earlier, angels are often individuals with extensive

business experience who have operated and owned successful businesses of

their own, they can often provide more value to your business than just the

money they invest.

Last year, the Center for Venture Research found that women angels

represented 16.5% of the angel investor market.


Why Angel Investors Invest

Angel investors usually invest in privately-held companies for the following

reasons:

1. They think they can get a solid return on investment. Obviously, investing

at the earliest stages for a company that eventually goes big can earn the

investor 100X their money back or more.

a. According to the Center for Venture Research, angel investors

expect an average 26% annual return at the time they invest, and

they believe that about one-third of their investments are likely to

result in a substantial capital loss.

2. They know, like and trust the entrepreneur. Like with friends and family

investments, sometimes angels know and trust the entrepreneurs and

want to help them succeed.

3. They feel they can add real value: many angels have lots of relevant

experience that can help the companies they fund, from experience hiring

staff to connections with key potential customers or suppliers. If angels

can see their involvement adding a lot of value to the company, they might

be very interested in investing.

4. Sometimes the angel wants or likes the action. Simply put, angel investing

is exciting. It is generally a higher risk/higher reward version of the public

stock markets requiring a more entrepreneurial analysis which is highly

intriguing.

Keeping these motivations in mind can help you secure angel investments for

your business.


What Sectors Angels Invest In

The following presents a breakout of the sectors in which angels invested last

year:

• Healthcare: 16%

• Software: 13%

• Retail: 12%

• Biotech: 11%

• Industrial/Energy: 8%

• Media: 7%

• Other High-Tech: 33%

Because retail represents a relatively low percentage of angel investments but

such a high percentage of U.S. businesses, I often get questions regarding

whether retail establishments, like restaurants, can raise angel financing.

The answer is a definite yes, however, the entrepreneur needs to first address

how the angel will recoup their investment (e.g., sale of business, dividend/profit

payouts, etc.).

The key reason why retail deals can reap angel investments are as follows:

As mentioned, there are over 9 million latent angel investors, most of which have

never been asked to invest in a private company

• As mentioned, angels often invest when “they feel they can add real

value” and virtually always only invest when they understand the business.

Because retail businesses are frequented by angel investors, they tend to

understand the businesses and believe they can add value.


• Finally, note that with retail establishments like restaurants, there is also

the ego element that the angel can go to and tell friends that it is partially

“their” restaurant. This ego-factor also holds true with other types of angel

investments.

What Angel Investors Look For in a Company

In order to consider investing, angel investors must believe that the company has

great potential to achieve a liquidity event, and one that enables them to earn a

significant return on their investment. The following factors imply that a company

has this potential:

The first criteria is scale or the potential for the company to achieve significant

annual revenues. If a company expects to raise venture capital after the angel

round, it must have the potential to earn annual revenues of $50 million to $100

million within five years.

Conversely, an angel investor, when no follow-on capital is required, might be

willing to invest in a restaurant or website that has the potential to generate

hundreds of thousands or a few million dollars as long as a clear path has been

laid out regarding how they could get a sizable return on their investment.

The second criteria is barriers to entry. Barriers to entry are those things that

make it difficult for another firm to compete against you, such as patents or

proprietary technology, a unique location, and long-term customer contracts.

The third criteria is having a strong management team with relevant experience

and successes under their belts. The angels must believe in and be comfortable

with both the founders and the key operating personnel of the company.


The fourth criteria is that angel investors need to feel confident of your exit

strategy, mainly that the chances are good of eventually having another firm

purchase you or your firm going public. It is through your exit strategy that these

investors profit from their investment in you.

Another important criteria, while not necessarily tied to liquidity potential, is that

angel investors tend to only invest in local companies. Angel investors often like

to invest in companies that are close by so that they can visit them often and

participate in Board and other meetings. In fact, according to the Center for

Venture Research, 70% of angel investments are made within 50 miles of the

investor’s home or office.

Finally, angel investors will only invest when the price is right. If companies price

their equity too high, than angels may not have the potential to reap significant

returns, and thus may not invest.

