Copyright 2006 Stephen Furnari

So you put your cash, ego and pride on the line and started
your dream business.  You have the business strategy that
will make you rich.  All you need is the cash to take your
business to the next level. Your plan is to look for
funding from venture capital firms (VCs) or angel investor
groups.  Not so fast.

VCs and angel groups are like the movie stars of the
financial world.  Stories about the “hot” VC market and how
VCs are virtually throwing money at companies sell
financial newspapers like Brangelina sells copies of US
Weekly.  The reality is, the average entrepreneur has as
much of a chance of closing a deal with a VC as they do
landing a date with either Angelina or Brad.

Here’s the scoop: VCs and angel groups fund as few as two
of every 2,000 companies they look at.  More and more, VCs
are acting like top tier investment banks and angel groups
are acting like VCs.  The competition for investor capital
is fierce and institutional style investors like VCs and
angel groups can afford to be picky.  Considering these
odds what can you do?

Many of my clients are emerging companies and early stage
businesses and have asked me the same question.  I have
been advising my clients to not waste any time shopping
their deal to VCs or angel groups unless they can answer
yes to at least three of the following questions:

• Do you, or does someone else on your management team,
have a proven track record building companies and taking
them through a liquidation event like an IPO or merger?

• Does your business have any revenues?

• Is your business in the “darling” industry sector of the
month?

• Do you even know what the darling industry sector of the
month is?

• Do you personally know anyone who is a venture capitalist
or member of an angel investor group who invests in your
chosen industry, or at least someone who can introduce you
to someone who does?

Instead, I have advised clients to raise money through a
self-directed private or public offering.  By using this
technique, you go directly to individual investors to
obtain the money you need to grow your business.

“That’s impossible,” you say, or maybe you do not know
anyone who can invest.  And while I agree that raising
money from individual investors is no simple task, neither
is getting a VC or angel group to write you a check, nor is
closing that big account, finding a deal with a big
supplier or recruiting a hotshot executive officer.  For
your business to be a success, you will need to sell your
product or service in the marketplace, and raising money
from individuals is not such a big stretch.   In fact, we
believe the average entrepreneur has considerably better
odds raising the funds they need from individual investors
than they do closing a deal with a VC or angel group.

The clients I have helped raise funds from individual
investors have experienced:

1.  Faster infusion of capital.  Searching for a deal with
a VC or angel group can take months.  The only time
limitation to raising money in a self-directed securities
offering is how hard you are willing to work.  The sooner
you get started, the faster you can raise funds.
Additionally, while VCs often invest in large sums at the
closing of a transaction, by going to individual investors,
you can “trickle” investment funds into the company quickly
to cover immediate expenses such as legal and accounting
fees, business planning, and research and development.

2.  Keeping significantly greater control of their company.
When working with a VC or angel group, you can often give
up a big chunk of your company.  Even worse, they may force
you to accept one or more of their board appointees with
whom you may not want to work.  Further, your ability to
take any material action, like change your business
strategy or raise additional capital, will likely require
prior approval from your new funding partner.  In a
self-directed offering, you set the valuation of the
company and the offering terms.  Accordingly, you will
likely give away less of your company and retain greater
managerial control.

4.  Rapid and exponential expansion of their professional
relationship network. Raising money from individual
investors requires meeting with many people.  Our clients
leverage the relationships they make while searching for
investors into an unlimited number of opportunities with
potential customers, vendors, investors and strategic
advisors.

5.  Keeping the deal terms simple.  VCs and angel groups
frequently require complex deal terms, including
convertible preferred stock with liquidation preferences,
dividend rights, anti-dilution rights and other terms that
can make doing deals more difficult in the future.  In a
self-directed offering, shares of common stock are
frequently the only securities that are sold, keeping the
capital structure of the company more straightforward and
easier to manage.

**Not a Time to “Play Securities Lawyer”**

Like most of my clients, I am also an entrepreneur. At
times I have been guilty of the entrepreneurial “I can do
it myself” bravado, usually to my detriment. Conducting a
self-directed offering is not something that you should do
without the guidance of an experienced securities attorney.
The offering will need to comply with federal and state
securities laws, and even the simplest mistake could cost
you tens of thousands of dollars to fix or could derail
your business for good.  **Can I pay someone to do it for
me?**

Generally, it is illegal to pay any person a commission or
compensation that is linked to the successful sale of your
company’s securities unless that person is registered with
the NASD as a broker or dealer.  Also, there are strict
rules relating to who can offer your company’s securities
to investors, how offers can be made and to whom.  Again,
make sure you resolve these issues with your lawyer before
you raise money.

The techniques used to raise funds from individual
investors are very powerful.  In fact, I helped one client,
the CEO of a software developer, raise over $10 million in
two years through self-directed private offerings.  My
client eventually left his company and leveraged his
experience into a job raising funds for a top tier hedge
fund.   Using the exact same skills he learned while
raising investment money for his company, he secured
$100,000,000 in offers from institutions to invest in the
fund. With determination, hard work and persistence, you
can do it too!

—————————————————-
Stephen Furnari is a corporate and securities attorney with
Furnari Levine LLP (http://www.furnarilevine.com ).
Stephen helps executives of young and growing companies
raise money quickly and efficiently so they can focus on
growing their businesses and accomplish their financial
goals.  He also teaches entrepreneurs how to protect their
assets and keep more of the money they make by avoiding
costly and avoidable legal mistakes.
To receive your free copy of the Target Investor Inventory,
a powerful tool to help you rapidly discover potential
investors within your professional network, contact him at:
sfurnari@furnarilevine.com.

This entry was posted on Saturday, October 21st, 2006 at 8:37 pm and is filed under Business, Business Thinking, Entrepreneur, Suppliers/Vendors. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.