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Saturday, November 1st, 2014


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Raising Money in a Down Market

So you’ve got an idea. One that you truly believe could launch a business and your fortune. Your friends and family completely agree and encourage you to go chase your dream. So you decide to get some funding and make it happen.

But have you checked the credit markets lately? This is where all the actual operational money comes from and the venture capital industry follows their lead. The current freeze in the credit markets means that no one is getting money right now. No money for payrolls. No money for inventories. No money for expansion. According to the National Venture Capital Association, the total private equity investment in the quarter was $7.1 billion, down from $7.8 billion a year ago, and those numbers are before the Wall Street and credit market meltdowns.  This means that raising money for a new venture right now will be tough, but definitely not impossible.

Here are some traditional and non-traditional sources of funding for young entrepreneurs:
 
Venture Capital
This is typically the first thought of aspiring entrepreneurs: make a pitch, get millions, have some fun and sell the company. But is that VC money still available? Sure, but you have to do more than WOW them during these times. You have to go in with a bullet-proof idea, run lean, and show how soon you’ll get to profitability—if they agree to meet with you at all.

Venture capital operates on seven-to-ten-year cycles. Firms don’t, for the most part, use debt to fund their companies. So in theory they should be shielded from the financial mess that has laid waste to some of the largest financial institutions in the world. But that doesn’t mean that they’re ready to shell out the dough. They get affected in other ways and when the credit markets slow down, VC’s tend to hold on to their cash (the “rainy day” theory).

Here’s what I tell entrepreneurs looking to VC’s:
• Be politely persistent.
• Make a solid, very direct PowerPoint presentation and send it.
• Be very specific on how you are “in the right place at the right time,” show that you are recession proof, and that you have clear timeline to profitability.
• Repeat this process as much as possible with a long list of VC’s (make sure they invested in your area prior: B2B, B2C, Biotech, etc).

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Peer-to-Peer Lending (P2P)

This lending method has been the unsung hero in the fundraising circle, especially in challenging times it’s proven to be a primary source of funding for small businesses. Sure, friends and family have encouraged you to move forward, but how many will actually step up and help you financially?

According to Asheesh Advani, President of Virgin Money USA, “Our loan volume has increased from $200M to $370M since Oct 2007.  It took us 5+ years to get to $200M and less than 12 months to get from $200M to $370M.

When consumers recognize the benefits they love the product.  We have a higher repeat business rate and willingness-to-refer rate than most banks and direct lenders.”

Corporate Partnerships
Does your idea fill a void or add value to a larger company’s interest? It’s easier for a company to invest in your idea and simply buy you out. Make a list of companies that should have an interest in your business, or will get hurt if you offer it to their competitor, and start making friends with their business development people. This is a great path without all the expense and a much easier meeting to set.

Community Banks
When I tell people about the strength of community banking, they look at me like I’m out of my mind. Not all banks have been affected by the current credit crunch. These types of banks deal at the micro level and have funds set aside for small business loans. Sandy Barauh of the SBA states that, “Most community banks offer SBA loans which are guaranteed up to 85% of the value of the loan. That dramatically reduces the risk for that bank in a time where they’re actually looking to reduce risk.”

Savoy Bank of Manhattan recently loaned $30 million to small businesses and is expected to loan up to $60 million total this year. Elena Sisti, Savoy’s Chairperson stated that, “Although we do look for character, integrity, ethics, personality and how much of a personal vested interest a business owner has in their idea, we also want to know how they will use the money and that they articulate that well.”

Well then, how can community banks lend when other banks are frozen up? Sisti replies, “We haven’t engaged in the same behaviors as the larger banks. We haven’t participated in consumer loans or credit cards, and that seems to be where all the issues came from.”

“Pitch” More
I’m sure you’ve all heard that “life is a numbers game.” The more contacts, the more meetings, and the more meetings, the more opportunities, with more opportunities comes the higher probability of getting what you want. Keep that machine going, stay organized, and get in front of as many qualified people as possible.

In any down market many businesses close. This creates voids which offer many new opportunities to promising new companies. If you have the right idea, are persistent, and believe in yourself, you have the power to make anything happen. 
                        

Tips for Raising Money

• Go on the offense—have an aggressive strategy to continually put your idea in front of people who can get you money.
• You must articulate how will you use the money and soon will you be profitable.
• Build your relationship with your local financial institutions.
• Run lean by controlling expenses—when the market shifts back you’ll be well positioned.
• Have a Plan B.
• Do your homework—be an expert in your space. 

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2 Responses to Raising Money in a Down Market

  1. Susan says:

    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

    Susan

  2. Thinking in Currency says:

    I think you forgot one of the last easiest ways to raise capital. The old way. Save up your money and invest in yourself! It’s the easiest way and it’s free. The only person you have to please is yourself. Personally I wouldn’t seek investors until I want to expand to the point that it is out of my spending budget.

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