Raising Startup Capital; Failures to Avoid

The business landscape is congested with ambitious entrepreneurs who either fail in their search for start-up capital or poorly execute on capital they raised. Many requests are denied. Even the luck ones frequently have hidden clauses of fiscal despair to face. Some deals that close come back to haunt the business owner in the form of gross debt, insufficient revenue share or closure.

Part of the problem lies in the nature of the entrepreneurial quest. New entrepreneurs are typically major risks for lenders because they lack business experience, collateral to secure the loan or both. No one wants to take a risk on a venture without a reasonable probability of return.

I have obtained many clients after they failed because of avoidable mistakes resulting from, misunderstanding the verbiage in the agreement or mismanaging the money once the deal is done.

Understanding the fundamentals of agreement strategy and business development can increase your chances of success, both in obtaining start-up funds and maintain cash flow. Be sure to avoid these missteps:

1. Business strategy/ plan—There is nothing worse than going into a investment meeting with no strategic position. If you haven't put the time and energy into writing a business plan complete with elements, such as a cogent business description, financial projections and a competitive market analysis, the people with the cash won't put the time into evaluating your proposal.

At LeverageSeed business plans are minimized in order to express strategy and realistic fiscal projections. A lengthy business plan is more of a time wasting ritual than a capital attracting tool. A new business needs to have some elasticity and an industry based vision. Google didn’t have a business plan for a long while after its inception.

2. Maintain a two point aperture-- It's not enough to convince potential backers that you've invented the next facebook or hottest new spring line of clothing. You must have a team that can generate the revenue to repay the bank loan, angel investor or provide an exit strategy for a VC. Many entrepreneurs ignore the strategy part of business; this is how you don’t get funding.

It’s not realistic for every new business to recruit a top-notch salesperson, a skilled marketer, or an accountant with start-up experience. But, you should show up to meetings with an accountant and have an atto
ey or business coach give professional guidance throughout the requesting process.

3. Don not be shy about fiscal needs— The three top reasons small businesses fail all include poor fiscal prudence. Either there is no cushion cash, growth was is too fast or operating cost was poorly considered, let alone calculated.

New business owners are frequently too optimistic about how soon they will begin to fill their cash pipeline and how fast the money will flow. If you're underfunded, you won't have a cushion to tide you over in the event of slow initial sales or unexpected market conditions.

4. Being desperate is unattractive-- One of the worst pits to fall in is trying to secure financing from multiple sources or unprofessional sources. Managing too many relationships and expectations takes time and energy away from your core business. New entrepreneurs try to bring in silent partners with hope that these folks will sit back and just take their pay.

These relationships often submit to ruin do to conflicting interests or demands. The business itself suffers and can be studded in growth or ultimately close.

This is particularly true when you raise money from friends and associates (my clients hardly get real funds from family). A hospice owner I know borrowed money from seven or eight friends to open her own salon. The business was successful, but there were perpetual battles over how the profits should be distributed. The arguments couldn't be settled and the vision and fiscal direction of the company deviated, eventually the owner was forced to sell.

6. Poor cash discipline-- Too many new business owners burn through their seed money too quickly and fail to reach cash flow-positive status in a timely manner. Some causal factors, such as late product deliveries and economic downtu
s may be beyond a start-ups control, but the executive team is clearly at fault for others, such as unnecessary spending and overly optimistic expense/income forecasts. Financial sponsors don't take kindly to that sort of mismanagement. If they kill the funding your hard work will perish as well.

5. Understand and legal agreements—Reading is fundamental but understanding is divine. Every lender or investor eventually will need his money back, and a legal document covering everything from the terms to the timing can avoid odd and expensive dispositions.

There are other pitfalls to avoid, but the bottom line is this: satiate the lenders' business perceptions and expectations to get them to open their checkbook, and protect yourself at the same time. There is no point in launching a business that will eventually sink under the weight of your investor's demands. If your business strategy is astute and solid you’ll lock in some good capital.