How to Find Individual Angel Investors

Individual angel investors can be found via:

A. Referrals

B. Networking at events and through multiple degrees of separation

C. Focused Prospecting

NOTE: As mentioned earlier in this guide, it is typically preferable to set up

“informational meetings” as opposed to “investment meetings.” This will

dramatically increase the number of meetings you are able to successful attain.


A. Referrals

The ideal way to be introduced to an angel investor is through a referral by a

mutual acquaintance. Talk to your friends, family members and service

professionals such as your accountant, lawyer, or business advisor and see if

they can either invest in your business or refer you to an angel who can.

Note that once you meet an angel investor, if they say “no” to investing in your

business, don’t stop there. Angel investors generally know other angel investors,

so always ask for referrals. These are often the highest quality and most fruitful

referrals.

B. Networking

If you can’t find referrals to angel investors from your current network, expand

your network.

Networking through attending events and constantly expanding your network by

asking for more introductions from your existing contacts works extremely well. It

does take time and diligence so you must stick with it.

Here’s a quick lesson regarding how Google raised its angel round of capital.

Founder's Page and Brin told their ideas to others in hopes that they would get

great advice and connections. And sure enough, it worked. Page and Brin

discussed their concept with their computer science professor David R. Cheriton.

Cheriton then introduced them to his friend Andy Bechtolsheim.

Bechtolsheim then wrote Google a check for $100,000.

And then, Google raised more money from friends and family.


And through their rapidly growing network of investors and advisors, they met

and received angel investments from Ram Shriram, a former Netscape

executive, and Ron Conway and Bob Bozeman, partners in Angel Investors.

The “and so on and so on” momentum had begun, and that, coupled with

continued success with the development and launch of Google.com, resulted in

millions of additional dollars being invested in Google.

If you already know some quality people, speak to them and then get them to

refer you to other people. If you feel you don't have highly networked people that

you know, go out and find them.

Go to industry events and conferences and meet people. Befriend them and

follow-up with them. Then get them to open up their networks to you. And/or

meet them on professional networking sites like LinkedIn, Spoke or Facebook.

And then, promote the story of your company to your newfound contacts and to

prove to them that investing in you and your dream will provide them with

significant financial returns.

C. Focused Prospecting

With regards to prospecting for angel investors, consider the statistics mentioned

earlier in this report:

According to TNS Financial Services, there are 9.3 million households in the

United States with a net worth exceeding 1 million dollars.

• Three million of these households, according to Merrill Lynch & Co. and

Capgemini Group, have investable assets of at least $1 million, excluding

their primary homes


As such, there are up to 9.3 million potential angel investors for your venture.

Most of these investors are either current or retired executives or business

owners. You just need to find them.

Retired Executives

One way to accomplish this is by seeking out retired industry executives online.

You can find the names of retired industry executives and often what they are

now doing via searches on Google.

For example if you were seeking angel investors for an aviation company, doing

Google searches on “retired Boeing executive” and “former Boeing executive” will

produce names of potential angels.

Likewise, you can find the names of executives and Board members of local

companies, contact them and see if they are interested in investing in your

company.

Business Owners

Business owners are the best angel investors. They generally have capital and

they can often provide great advice regarding starting and growing your

company.

In addition, business owners are easy to find. You can simply pick up the phone

book or drive around to find businesses in your area that seem to be successful.

And then strike up a conversation with the business’ owner. It really is that

simple.


Another way to find business owners along with their contact information is to

purchase lists from organizations such as InfoUSA and Dun & Bradstreet. These

firms allows you to create highly focused lists. For example, you can purchase

the contact names of business owners within specific industries, with certain

annual revenues, and within specific zip code ranges.

As a result, you can quickly, easily, and cost-effectively create highly-targeted

angel investor contact lists. Then, you can call these prospects and/or use both

online and offline networking to get introductions to them.

Re-Cap: Action Plan for Raising Angel Capital

The following is our proven 5-step action plan for raising angel capital:

1. Prepare your business plan.

2. Create a list of prospective angel investors via referrals, networking,

prospecting, etc..

3. Contact and meet with the angel investors.

4. Establish the terms of the investment agreement (keep them simple!).

5. Receive your financing check.


Raising Venture Capital

Read this section to learn how to raise institutional equity and venture capital.

What is Venture Capital?

