As a general rule, after you’ve produced your company’s business plan, you submit it to institutional sources of capital. Institutional sources of equity and/or debt capital would include venture-capital firms, commercial banks, private-equity firms, family offices, broker-dealers, pension funds, angel-groups and other similar financial institutions. When soliciting financial institutions for capital, the definition is essentially defined as: “any entity regulated as a financial institution and or any un-regulated organization of professional investors, e.g. hedge funds and angel groups”
However, submitting business plans for substantial amounts of funding to financial institutions simply does not work for most start-up, early stage, or later-stage companies—those companies with under $10 million in annual revenues, rarely works. When it does work, only 0.77% of companies seeking seed capital receive it and they only receive 1% of all venture capital available and it often requires sacrificing too much equity ownership and control to make the funding worth it.
Business plans are highly ineffective as documents used to raise capital, as they do not carry the “threat” of the “take away.” For instance, a business plan relies on any number of financial institutions to either accept or reject all of the financing. However, if you produce the required securities offering documents and advertise a securities offering in compliance with federal and state(s) laws, you can sell a little piece of your company to many individual investors, thereby eliminating the need to “beg” financial institutions to invest large amounts into your company.
If you structure the deal where it’s extremely attractive to any investor, and your securities offering qualifies for general solicitation, and you have the advertising power to “by-pass” the financial institutions and go directly to passive investors, then you are dealing from a relative position of strength because you will have many opportunities to sell to many individual investors, and therefore you don’t need to “beg” and can pull it back or “take away” from any particular investor.
Remember, there are only two investor fears: 1.) The fear of investment capital loss and, 2.) The fear of return on investment (or opportunity) lost. An investor might fear losing $10,000 of investment capital but may fear losing a $50,000 return on investment capital more. Through proper corporate engineering and deal structuring you easily can shift the fear of loss of money to loss of opportunity. It’s really not that hard once you know how.
Latest posts by Charles David Dreher (see all)
- CREATIVE / MATURE INDIVIDUALS ARE… - July 11, 2017
- Commonwealth Capital Private Venture Fund - June 26, 2017
- Investment Capital for Startup and Early Stage Companies - June 10, 2017