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This section gives you direction on where to concentrate your fund raising activities.
It is important to remember what debt can do and what equity can do. Don't try to solve with debt what only equity can
accomplish. Debt is to finance growth—receivables, inventory, equipment, purchase orders, and working capital needs associated with cash flow. If you have a strong cash flow debt may be your answer.
Equity
should be used to finance development activities, market tests, prototypes, intellectual property, and any expenses associated with the creation and launch of a business. Remember, a venture capitalist will allow
his/her funding to be used for just about any legitimate business purpose EXCEPT paying for your education.
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Investor Class
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Initial Public Offering (IPO). Working with major investment banking firms (e.g., Deutsche Banc Alex. Brown) as well as a top law firm (for example, LeBoeuf, Lamb, Greene & MacRae L.L.P.); and a
big five accounting firm (e.g., Ernst & Young, PriceWaterhouseCoopers, KPMG Peat Marwick). Your current investors and professional service providers will assist and sometimes dictate
to you which investment bankers you will use. Your Company is probably doing a minimum of $30 million a year in sales unless you are a biotech or an Internet company in which case sales
may be nominal, but your cash position is strong.
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Mezzanine Round. You're less than 24 months from an IPO. You're raising a large round $20 to $50 million to finance growth or market share if you are an Internet company. Current
venture investors and your network of top service professionals will help facilitate introductions. Your company needs to sharpen its venture pitch and be introduced to other VCs and the
investment banking community. It should take two to six months to obtain financing unless current investors are large enough to take this round. The financing may be equity, debt or a mix
of both. Your company is probably doing at least $15 million a year in sales and is profitable.
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Debt financing. Unless
you have large personal assets, your business isn't going to be able to obtain debt financing until your company has a somewhat stable cash flow or a major venture investor already in
your venture. Banks generally want predictable cash flow and security in the form of assets. A more traditional small business (rather than an emerging technology business) may be able to
approach an aggressive SBA-preferred lender, credit union or visit the loan auction site: primestreet.com. Also, small business ideas that are
quick to cash flow should look for local "Micro Enterprise Loan Funds", and special lending programs for minorities and women. Emerging growth companies should seek out
knowledgeable commercial bankers such as Silicon Valley Bank, City Bank or Deutsche Bank and/or non-bank lenders and venture leasing companies such as Third Coast Capital. Don't try to
solve with debt what only equity can do.
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First Round of Venture Capital. You have sales, you are at break-even on cash flow, or if you are a biotech company you have some significant strategic relationships. The market has accepted
your product, and your management team is nearing completion. Your company has reached what is known as critical mass. Your company is now what is called an execution play. You
need money to execute your growth plan. You will need your network of equity professionals to assist you in introductions to venture sources. Cold-calling will prove ineffective and
damage your ability to raise capital in the future. A solid venture pitch is essential as well as a well-written business plan. Your capital needs are around $5 million or greater. Also,
check out venturecapital.org,
garage.com,
ventureone.com and
vfinance.com.
It will take two weeks to twelve months to raise financing depending on the industry; how "hot" the company is perceived, and
how well prepared you are. Count on a minimum of six months.
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Angel Round. You need to find a sophisticated investor(s) who
can add both money (between $2.5 to $5 million) and value. Local networking with investors, seasoned entrepreneurs, and service professionals is key. The better the plan and pitch, the higher the
probability of success. Check out local angel networks. It will take two to six months to raise capital if you are prepared.
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Strategic Alliances. In order to finance your company and demonstrate market interest, it is often advisable to obtain financing from a large potential customer(s) or vendor(s). This is
especially true for biotech firms. Such alliances are consummated due to strong management contacts in the target industry or company. Expect a minimum of six months to raise capital, if
all the stars are correctly aligned.
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Research Grants. Small Business Innovation Research (SBIR)
grants, NSF grants, ATP grants or other collaborative or contract research efforts confirm the technical competence of the company and market interest in the technology. These are
received due to management's reputation and grant-writing skill. Many states have offices that assist in SBIR grants. Expect six to twelve months to obtain financing. They are useful for
companies requiring proprietary technology. Dot.coms most likely need not apply.
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Founders, Family and Friends. You use your own network. Most of
these investors are unsophisticated, so use as few as possible. Too many and you will never be able to raise follow-on capital for your venture. Plan on raising between $250K to $1
million. Typically, these investors work better in businesses that are quick to cash flow and don't require follow-on investments. Your personal relationships, reputation and salesmanship
are the most important tools to raise capital at this level. Be careful; use your service professionals to help put together a good deal that can take on new professional investors in the
future without having to be completely restructured, and to keep free of securities law violations. Expect one to six months to obtain financing if you're diligent, well connected and
have something more tangible than just an idea.
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