Venture capital, also abbreviated as “VC”, is a sub-set of private equity, and

refers to institutional investments in early-stage, high-potential growth companies

(like yours).

Private equity refers to investing in shares in privately-held companies, rather

than publicly-traded stocks.

And in this context, institutional means that venture capitalists are NOT investing

their own money, like “angel” investors do. (More on angel investors later…).

Instead, they are investing money on behalf of institutions, such as pension funds

and university endowments (as well as the collective funds of some very wealthy

individuals).

A venture capital firm is an investment company that regularly makes venture

capital investments.

The size of the venture capital fund is the specific amount of money the

venture capital firm has raised (from pension funds, etc.). Successful venture

capital firms regularly raise new funds to invest in promising new companies.

A venture capitalist is an individual who works at a venture capital firm, who

makes such investments.


To get a sense of the amount of money that venture capitalists invest, VCs

invested $28.3 billion in 3,808 companies in 2008 according to data from the

National Venture Capital Association, PricewaterhouseCoopers and Thomson

Reuters. This implies an average funding amount of $7.4 million per financing

transaction.

The 5 Key Stages of Equity Investments

To understand where venture capital fits in, it is important to understand the five

main sources of equity capital:

1. Friends and Family

2. Angel Investors

3. Venture Capital

4. Strategic/Corporate Investors

5. Private Equity Firms

For equity investments, the source of capital is, for the most part, tied to the

round of capital being raised. Read below to learn more.

Equity capital is raised in stages or rounds. The five main stages include the

following:

1. Pre-Seed Funding

2. Seed Funding

3. Early Stage Investment (Series A & B)

4. Later Stage Investment (Series C, D, etc.)

5. Mezzanine Financing

Most companies that raise equity capital that are eventually acquired or go public

receive multiple rounds of financing. It is important to consider this when


negotiating deal terms on earlier stage financing rounds. That is, you don’t want

to include terms in early-stage financing agreements that limit your ability to raise

future rounds of capital.

Here are the five main stages of equity capital, in more detail:

1. Pre-Seed Funding

Pre-seed funding refers to the initial capital that a company brings in that comes

from friends and family members.

This round of financing typically can be as small as $5,000 and as high as

$100K. Not all companies raise a pre-seed round.

With this funding, the company often perfects its business plan and starts

building its management team in order to position itself for its next round of

funding. (Note that companies do not necessarily have to raise pre-seed or seed

funding in order to raise venture capital.)

2. Seed Funding

Seed funding or seed capital refers to the capital that a company brings in before

the first institutional round of funding (e.g., capital invested by a company or

institution such as a venture capital firm).

Seed funding typically ranges from $100K to $500K and is generated by angel

investors and even the rare early stage venture capital firm. In addition,

sometimes debt capital, like SBA loans and traditional bank loans, are used as a

company’s seed funding -- yes, oftentimes companies raise both debt capital and

equity capital.


Seed investments are typically structured as convertible notes or common stock.

Convertible notes are loans which are made to a company at a fixed rate of

interest which can either be redeemed for cash (like traditional debt capital) OR

can be converted into stock (equity) at a predetermined date, usually upon the

next round of financing, or within a certain time period.

A key benefit of convertible notes is that you don’t need to negotiate valuation

since the valuation is tied to your Series A financing.

3. Early Stage Investment (Series A & B)

Series A is the term used to describe the first round of institutional funding for a

venture. The name “Series A” is derived from the class of preferred stock

investors receive in return for their capital.

The average Series A round is between $2 million and $5 million, with the

expressed goals of funding early stage business operations. Providing enough

capital for 6 months to 2 years of operations, funds obtained from the Series A

round can be used for the full gamut of needs -- from product development and

marketing to employee salaries.

Series B is the round that follows Series A in early stage financing. These rounds

generally raise $5 million to $10 million, but can sometimes generate up to $20

million in capital or more.

Series A and Series B rounds are usually obtained from venture capital firms

and/or strategic/corporate investors (more on strategic/corporate investors later),

and are best pursued once your company has completed its initial products,


shows initial revenue, and/or demonstrates compelling growth (such as fast and

steadily increasing member growth).

