THE VCs AND ANGEL GROUPS: TAKE CONTROL OF YOUR COMPANY'S FUNDING STRATEGY
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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
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
- 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.
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:
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.
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.
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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