Small Business: Raising capital wisely
Raising capital can be expensive, particularly for early-stage companies.
Investors can require a significant stake in a company in exchange for financing. So it can be a difficult balancing act trying to finance your start-up and not give away too much of your business, say experts.
"The first influx of capital is usually the most expensive, so you'd better choose wisely," cautions Andrew Hazen, a "serial entrepreneur," attorney and founder and chief executive of Angel Dough Ventures in Hicksville, which has more than a dozen companies in its portfolio. "Otherwise, you might get stuck with the wrong investor and not have enough equity left to incentivize future investors."
Some investors can take upward of 60 percent equity in your company, says Hazen, who has taken stakes from 5 percent to 65 percent in companies he's funded and has given up 10 percent to 52 percent ownership in his own start-ups.
Before seeking equity financing, try other sources, such as loans from family and friends or more traditional lenders.
"Only about 6 percent of small businesses in the U.S. actually take in angel or venture capital," says Monica Mehta, a managing principal at Seventh Capital, a Manhattan-based investment firm, and author of "The Entrepreneurial Instinct" (McGraw-Hill; $25). More small business, she says, is financed by credit cards.
Take a step back and assess whether your business is a high- growth start-up, she suggests.
"If you can't show astronomical growth . . . it's probably not appropriate for a venture capitalist," Mehta says. "Angels" or high-net-worth individuals may be more willing to take less equity at times, but even they want a return on their investment, she notes.
When seeking an investor, look beyond the money and think of it as getting a business partner, says Jeff Bussgang, author of "Mastering the VC Game" (Portfolio; $25.95) and general partner of Flybridge Capital Partners, a venture capital firm with offices in Manhattan and Boston. "Look for value-add," he advises.
In fact, you could be giving up equity not just for money but perhaps for a beneficial strategic alignment, says Hazen, who has done this in some of his own ventures.
For one of his newest start-ups, BagelOfTheMonthClub. com, he gave up equity to align himself with Bagel Boss. They produce the bagels, and he handles marketing, sales, public relations and customer service.
KNOW YOUR VALUE
The amount of equity you'll be asked to give up depends on a variety of factors, including what stage your company is at (is it pre-revenue, etc.), its market position, uniqueness, and the track record of its founders, says Hazen.
For starters, it's good to have a reasonable valuation of your company so you can demonstrate to investors you have a realistic approach and can give up the right amount of equity accordingly, says Tyler Roye, CEO of Hauppauge-based GroupGift ing.com. Roye has raised equity financing in his past businesses as well as for GroupGifting.com, which developed eGifter, a social gifting app.
You could value your business on some multiple of earnings with a factor for growth rate, or by comparable deals on similar companies sold, and/or other commonly accepted methods, he notes.
Investors will challenge your valuation, so be prepared to defend it, says Roye.
Come in understanding how much capital you really need.
"Stage your financing needs relative to the milestones you are trying to achieve," says Bussgang. You might raise a small amount initially to achieve a few targeted milestones, requiring you to give up less equity early on.
And be sure to choose wisely. "Taking money from a professional investor is like hiring a boss you can't fire," he says.