To get from Series A to Series B, the primary challenge for your company is to

demonstrate market adoption of your venture (i.e., that customers really want to

buy your product or service).

Key point: If your company doesn't resonate with its target market or

demographic, you will have serious difficulty attracting additional funding.

4. Later Stage Investment (Series C, D, etc.)

Series C, D, etc. (some venture backed companies raise over 10 rounds of

financing) are further rounds of venture capital. Each round may raise between

$5 million and $20 million or more. This type of financing is provided to

companies that have demonstrated a high level of success, are approaching or

have reached a financial “break-even” point, and are looking to expand even

further.

Series C, D, etc. rounds are usually obtained from venture capital firms and/or

strategic/corporate investors.

5. Mezzanine Financing

Mezzanine capital is capital – provided either as equity, debt or a convertible

note – that is provided to a company just prior to its IPO.

Mezzanine investors generally take less risk, since the company is generally

solid and poised to “cash out” relatively quickly. However there is still some risk


since sometimes companies cancel their IPOs, the valuation at the IPO event is

lower than anticipated, and/or the company loses value after its IPO.

Note that investors in pre-IPO companies often have to endure a “lock-up period”

which is the period of time after the IPO (often a year) in which they cannot sell

their shares of the public company.

Mezzanine capital is often provided by private equity firms.

Strategic/Corporate Investors

In addition to venture capital firms, venture capital is also disbursed by “strategic”

or “corporate” investors.

Strategic investors are generally corporations that invest in early stage

companies in order to 1) earn financial returns and 2) partially control ventures

that could effect or “disrupt”, that is cause a significant change to, their market(s)

in the future.

Strategic investors can offer capital in amounts ranging from a few hundred

thousand dollars or less to several million dollars.

Some corporations, like Intel (via Intel Capital) and Siemens (via Siemens

Venture Capital), have formal venture capital arms that actively seek and invest

in emerging companies.

These corporations are often the ideal investors to contact should you have a

venture in their market space(s), since if they like your concept they could

provide value well beyond their capital contributions such as strategic advice,

industry connections, and distribution assistance.


Note that most corporations, even if they don't have formal venture capital arms,

do fund emerging ventures if they are properly presented to them. This is

specifically the case if the venture's management team clearly shows how their

venture could impact the industry and/or help the corporation further its mission.

For example, if you have a product or technology that enables a corporation to

gain competitive advantage and thus increase profits, they might be extremely

receptive to providing funding. Most major U.S. corporations have provided

venture capital financing to emerging ventures.

Private Equity Firms

As the name implies, private equity (PE) is the process of investing in private

companies (those that are not listed on a public exchange) in return for shares of

those companies.

There are several subsets of private equity including:

1. Venture capital, which focuses on investing in privately-held, young, fast

growing companies

2. Buyout investing

3. Recapitalizations

4. Mezzanine investing

While venture capital is technically a subset of private equity, it is generally

treated separately and the term “private equity” is generally thought of as buyout

and mezzanine investing, both of which focus on investments in mature

companies.


Private equity deal sizes are generally very large. While some deal range in the

millions of dollars, private equity deals often reach hundreds of millions if not

billions of dollars.

For example, private equity firm Cerberus Capital Management owns or has

financing stakes in massive firms including Chrysler, GMAC Financial Services

and Spyglass Entertainment.

From a risk/return perspective, private equity generally falls in between debt

capital, which is low risk/low return, and venture capital, which is high risk/high

return investing.

Private equity is generally not appropriate for early stage companies. However, it

is never to early to meet with private equity firms as they may introduce you to

earlier stage investors, and also track your performance so as to potentially

provide funding to your company in the future.

The Types of Companies That Venture Capital Firms Finance

Most venture capital firms invest between $1 million and $25 million in the

companies they fund. The amount they provide often reflects the size of their

funds. For example a VC with a billion dollar fund cannot manage 1,000 one-

million dollar investments and thus tends to offer more capital to each company it

funds.

Virtually all VC firms have specific criteria that guide them such as the amount of

financing they give to a company, the stage at which they like to invest, the

sectors they are interested in, and the geographic area in which they will invest.


