Israeli Ventures

BME Capital Management

 Tips on Raising Capital for a
  Start Up Business

                                                  Written by Dr. Gideon Tolkowsky

equity capital investment

1. When asked how much equity investment  you need in order to get your venture off the ground, E.g. to reach cash break even (Or when specifying this figure in your business plan, always ask for at least twice the amount of capital you think you need (preferably thrice). 
The main reason is that entrepreneurs, by definition are optimistic people who tend to underestimate the difficulties that await them (Or else they would not start at all). yet another reason is that entrepreneurs typically fail to realize that marketing is much more expensive than product development. Consequently, they grossly underestimate the capital needed to bring the product to market once it’s available and to expand revenues to a satisfactory level. The result is that entrepreneurs, while raising capital ask for about a third of the capital they really need this is a mistake because they will find themselves having to repeat the huge effort of fundraising sooner than they would have liked.

2. You should always try to sell to investors just one project at a time.
You must keep them focused, interested and relaxed.
 A typical mistake, that fundraising entrepreneurs often make, is trying to raise capital for more than one project at a time. Entrepreneurs, by definition, are creative people. Often at the same time an entrepreneur is trying to start and build one particular project, then one or more other creative project bubble up in his/her creative mind. Then, when the entrepreneur starts raising capital, then, at the end of a meeting with a prospective investor, when everybody stands up and start walking to the door, the entrepreneur would say: "Wait, I have another project that I want to show you and you may like"! This is a big mistake. 

3. Don't bring with you to fundraising meeting too many people. 
You may bring one or more co-founders, so as to better familiarize the prospective investor with the founding team. Just don't bring with you advisors, fundraising brokers or all sorts of experts who know the start up's field of activity. Otherwise, the fundraising meeting will turn too crowded, unfocused, and unmanageable. A large delegation from the start up's side will make the prospective investor feel under unnecessary pressure.

4. Beware of Bridge financing. 
When a start up runs out of the funds it raised in its first round(s) of financing, the entrepreneur heading it faces a need to launch another fundraising effort. In doing so he/she would naturally approach investors who have already invested in the company as well as new ones. The entrepreneur then often encounters the concept of " bridge financing" This is the idea of providing to the company just the amount of capital it needs to reach its next meaningful operating milestone (such as successful completion of a beta-site for a new product or FDA approval of a medical product This with the hope that achieving the said milestone will significantly raise the company's value. The idea of bridge financing is to risk the minimal amount of capital in order to reach a valuation-raising event. Thus presumably giving a good deal to the investors providing the bridge financing. The problem with bridge financing is that it often turns into "pier financing" that is to say that it brings the company once again to a point where it's out of money and once again needs to raise capital. This time if it fails to raise all the capital it will have raised until that time, including the bridge financing, is lost and the company dives into oblivion, hence the term" pier financing".

5. Prepare the right documents.
Another fundraising issue is that of documentation. Which documents should the startup under question prepare prior to launching a fundraising effort? 
First and foremost is a comprehensive business-plan. a quality business plan is absolutely critical for investors, as it sheds light on the quality of the founding team (read more about writing your business plan). Then there is an executive summary, which is the first document that the entrepreneur should send to a prospective investor prior to a meeting. The executive summary should summarize ALL aspects of the business-plan and had better be no longer than 3-4 pages, or else nobody would read it. Entrepreneurs also like to compile slide presentations that present the company in a visually attractive way. This is generally a good idea. But such slide presentation had better be no longer than 15 slides. No meeting is long enough to show 40 slides, and if it is, the, everybody fall asleep in the darkened presentation room.