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DITCH THE VCs AND ANGEL GROUPS: TAKE CONTROL OF YOUR COMPANY'S FUNDING STRATEGY
So you put your cash, ego and pride on the line and started your dream business. You have the business strategy that will make you rich. All you need is the cash to take your business to the next level. Your plan is to look for funding from venture capital firms (VCs) or angel investor groups. Not so fast.
VCs and angel groups are like the movie stars of the financial world. Stories about the “hot” VC market and how VCs are virtually throwing money at companies sell financial newspapers like “Brangelina” sells copies of US Weekly. The reality is, the average entrepreneur has as much of a chance of closing a deal with a VC as they do landing a date with either Angelina or Brad.
Here’s the scoop: VCs and angel groups fund as few as two of every 2,000 companies they look at. At one time, angel groups funded true start-ups, and VCs were the next step for financing after the Angels. Lately, however, the VCs’ investment criteria looks more like that of top tier investment banks and the angel groups’ investment criteria looks more like that of VCs. The competition for investor capital is fierce and institutional style investors like VCs and angel groups can afford to be picky. Considering these odds what can you do?
Many of my clients are emerging companies and early stage businesses and have asked me the same question. I have been advising my clients to not waste any time shopping their deal to VCs or angel groups unless they can answer yes to at least three of the following questions:
- Do you, or does someone else on your management team, have a proven track record building companies and taking them through a liquidation event like an IPO or merger?
- Does your business have any revenues?
- Is your business in the “darling” industry sector of the month?
- Do you even know what the darling industry sector of the month is?
- Do you personally know anyone who is a venture capitalist or member of an angel investor group who invests in your chosen industry, or at least someone who can introduce you to someone who does?
Instead, I have advised clients to raise money through a self-directed private or public offering. By using this technique, you go directly to individual investors to obtain the money you need to grow your business. What I have found is that when I helped my clients execute a funding strategy like this, they were able to raise more investment money, faster and with greater success than if they had pursued angel or VC money. Ultimately, this enabled them to concentrate on what was important: growing their business and achieving their financial goals.
“That’s impossible,” you say, or maybe you do not know anyone who can invest. And while I agree that raising money from individual investors is no simple task, neither is getting a VC or angel group to write you a check, nor is closing that big account, finding a deal with a big supplier or recruiting a hotshot executive officer. For your business to be a success, you will need to sell your product or service in the marketplace, and raising money from individuals is not such a big stretch. In fact, we believe the average entrepreneur has considerably better odds raising the funds they need from individual investors than they do closing a deal with a VC or angel group.
The clients I have helped raise funds from individual investors have experienced:
Faster infusion of capital. Searching for a deal with a VC or angel group can take months. The only time limitation to raising money in a self-directed securities offering is how hard you are willing to work. The sooner you get started, the faster you can raise funds. Additionally, while VCs often invest in large sums at the closing of a transaction, by going to individual investors, you can “trickle” investment funds into the company quickly to cover immediate expenses such as legal and accounting fees, business planning, and research and development.
Keeping significantly greater control of their company. When working with a VC or angel group, you can often give up a big chunk of your company. Even worse, they may force you to accept one or more of their board appointees with whom you may not want to work. Further, your ability to take any material action, like change your business strategy or raise additional capital, will likely require prior approval from your new funding partner. In a self-directed offering, you set the valuation of the company and the offering terms. Accordingly, you will likely give away less of your company and retain greater managerial control.
Rapid and exponential expansion of their professional relationship network. Raising money from individual investors requires meeting with many people. Our clients leverage the relationships they make while searching for investors into an unlimited number of opportunities with potential customers, vendors, investors and strategic advisors.
Keeping the deal terms simple. VCs and angel groups frequently require complex deal terms, including convertible preferred stock with liquidation preferences, dividend rights, anti-dilution rights and other terms that can make doing deals more difficult in the future. In a self-directed offering, shares of common stock are frequently the only securities that are sold, keeping the capital structure of the company more straightforward and easier to manage.
Not a Time to “Play Securities Lawyer”
Like most of my clients, I am also an entrepreneur. At times I have been guilty of the entrepreneurial “I can do it myself” bravado, usually to my detriment. Conducting a self-directed offering is not something that you should do without the guidance of an experienced securities attorney. The offering will need to comply with federal and state securities laws, and even the simplest mistake could cost you tens of thousands of dollars to fix or could derail your business for good.
Can I pay someone to do it for me?
Generally, it is illegal to pay any person a commission or compensation that is linked to the successful sale of your company’s securities unless that person is registered with the NASD as a broker or dealer. Also, there are strict rules relating to who can offer your company’s securities to investors, how offers can be made and to whom. Again, make sure you resolve these issues with your lawyer before you raise money.
The techniques used to raise funds from individual investors are very powerful. In fact, I helped one client, the CEO of a software developer, raise over $10 million in two years through self-directed private offerings. My client eventually left his company and leveraged his experience into a job raising funds for a top tier hedge fund. Using the exact same skills he learned while raising investment money for his company, he secured $100,000,000 in offers from institutions to invest in the fund. With determination, hard work and persistence, you can do it too!
- by Stephen T. Furnari
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