Also, venture capital firms have very strict criteria regarding scale, speed and

liquidity potential. They want to fund companies that can grow very quickly,

achieve significant revenues, and be sold or go public for many times the

company's current valuation. Typically, venture capital firms like to exit an

investment within 5 to 7 years.

As a result, VCs tend to fund technology companies that typically have scale,

speed and exit potential. Remember, they are looking for companies with the

potential to turn every $1 million they invest into $10 million.

Market Sectors Where Venture Capital Firms Focus

Venture capitalists tend to invest in the following sectors:

• Biotechnology

• Business Products and Services

• Computers and Peripherals

• Consumer Products and Services

• Electronics/Instrumentation

• Financial Services

• Healthcare Services

• Industrial/Energy

• IT Services

• Media and Entertainment

• Medical Devices and Equipment

• Networking and Equipment

• Retailing/Distribution

• Semiconductors

• Software

• Telecommunications


How Venture Capitalists Assess Companies

As mentioned, venture capitalists primarily look for companies that can grow

really fast with an infusion of capital.

The other key thing that VCs look for is a quality management team. In fact,

many VCs say they rather bet on the jockey (i.e., the management team) than

the horse (i.e., the company’s products and/or services).

With regards to the management team, VCs look for the following:

• Management teams who can really execute, which often includes:

o Management teams who have successfully worked together in the

past.

o Management teams who have succeeded in prior positions.

• Management teams who really know their business/market, which often

means:

o They are known as experts in their industry.

o They have been working in their industries for a long time and know

all the ins and outs.

• A good fit with the founder(s) and management team:

o Entrepreneurs and venture capitalists are partners. That is,

they generally work very closely together to achieve a common

goal (growing a successful company and getting to an exit). As

such, it is critical that there be a good personality fit and ability to

work together between the VC and the company’s

founder/management team.


Factors to Consider when Seeking a Venture Capital Firm

Once you prepare your marketing and presentation materials, the next part of the

process of raising venture capital is to find the right venture capital firms. While

this may seem simple, it isn't. There are thousands of venture capital firms in the

United States alone, and going after the wrong ones is one of the most common

reasons why companies fail to raise the capital they need.

When seeking a venture capital firm, there are seven key variables to consider:

1. Location: Most venture capital firms only invest within 100 to 200 miles of

their office(s). By investing close to home, the firms are able to more

actively get involved with and add value to their portfolio companies.

2. Sector preference: Many venture capital firms focus on specific sectors

such as healthcare, information technology (IT), wireless technologies,

etc. In most cases, even if you have a great company, if you fall outside of

the VC's sector preference, they'll pass on the opportunity.

3. Stage preference: VCs tend to focus on different stages of ventures. For

instance, some VCs prefer early stage ventures, for example companies

with no revenues, where the risk is great, but so are the potential returns.

Conversely, some VCs focus on providing capital to firms to bridge capital

gaps before they go public.

4. Partners: Venture capital firms are comprised of individual partners.

These partners make investment decisions and typically take a seat on

each portfolio company's Board. (Note that companies that VCs fund are

known as “portfolio companies.”)


Partners tend to invest in what they know, so finding a partner that has

past work experience in your industry is very helpful. This relevant

experience allows them to more fully understand your venture's value

proposition and gives them confidence that they can add value, thus

encouraging them to invest.

5. Portfolio: Just as you should seek venture capital firms whose partners

have experience in your industry, the ideal venture capital firm has

portfolio companies in your field as well.

In fact, a VC may ask the management teams of their portfolio companies

about your venture since these individuals are industry experts. In

addition, if your venture has potential synergies with a portfolio company,

this may significantly enhance the VC’s interest in your firm.

6. Assets: Most companies seeking venture capital for the first time will

require subsequent rounds of capital. As such, it is helpful if the VC has

“deep pockets,” that is, enough cash to participate in follow-on rounds.

This will save the company significant time and effort in raising future

funds.

7. Fit: As mentioned previously, entrepreneurs and venture capitalists are

partners. That is, they generally work very closely together to achieve a

common goal (growing a successful company and getting to an exit). As

such, it is critical that there be a good personality fit and ability to work

together between the VC and the founder/management team.

