Obtaining and securing financing is the first hurdle of any business start-up. Whether you are looking towards banks, venture sources, angel financing, or even from your wife or Aunt Gilda, the process of raising capital generally requires a specific sequence of actions. Understanding this process can really improve your chances for success.
Here are the six steps on how to raise capital for your small business:
1. Finding Investors
Without a doubt, finding potential investors for your business is the hardest part of raising capital. You may start within your family circles, your friends, your business associates and acquaintances. Then you can approach institutional sources of funds, such as banks and even the government. Once you find the right person or institution willing to finance your business, your business plan will do most of the talking. The first step should occupy about half of the entire time used to prepare and present a business plan. Most entrepreneurs fail to do this step well and, consequently, fail at raising capital.
2. The Approach.
During the approach, two things must occur. First, you should seek to reduce tension in your relationship with the venture source. While it may at times seem like an adversarial relationship, it is important to remember your goal is to make money together. Second, the entrepreneur should simultaneously be building a degree of task tension. As relationship tension is reduced, a reciprocal concern about building up the task at hand should occur. The venture source needs to invest capital, and you need to raise capital. Fulfilling your mutual needs is the task you must accomplish together.
3. Qualifying the Source.
After identifying potential sources of funds, the next step is to ask, “Why will they be interested in funding my business?” Every possible funding source has a “hot button” that you need to push for that person to agree with the deal. Not everyone invests in the same deals for the same reasons, as certain benefits among the features will be more important to individual capital sources than others. In fact, the same plan is likely to be supported by different people for different reasons. You need to identify the needs and reasons for investing of your potential money source. Study the fund source’s portfolio and needs.
4. Presenting the Business Plan.
The presentation of the business plan is an area that entrepreneurs can be expected to do well. They are so familiar with their product, having lived with it night and day, that they can always make a convincing presentation. However, the benefit to the potential investors is an element that should be sufficiently highlighted. Don’t dazzle investors with your knowledge of the latest technology or understanding of the market – stick to explaining the benefits of your business concept.
What is the perceived value of your product vs. what your product actually does? What are its features? Why will everyone need your product or service? What will it replace? What is it most similar to? What will happen to your customers if they don’t buy your product or service?
5. Handling Objections.
As an entrepreneur, you should always expect objection to your business plan – from the product concept, to your approach, to your marketing strategies, or any apparent weakness of your plan or your product. Some will also ask you, “What are you going to do that’s different, and how are you going to do it better than what is already being done?” In handling objections, the first thing to avoid is to be defensive. Instead, acknowledge the comment, and respond to the objection in a sincere way. Empathize with it, legitimize it, and then introduce new information to counter the objection. Occasionally, objections stem because they are only partially informed, but they are never wrong. Your job is to have all the facts on hand so you can turn the objection around — turn a no into a yes.
6. Gaining the Commitment.
If the first five steps are handled carefully, then gaining the commitment will be the easiest and least stressful step in the entire process. To gain a commitment, you need to close any objections your potential investors may have had and turn it around in your favor. Remember, your enthusiasm and “entrepreneurial fire” are two elements that most investors will look for.
Recommended Books on How to Raise capital for Your Small Business:
- Raising Venture Capital for the Serious Entrepreneur
- How to Raise Capital : Techniques and Strategies for Financing and Valuing your Small Business
- Angel Capital: How to Raise Early-Stage Private Equity Financing (Wiley Finance)
- Venture Capitalists at Work: How VCs Identify and Build Billion-Dollar Successes
- Pros and Cons of Financing a Business
- How to Raise Money to Finance a Franchise
- Why Investors Say “No”
- How to Raise Capital in the New Economy
- 12-Step Template to Write an Effective Sales Letter