ECONOMICS:
A World of Opportunity

CAPITAL RAISING

i) The Capital Hierarchy

1. Reduce the amount of capital you estimate you need by re-evaluating your venture and product fundamentally and from the beginning. Every dollar you reduce is more equity for you. But you must actually reduce your capital requirement by redesign, still making conservative estimates of your requirements.

   Capital reduction is not just saying you "will get by with less" somehow. That is an invitation to disaster. Among many capital reduction strategies are the following:

   • lease, instead of buy, whenever you can
   • contract out everything but core functions
   • rent space only when no one will give you a spare basement, shed, warehouse or barn
2. Money from you, close family and friends. The amount must be large enough so that others know that your commitment is unquestioned and that you would walk away only as a last resort.
3. Wide circles of extended family, acquaintances and friends of friends.

   4. Suppliers may provide modest funding in the form of extended credit (sometimes freebies).

4. Angels. Angels are usually older affluent individuals who wish to provide start-up capital to no more that a couple of companies. They will often provide seed capital on the basis of your concept and plan, with no revenue yet. They expect equity and the opportunity to advise you, to use the expertise acquired over a lifetime. They expect a handsome profit but they equally wish to be part of an "exciting" new venture or technology. You offer them the chance to be young, one more time.
5. With a developed product and/or revenues, supplier credit is more readily available. Limited amounts of traditional financing secured by hard assets is possible.
6. As you grow you may access capital through "private placements" of equity with either interested companies who are suppliers, customers or allies or with venture capital companies. Hundreds of millions of dollars are ready for placement by Canada's venture capital companies, for the right proposal.
7. As you grow profitably, other sources of capital become available. It will be easier to borrow, and not give up equity share.
8. Eventually, many companies offer their shares to the public (an Initial Public Offering - IPO) though an elaborate and expensive process.

ii) How to Get Start-up Capital from your Brother-in-law

Many, if not most, small businesses scrape together their initial capital from family and friends and only then do they find it practical to approach other sources. Unfortunately, few business persons tackle their families with the same preparation and outlook they use on strangers. After all, what are family and friends for but to provide unquestioned support when it is needed.

However, while family members may automatically provide emotional support, they are far less likely to turn over the kind of cash that start-up capital involves. So if you approach your brother-in-law for financing on the assumption your sister owes it to you, you've made your first mistake. Herewith then are some suggestions to help you successfully raise capital from those close to you. Work at winning the support of family and friends

Treating your family as if their help were automatic can be so insulting you get turned down flat or they will provide minimal support at best. And inadequate help can be worse than no help at all. Far too many business persons have tapped their family and friends for a few bucks of start-up capital, only to plunge ahead on the entirely unwarranted assumption that further financing would be forthcoming as needed. Three months later the bailiffs are at your door and everyone's mad at everyone else.

You must approach your family by offering participating in a good business deal with a reasonable chance for substantial success. Yes, even to your family you offer profit. (By the way, if even your family won't buy the idea, you almost certainly need to rethink it.) Also, recognize that because most people tend to resist handing over their money, you're going to have to plan a market strategy to use on your loved ones. And you'll have to execute that strategy methodically.

Begin by identifying your most likely prospects

Approaching everyone you ever knew for money is usually a futile waste of time. If the word gets around, you'll end up looking desperate and a lot of people are going to avoid you. Accept the fact that even though you are going to offer a solid business deal, the ultimate decision will hinge on someone's intimate trust and confidence in you. So don't bother asking a casual friend, your father-in-law who hates you, or uncle Fred whom you last saw two years ago at cousin Martha's funeral. Instead, make an inventory of those to whom you genuinely feel close and don't restrict yourself to immediate family members. Include the brother-in-law you've always gotten along with, the cousin you've played with since kindergarten, that special friend.

The need for you and your backer to have a harmony of interests and attitudes is doubly important because you cannot seriously expect someone to give you a sizeable chunk of capital and then to retreat into the background for five years. Since you're inevitably going to have someone looking over your shoulder, it's better to have a confidant, rather than a busybody or worse, an enemy.

Next, you refine your list of prospects by estimating their financial resources. You need to separate those who would be only willing from those who would also be able. And remember that your initial guesstimate of capital needs is probably far too low.