Finding the right venture capital firm is absolutely critical to companies seeking

venture capital. Success yields you both the capital your company requires and

significant assistance in growing your venture. Conversely, failing to find the right


firm often results in raising no capital at all and being unable to grow your

company.

How to Create Your List of Potential Venture Capital Firms

If you talk to an experienced direct marketer, they will tell you that “The list is

everything.” If you don't have the right list, you are wasting your marketing

dollars. The right list is ten times as important as whatever you put in the mailing

envelope, or whatever offer you include in your outbound telemarketing script.

The same holds true for your list of prospective venture capital firms. That is, if

you are going after the wrong VCs, no matter how good your company is, you

probably won't get funding.

There are three steps to creating a killer VC list.

1. Develop a list of VC funds. You can do this either by purchasing a list or

database access from a firm such as Growthink Research or by going to the

National Venture Capital Association's website (which lists NVCA member

organizations).

2. Narrow your list. VCs invest primarily based on:

• Market sector

• Stage of development

• Geographic location

The other factors presented in the last section, mainly partners, portfolio, assets,

and fit, become more important after you create your initial list.


Virtually all VCs have websites that make this information readily available. Find

investors that are a fit with your company for all three of these areas. For

instance, if you are a pre-revenue software company based in Chicago, your best

bet is to find a venture capital firm within 200 miles of Chicago that has

experience funding pre-revenue software companies. Sites like Growthink

Research allow you automatically filter your lists by these criteria.

3. Make sure the VC is active. Go to the press release section of the VC's

website and/or search Google News to see how active the VC is. If the VC has

not done a deal in a year, they probably are not actively investing in new deals

and may not be worth contacting.

What you will be left with is a list of VCs that are actively seeking companies like

yours. Once you have this list, you need to identify the right partner at that firm to

contact.

Identifying the Right Partner at a Venture Capital Firm

As mentioned above, venture capital firms are comprised of individual partners

(and associates that assist them). These partners make investment decisions

and typically take a seat on each portfolio company's Board.

Partners tend to invest in what they know, so finding a partner that has past work

experience in your industry is very helpful. This relevant experience allows them

to more fully understand your venture's value proposition and gives them

confidence that they can add value, thus encouraging them to invest.

Fortunately, most venture capital firm websites list their partners with great pride.

Each partner typically has a bio that includes their educational credentials,

business accomplishments and investments that they have made. In identifying


the right venture capital partner to contact for your company, try to find the

partner that, from their background, will truly grasp the opportunity and can really

add value.

Once you have identified the most appropriate venture capital partner, it is

important to figure out how to contact them. As partners are often inundated with

business plans, having a personal connection and/or introduction is often the

difference between getting heard and not getting heard.

For instance, if you attended the same university or worked at a company that

they did, call or email them and use this as the introduction. If not, it is important

to network. Call people that may have been associated with the partner and ask

for an introduction.

Getting the partner's attention is the first key hurdle in raising venture capital. The

second hurdle is getting them to believe in the opportunity, and finally, giving

them the enthusiasm and information needed to convince other partners in their

firm that investing in your venture represents a sound investment.

The Three Ways to Contact Venture Capitalists

To recap, at this point, you should have a list of venture capital firms who seem

to be a good fit for your company with regards to their geographic, sector and

stage foci. In addition, you have reviewed their websites to make sure they are

actively investing, and you have identified the ideal partner at their firm to

contact. Now, let’s talk about how to most effectively contact these partners.

There are three main ways to contact partners at VC firms:

1. Get an introduction


2. Meet them online or offline

3. Contact them cold

I have listed these in descending order of preference, meaning that the most

effective contact method is via an introduction. Cold contacting is the least

effective; however it still works time and time again.

1. Getting Introductions

Getting an introduction is the easiest way to getting a VC’s attention. Because

VCs are inundated with pitches from entrepreneurs, they simply lack the time to

meet with everyone. An introduction gives you priority over other entrepreneurs

who contact the VCs.

There are six key types of individuals who can introduce you to the venture

capitalist you are seeking.

1. Entrepreneurs whom the investor has previously backed or is

currently backing.

Venture capitalists place significant value on the opinions of the

entrepreneurs they are currently backing (they obviously believed in them

enough to write them large checks). As such, getting an introduction from

these entrepreneurs carries a lot of weight.

