It sure would be nice if the capital raising process always worked the same way for everyone. That would be like saying falling in love and getting married worked the same way for everyone! The truth is that there are many ways to go about raising capital, although for the sake of explanation, we’ll stick to the basic parts here.
Phase One: The Match
Most capital raising processes begin with the entrepreneur and investor getting introduced. These introductions can be made by friends and family, professional colleagues, or at networking events. We prefer using the Go BIG Network to match thousands of entrepreneurs to qualified investors, but hey, we’re kind of biased!
During the match making process your job is to look for investors that fit the profile of your investment. An investor that has a history of making successful investments similar to yours is the best fit you can find. This type of investor will already understand the value of your product or service and will provide useful feedback about your plan.
When you start to stray outside of the investor’s sweet spot, you begin to make the process longer and more complex. Now you’ll have to spend an even greater amount of time schooling the investor on your industry, versus getting straight to the value of your opportunity.
During Phase One your goal is to simply identify as many potential fits for your investment opportunity as possible. A dozen investors would be a good number to start with. You can always add more later.
Phase Two: The Contact
Once you have created your list of potential investors, the next step is to make the initial contact. The process of contacting an investor is so important that we have dedicated an entire section to it. (see Contacting Investors)
It’s typical during the initial contact for the investor to try and quickly weed out a deal she’s not interested in. Investing is often more about turning deals down than accepting deals. Many investors will pass on hundreds of deals before accepting just one for further review. That’s why it’s so important to make the best possible impression on your first contact.
During Phase Two your goal is get a full “pitch” meeting that will allow you to meet with the investor (preferably face to face) to give an extensive overview of your business opportunity. You shouldn’t try to “close” the investor on the initial contact. Instead, you want to get the investor excited enough to want to learn more.
Phase Three: The Pitch
If you’ve made a good impression with the initial contact, an investor will then invite you to provide a full-fledged pitch. Unlike the initial contact, the full-fledged pitch allows you to go through your entire business plan in detail. In some cases you may be pitching a group of investors, whereas initially you were only talking to one representative.
Getting to the pitch is what raising capital is all about. It’s your one opportunity to deliver a stunning performance. Deals are often won or lost based on the entrepreneur’s ability to present their idea. Simply having a great idea is not enough – if you can’t sell the dream, you can never turn it into a reality.
The goal of Phase Three is to get the investor interested in putting a deal together. Just because an investor is interested doesn’t necessarily mean the deal is done. You still have to settle on the terms of the deal, which is what brings us to Phase Four.
Phase Four: The Deal
If you’ve made it to Phase Four you’re far ahead of the game. Very few entrepreneurs make it to “yes” with investors, and those that do have the dubious honor of negotiating deal terms with the investor.
But you’re not out of the clear just yet! Deals can quickly fall apart when two parties cannot agree on terms. There are a few common sticking points that can make or break a deal.
Valuation is the most heated negotiating point. Your valuation refers to what the perceived value of the company is when the investment is made. The entrepreneur argues for a higher valuation so that each dollar that is invested buys a smaller amount of the company for the investor. The investor, on the other hand, argues for a lower valuation so that they can retain more of the company for each dollar invested.
The valuation and other terms are collectively represented in what’s known as a “term sheet” which is an agreement on how the money will be invested (on what terms). You’ll often hear investors talk about “getting to a term sheet” which simply means agreeing on the core points of the deal.