It is also essential to make these evaluations based on the first rule for all investors: don't risk it if you really can't afford to lose it. So don't count your parents' only house as available to be mortgaged or grandpa's retirement annuity or your nephew's college fund. Be realistic and basing your judgment on career, age and lifestyle, decide who close to you have some thousands of dollars of easily-realizable cash to spare. Note, for example, that if you know a professional couple without children who live relatively modestly, you can suppose there's cash buried somewhere. Incidentally, an evening spent with the family story-teller (every family has one) might help ferret out some unsuspected treasure.

Tailor your proposal to the means available

Keeping in mind that you may need to tap more than one source, make a conservative estimate of how much capital might reasonably be available. Then construct your business plan and budget to suit this figure. Do not do it the other way around by fantasizing some glamorous business venture for which you "need" a million or so. On the contrary, you must be able to convince family and friends that together they can raise enough capital to establish a viable enterprise, without depending on outside help. That does not mean you ignore the possibility that after a period of successful operation you may approach others for help to grow; it does mean you plan a small business with enough capital to be able to stand on its own. In fact, unless you adapt your plans to what you can afford, your family should keep its bankbook tightly shut.

Make your pitch businesslike

Once you've constructed a solid business plan and set up your budget, you're ready to sell your proposal. But don't broach the subject over a couple of beers on the way home from the game. Serious people do not discuss serious money with dancers swaying in the background. So approach your brother-in-law in your own den with the TV off and the kids in bed. Have a ten-minute pitch about the basics of your proposal carefully rehearsed so you don't spend an hour rambling in embarrassment. After all, there is nothing to be embarrassed about: you're not asking for charity; you're making a business proposal.

At first you want to persuade your prospect only to look over the details of your deal. Since there is no advantage in talking about some' money, provide copies of your market estimates, exact capital budget and cash flow projections. (Naturally, if you're starting a business, you'll have that data.) It also helps if the figures are not on the back of an envelope. Finally, don't press your prospect for an immediate reply. Assuming that someone would commit thousands of dollars in a half hour conversation brands you as either an amateur or desperate.

Make sure you look for a partner

Although it is assumed that you will be the active head of the new business, it is still the wisest course to seek an investor, not a lender. You need your brother-in-law as an equity partner, not merely as a creditor. This allows your new, typically cash-scarce, enterprise the flexibility that comes without fixed interest charges and repayment schedules. Furthermore, since new businesses are rarely overnight successes, an equity partner has little choice but to hang in. A creditor of any kind, however, often panics at the first missed payment. And, of course, you can set up any number of contractual arrangements that would allow you to buy out your partners if the circumstances warrant.

Now sell the family connection

After you've presented a careful proposal that offers a reasonable chance for profit, your real selling job begins. Acknowledge to yourself and to your prospects that no matter how good your plans look on paper, it's still riskier than Canada Savings bonds. Therefore, you'll have to use your family's trust in you to compensate for the risk disadvantage and it cannot be just assumed that this family affinity will be strong enough to make the difference. You may then have to make this argument explicitly. Trust me, you will say.

Or sell the comrade-in-arms angle

A friend requires a somewhat different approach. You present your business proposal as you and your best friend in battle against the competitive marketplace that would destroy you if it could. That's a special feeling, you argue, which makes a tennis-on-the-weekend friendship pale in comparison.

Sell the thrill

Being in business is about making money, but it involves much else besides. It involves the zest of competition, the satisfaction of accomplishment, accession into the business elite, the promise of financial independence, the lure of freedom, the glamour of technology, and the heady power of commanding resources. Allow your prospect to feel that by supporting you financially, he or she too can enjoy the thrill of enterprise (with you doing most of the sweating).

Then return to the lure of profit

Finally, you clinch your deal by pointing out that nobody ever got rich by being someone else's employee. Except for a few senior executives of huge corporations, the vast majority of all employees can expect only a tolerably comfortable middle-class life. For something more you need to have employees working for you, to have your money working for you. This elemental appeal, set against the background of your previous approaches, will often be the final push that gets someone's chequebook open.

Get a firm commitment

Once you've landed a financial backer, make sure there's no doubt about it. Too many business persons get underway after receiving a positive response, only to discover later that it was merely an expression of moral support. Therefore, distinguish very clearly between That's a good idea,' and Great! What can I do to help.'

Also, if several capital injections may be necessary over time, make that explicitly understood. And emphasize that the pay-off is considerably into the future. That should help separate the committed from the mildly interested. The last thing you need is someone who gets you going and takes flight the next day.

The opportunities to enter business have never been greater. To do so, however, requires substantial equity, the kind that in the beginning only your family and friends can offer. If you approach them methodically, aggressively, and with sensitivity, you can raise it.

Next Section: Planning

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