Better yet, VCs have an even higher opinion of entrepreneurs they have

funded that have made them a lot of money (i.e., entrepreneurs who have

successful grown and exited companies giving the VC major returns).

Getting introductions from these entrepreneurs is even better.


Even if you don’t currently know such entrepreneurs, finding them can be

quite easy. Growthink Research maintains a database with the contact

information of nearly 100,000 entrepreneurs who are, or have been, on

the management teams of venture backed companies.

A great story of leveraging other entrepreneurs to get VC contacts is the

story of Ryan Allis, the CEO of iContact. Ryan raised $5 million in venture

capital for his North Carolina-based company at the age of 22. He did this

by finding a nearby entrepreneur who had successfully raised venture

capital and getting him to agree to be his mentor. The entrepreneur

introduced Ryan to several venture capitalists, advised him on many of the

capital-raising issues, and ultimately led to his financing success.

2. Other investors with whom the investor has co-invested.

If you have connections to other venture capitalists, particularly those who

have co-invested with the venture capitalist you are seeking, ask them to

introduce you.

Likewise, whenever you speak with a potential investor, find out who else

they know that could be a good fit and ask for an introduction to them.

3. Market, product, and technology experts such as senior executives

at dominant companies or lauded professors.

Venture capitalists follow industries. For example, if a venture capitalist

focuses on software, you can bet that they are reading the software trade

journals, attending software conferences, following public software

companies, etc.

As such, the venture capitalists generally know, or at least know by name,

executives at dominant companies or professors in the space. Finding


these individuals and asking them to introduce you to the appropriate

venture capitalists is often very effective.

Key Point – assembling your Board of Advisors: Oftentimes you

should first solicit these individuals to become a member of your Board of

Advisors. A Board of Advisors is an informal version of your Board of

Directors. They generally have no voting privileges, but provide value in

the form of advice, know-how and contacts. Typically, Advisors are

compensated with equity. Industry executives, successful entrepreneurs,

and professors make great Advisors.

If you don’t have an Advisory Board, you should get one as they are

relatively easy and cost no money to create. In fact, SCORE (go to

score.org) offers a free service to help you build your Advisory Board.

4. Lawyers, accountants, consultants and other industry people.

Lawyers, accountants, and consultants are the trusted advisors of venture

capital firms, and VCs pay them large sums of money each year to

provide their services. As trusted advisors, venture capitalists give great

merit to entrepreneurs which they introduce to them.

While top law firms may charge significant dollars to set up legal

agreements, entrepreneurs should consider the benefits they may provide

with regards to introductions to venture capitalists. The same holds true

for many accountants and consultants.

5. Angel Investors and Board Members.

As mentioned above members of your Advisory Board often have

connections to venture capitalists. Likewise members of your Board of

Directors, if you have one, are often well-connected. Finally, if you have


angel investors, they often have relationships with venture capitalists or

are can contact friends who do.

6. The venture capitalist’s online social networking colleagues.

Many venture capitalists participate in online social networks such as

LinkedIn, Spoke, or Facebook. On networks such as LinkedIn, you can

ask other individuals who are connected with the venture capitalist you

seek to introduce you to them. If you are not yet a member of LinkedIn,

join it (at LinkedIn.com). It’s free and doesn’t take too much time to get

real value from it.

Successful entrepreneurs oftentimes leverage several of these sources of

introductions. As mentioned above, each time you meet a venture capitalist or

other established individual, don’t hesitate to ask for an introduction. Oftentimes

the random introduction leads to a financing transaction.

One example of using multiple introductions was the story behind Google’s

financing. Google founder's Page and Brin discussed their concept with their

computer science professor David R. Cheriton. Cheriton then introduced them to

his friend Andy Bechtolsheim.

Bechtolsheim then wrote Google a check for $100,000.

And then, Google raised more money from friends and family.

And through their rapidly growing network of investors and advisors, they met

and received angel investments from Ram Shriram, a former Netscape

executive, and Ron Conway and Bob Bozeman, partners in Angel Investors.


And later these angel investors introduced Google to the right venture capitalists

who wrote Google even larger financing checks.

