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3 Tips for Startups Raising Capital

January 15, 2014

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Last week I wrote about mistakes that Startups make when raising capital. Now, I want to shift the focus to what Startups should do; not what they should avoid.

These tips differ from most of the advice that I give in that they aren’t strictly legal advice.  But, 25 years of being around Startups has taught me a thing or two.

1.       Raise Money Before You Need It. This may seem wrong at first blush.  Raising money takes a lot of energy and effort and when you have money, you tend to think that you’d be better off working on research, product development or marketing.

But here’s the thing: when you need money badly, investors can smell it…and it doesn’t smell good. When you have money, investors want to give you more. This may seem counterintuitive, but it’s true. Take a look at public companies. Who has the easiest time raising money (and pays the lowest interest)? The cash rich companies. Private fund raising is no different.

2.       Dumb Money is as Green as Smart Money. Smart Money is money invested by Venture Capital funds, Private Equity funds and the like. Dumb money is money invested from friends and family or other investors not part of that industry.

The VC world will talk about Smart Money and the value that they add to your enterprise ad nauseum, but remember when you need to pay the rent, the Landlord doesn’t care where the money came from.

Furthermore, Smart Money tends to meddle a lot more. After all, they are Smart Money. And why are they smart? Because they have a fund. But, the “how to run a  business” advice you get from the VC associate who just graduated from Wharton may not be as good as the advice you get from your Uncle who built a small real estate empire.

3.      Treat Investors like Customers. The same holds true for potential investors and the ones that passed on investing. I’ve seen a lot of  companies that don’t communicate with their investors, let alone those who passed on investing. But, they’d never do this with potential customers.

When a customer reaches out to a company with a good sales and marketing structure, they never lose contact with her. They send her announcements, updates, newsletters, blog posts, etc. So why would you treat your investors or potential investors any differently?

Sometimes entrepreneurs are timid around their investors because their projections haven’t come through. But, the solution for that is not to hide. Face up to the reality and let your investors know the truth. Spin it as best you can, but communicate. You owe that to your investors. In the long run, a prolific and thorough communications policy with your investor will inure to your company’s benefit.

Avrum Aaron, a 1994 graduate of Columbia Law School, is the COO of Legal Outsourcing Partners, LLC. He can be reached at 201-379-9230 or avrum@lop-llc.com.

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