Money
FIVE THOUGHTS ON RAISING CAPITAL FOR YOUR START-UP BY GERRY A. HAYES, PHOTOGRAPHY BY FAITH BLACKWELL PHOTOGRAPHY
W
hile the process of launching and growing a company can be both exciting and financially rewarding, raising equity capital may be one of the most frustrating components of the process. Yet every business needs capital and, in the case of food product and technology start-ups, lots of capital. So this article is designed to shed some light on the equity capital formation process to make it less aggravating and increase your odds of success. Note: There are lots of different types of businesses. For this article I’m focusing on food technology and food products start-ups.
Thought #1: Understanding what equity actually means. Exchanging equity for capital means you are selling “ownership” in your business. The amount of ownership will be negotiated between you and your investor(s). It means you both want the company to grow in value over the ensuing years and you both want to harvest that value at some point. It also means you now have a business partner who has rights to certain information, and perhaps even control over certain decisions. Which means: Pick your partners wisely! Long after the money has been spent, you will have to deal with the investor. And, just like in a marriage, a business divorce can be a long, expensive and emotionally draining process. Noam Wasserman, a Harvard professor, wrote a book called The Founder’s Dilemma. The book can be summarized in a question each entrepreneur should ask before raising equity capital: cash or king? In other words, are you raising money for “your baby,” or because the company needs money to become successful (even if you are no longer part of the company). There’s a huge difference between the two mindsets. I would suggest if you view your start-up as “your baby,” don’t raise equity capital.
friends) until you’re able to demonstrate a market exists for the product you are hoping to build. This is typically achieved by building a version of your product that “does not scale” in order to demonstrate market traction. Over the past 10 years, I’ve probably taken more than 150 pitch meetings. If someone is pitching me to invest in their idea without any proof of market acceptance, he or she is basically asking me to take 100% of the risk on their behalf. So it’s an automatic pass for me (and typically most investors). The “abstract” is a scary place to be when you are out raising capital. It means the only tools you have available to convince investors are your enthusiasm backed up by some generic data points (it’s called promotion). Every seasoned investor, including me, has been burnt at least once by a great promoter. What you should be showing is proprietary data points you’ve amassed over a period of time that demonstrate an interesting investment opportunity. Only getting out of the abstract and into the trenches (meaning in the market selling some semblance of product or service that mimics what you hope to build with the investor’s capital) can achieve this. Which means you may have to rely upon good old-fashioned bootstrap strategies to get your business ready for outside capital: •
Your own money;
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Selling a product or service (any product or service);
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Keeping your day job to finance your start-up; and
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Bartering (trading services with others who can help you).
The great thing about bootstrapping is it teaches you to be resourceful and frugal, which are tremendous qualities to have as a founder.
Thought #2: Are you ready for outside capital?
Thought #3: Understand how much to raise and when.
It’s 2016 and, unless you are a seasoned entrepreneur with a proven track record of returning capital to investors, a PowerPoint presentation or “back of the napkin” pitch is no longer sufficient to raise capital. You shouldn’t be speaking with investors (even family and
One of the biggest mistakes entrepreneurs make is trying to raise too much capital. I know, I know: It takes just as much time to raise $100,000 as it does $1,000,000. I also know the best of all worlds is to raise a bunch of capital that provides for a reasonable salary while
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edible INDY food start-up boot camp issue 2016