2. Meeting Venture Capitalists Online or Offline

As mentioned above, many venture capitalists participate in online social

networks through which you can get introductions to them.

You can also create relationships yourself with VCs through the online medium.

For example, you can find out if the venture capitalists has a blog (many do). If

so, read their blog to learn more about them and what excites them. It is also

smart to post comments on their blog. Oftentimes they’ll reply to your comments,

and before you know it, you have established a relationship with them.

You might also see if the VC is active on Twitter (many are). If so, follow them

on Twitter and see what they’re posting about. See if there are opportunities to

start a dialogue.

And all the while, think of these online interactions just as if they were offline in

the “real world.” Act just like you’d act as if you were meeting them in person at a

cocktail party.

While meeting venture capitalists virtually/online may be simpler and easier,

meeting them offline is also highly effective. In order to stay abreast of the

happenings in their markets, venture capitalists attend lots of events. They attend

capital conferences, pitching events (where entrepreneurs pitch VCs or angel

investors), trade shows, etc.

Oftentimes you can read on their blog about the events they will be attending. It

is a good idea to attend these same events and meet the venture capitalists


there. You can then discuss the event with them and establish yourself as a

credible industry insider.

As an example of the power of offline events, note the story of Ron Feldman,

CEO of Kwiry. Ron met a venture capitalist at a University alumni event he

attended; that VC eventually funded his company.

Finally, when you are seeking venture capital, you need to let your network know

about it. Tell your contacts on Facebook and/or email your friends. You never

know who has connections to potential investors.

3. Contacting Venture Capitalists Cold

The final way to contact venture capitalists is “cold” – that is, without an

introduction and without meeting them at an event or conference or online.

While this method is the most challenging, since you need to get through the

VC’s filters, it can be highly effective.

The best strategy for contacting venture capitalists “cold” is to email them. Note

that calling them is much less effective as you will nearly always get their voice

message and rarely if ever will you receive a call back.

With regards to emailing the venture capitalist, usually the email address of each

partner is listed on the VC’s website. If not, call the VC firm to find out the

partner's email address.

It’s critical that you NEVER email a generic email address (such as

[email protected] or [email protected]). These

types of email addresses are like “black holes” – you’ll generally never see a

response.


In the email, ideally you can make a connection to them via their blog or research

(e.g., I read how you are involved with this and that. Based on that, I think you

might be interested in my venture…).

In your email, do NOT send them your business plan. Realize that VCs are

inundated with business plans. They are NOT going to read your business plan if

you send it to them in the initial email. Rather, send them a “teaser email” that

confirms that they are interested in learning more about your venture.

Once you contact venture capitalists, your goal will be to get a face-to-face

meeting. The meeting will ideally progress into a “term sheet” (a document that is

like a “letter of intent” that the VC firm will fund you and lays out the general

terms of the financing). Then there is a negotiations phase and finally, the

financing check is delivered to you.

Growthink has developed a comprehensive guide called Growthink’s Step-By-

Step Guide to Raising Venture Capital that provides detailed step-by-step help

on raising venture capital: http://www.growthink.com/products/venture-capital-guide


Conclusion

Every great company you’ve ever seen required funding.

Sometimes the funding came from the entrepreneur’s “other” job. Sometimes it

came from credit cards. Sometimes it came from venture capitalists. And more

often than not, it came from multiple sources.

The key to remember is that there are many sources of capital available to you to

start and/or grow your business. And every source has its pluses and minuses.

Some require high interest rates. Some take a long time to get. Some require you

to have already achieved certain milestones. Etc.

As you have learned in this guide, start your search for capital at the bottom of

the pyramid. Raise the easiest forms of money first. And then use that money to

achieve milestones that position you to raise the next round of capital….from

which you will have more funding sources to choose.

That’s not to say that you can’t contact the higher sources (on the pyramid) of

capital now. You can, but more likely than not, they will say “come back later.”

This is fine because when you do come back later, you will already have

established the relationship, which will help you secure the funding.

But don’t take rejection from these higher sources of capital as an indication that

your idea or venture is no good. It just means that the source of capital is not

appropriate for you today. That’s why today you should go after the lower

sources of capital, and continually work your way up to the top.

Good luck!

Documents

The Truth About Funding