Other Considerations About Raising Private Equity

(seventeenth of a series)

By Frank Demmler

As I hope is obvious by now, raising money is not an easy undertaking. Trying to raise money will take you away from building your business on a day-to-day basis. You must keep in mind that it takes time to raise capital, probably longer than you ever imagined, and there is no guarantee that you will be successful in your efforts. You will have to run as many parallel paths as possible until a deal takes shape. During that period, you will likely be in “boot strap” mode. You must make a conscious decision that the opportunity costs and the potential downsides are worth risking.

TIME TO RAISE CAPITAL

The time it takes to raise capital can be excruciatingly long. As a rule of thumb, you should plan on anywhere from six to 12 months to conclude a successful round of fund raising. The primary steps are:

1. Develop a business plan 2-9 months
2. Initiate discussions with potential investors 2-4 months
3. Respond to investor requests for additional information 0-3 months
4. Bide time while potential investors do their due diligence 0-6 months
5. Receive a term sheet and negotiate a deal 1-6 months
6. Prepare legal work, negotiate the fine points and close the deal 1-3 months

It is unlikely that your company would be at either pole for all factors. As a practical matter, if you haven’t closed a deal within a year, it is unlikely that you ever will.

ALTERNATIVES to raising capital

Alternatives should always be considered. Raising money is rarely a linear path, so building in flexibility, as well as developing viable options will work to your advantage. Here are some of the questions that you should ask yourself:

· Can I make meaningful progress with less money? Is the perceived risk of my business such that I can use a small amount of money to accomplish one or two particular things that will set the stage for me to raise a larger amount of money later?

· Can I stage the investment? Can I close on a portion of the investment now, with the balance due upon successful completion of milestones?

· Can I get development funds from a customer or supplier who will ultimately benefit from my success? Will my suppliers and customers consider special terms and conditions for me? Might my supplier give me goods on consignment? Might my customer place a deposit at the time of an order, or at least agree to progress billings?

· Can I get a customer to pay for a custom development of my technology for them while retaining ownership of the intellectual property?

· Might money be available from an economic development agency? Typically, such agencies focus on jobs creation and retention.

· Are funds a possibility through programs like InnovationWorks, Idea Foundry, the Pittsburgh Digital Greenhouse, or the Pittsburgh Life Sciences Greenhouse?

· How about the Federal Programs like SBIR, STTR and ATP?

· Should I partner with a competitor who might be better able to exploit the commercial potential of what I’m pursuing?

· Would someone pay a licensing fee for limited license to my technology, perhaps by industry or geography?

· Can I boot strap for a while?

· Can I sell consulting or services to generate cash flow, create industry visibility, and secure Referenceable customers?

WEEKLY WARNING: I am not an attorney. Some of what I’ve written could violate securities laws if not done correctly. Make sure your attorney is aware of what you are doing.

advice for Entrepreneurs

• It is likely to take you twice as long to raise money as you think it will.
• Make sure you consider the opportunity costs of the fund raising effort before you launch it.
• Consider alternatives to raising private equity.
• Surround yourself with professionals, mentors, and advisors who can help you level the playing field.

Frank Demmler (fd0n@andrew.cmu.edu) is Associate Teaching Professor of Entrepreneurship at the Donald H. Jones Center for Entrepreneurship at Carnegie Mellon University. (http://web.gsia.cmu.edu/display_faculty.aspx?id=168)