For some entrepreneurs, the transition from an unfunded business vision to a capitalized business enterprise is seamless. Some entrepreneurs are intimidated by the task and struggle to raise capital for months or even years. What makes the difference between them?
Entrepreneurial vision is vital to the US economy and the global economy. However, overlooked business and securities disclosure principles often impede the process of raising capital.
To turn an idea into a profitable business, first-time entrepreneurs need to follow certain basic legal and business principles.
These key factors will help founders succeed, regardless of whether the economy is booming or stagnant. They are also in a better position to attract investment capital from investors such as angel investors, venture investors, strategic partners, accredited or mixed investors.
Prepare a comprehensive business strategy. A surprising number of entrepreneurs seek external validation before preparing a detailed business analysis. It is common to distribute an investment deck to potential investors. However, a business plan is necessary to address the investment case and validate the data used in a pitch deck.
Define your target investor. Entrepreneurs should have an idea of who their target investor is.
If the target investor for the offering is a venture fund, they will expect a capitalization chart with the price of the new shares or percentage of the venture capital funds available to investors as well as projected revenues and revenue growth. The offering could fail if investors don’t see an exit strategy, such as an initial public offer, sale of investors’ positions, or sale the company.
Venture capital investors will need to exit their investment within three to five years, with a return on investment. Investors are unlikely to invest if they don’t see a clear return on their investment.
Sell the consumer value proposition of the company. It is important to differentiate the company’s value proposition from the competition, if they have earlier entrants who offer a similar service or product.
Investors will be more interested in an investment opportunity if they can speak to potential customers, understand what their needs are, and identify any “painpoints” that the product or service addresses. Investors must understand the strategy of a business that creates a product or service without any existing customers.
Don’t underestimate the startup’s funding needs. Founders tend to underestimate their early-stage funding needs in order to conserve early-stage equity. Nevertheless, smaller amounts of capital may be harder to obtain in certain cases.
If you need modest funds, instead of selling equity, consider a promissory note or convertible instrument such as a simple agreement for future equity or a promissory note convertible to equity. Consider a convertible instrument or promissory notes instead of selling equity if modest funds are required.
Hire an experienced chief financial officer. The finance team will create projections and a model of valuation, which are critical to the success of a business. Investors will not trust a valuation model that isn’t based upon sound financial or accounting models. Investors are looking for someone who has experience as a CEO or comptroller in the industry.
Determine interest of investors. Following the JOBS Act, US federal securities law has been modified to encourage investment in early-stage ventures. In limited circumstances, and assuming that state law permits it, companies can make safe-harbor statements on social media or in public forums in order to determine whether an investor community is interested in learning more.
Companies can test the waters under certain sections of Securities Act of 1933 before finalizing a circular or pivoting in a different direction.
The current entrepreneurial landscape is a good time to reevaluate business strategies and avoid potential pitfalls when raising capital.
This article is not the opinion of Bloomberg Industry Group, Inc., publisher of Bloomberg Law or Bloomberg Tax, nor its owners.
Author Information
Rebecca G. DiStefano works in Greenberg Traurig’s global corporate practice, focusing on capital formation and securities law.
Write to Us: Guidelines for Authors