"It was the best of times, it was the worst of times." This famous introduction by Charles Dickens sums up what entrepreneurs seeking startup capital are facing in 2012.
On the one hand, banks still aren't lending. And with the debt crisis looming over Europe and political uncertainty here in the U.S., there's an increased perception of risk for early-stage investors. However, record low interest rates, stagnant public stock markets and real estate, and weakening commodities prices offer investors few alternatives to achieve decent returns. This creates an opportunity for entrepreneurs in spite of all the challenges.
What does this mean if you're an entrepreneur hoping to raise money after the New Year? It means there is hope, even if there isn't a huge margin for error. Here are six important tips to hit the ground running with your financing efforts:
Structure your raise right.
External financing for startups usually comes from friends and family, angels (wealthy individuals), early-stage funds, or some combination of these sources. As you're planning for your raise, make sure you're structuring a deal that's appropriate for your prospective investors. Terms you should be concerned about include how much you're raising, whether the deal is equity or debt, what kind of rights the investors will be given, and the valuation. Be sure you're working with an experienced attorney, because mistakes in structuring a raise can have serious repercussions down the road. And don't be too aggressive on valuation; it's better to leave something on the table than price yourself out of a raise altogether.
Prepare key documents.
A brief slide deck summarizing your business is a must-have before starting due diligence. Make sure it describes the problem your company is solving, the addressable market, your progress, competitors, your team, and other relevant information. Slides are generally preferred over a written business plan for tech startups nowadays, but you should confirm if this is true for your industry. Financial projections are important to demonstrate that you understand how key inputs impact your business model; it's best to keep them simple and focus on the "big picture" rather than budgeting minutiae. I'd also recommend including a cap table and a term sheet to provide to prospective investors who express interest.
Put your network to work.
Entrepreneurs often tell me that they don't know anyone who can help them with their capital raise. When I press them further, 9 times out of 10 that turns out to be wrong. Anyone who's been in the business world for a few years has met investors, advisors, and other influencers who can play a role in syndicating a capital raise. But you can't get what you don't ask for. Successful entrepreneurs make sure their contacts know what they're working on and ask for help when they need it. Besides investors whom you know directly, ask your contacts for introductions; if they know you and respect you, they'll generally be happy to make them.
Meet new people.
While 4 out of 5 leads will probably come from networking, it helps to meet new people as you look for investors. Sign up for industry newsletters and read local blogs so you're aware of networking events. Introduce yourself to speakers and panelists who might be a good fit; try asking for their advice and see if they'd be willing to meet you for coffee before giving them the "hard sale." Try meeting people through online sites, including LinkedIn (try out their groups and engage in discussions), Facebook (Branchout lets you sort Facebook connections by profession), and my company, CapLinked (search for investment-related professionals by industry and role).
Don't break the law.
There's a lot of euphoria out there now about the potential for crowd-funding to ease restrictions on obtaining startup capital. But nothing has yet been signed into law yet. For now, make sure you're familiar with Regulation D, which governs who can invest in a private company. Reg D also puts strict limits on public advertising for private investment opportunities, so be sure that you're not soliciting investments on a public medium such as Twitter or your blog.
Start the process now.
Raising capital generally takes longer than most new entrepreneurs think. Networking to get in front of investors is a lengthy process, and investors will often take a long time to give you a definitive answer. So the sooner you get started, the better . Find a lawyer, dust off your Rolodex, and start working on that slide deck now. Also consider setting up a deal room on CapLinked to make document management easier, and include your company's advisors in the entire process.
Raising capital in 2012 is by no means a hopeless endeavor, but it will take hard work and persistence. Get started now -- and good luck!
A serial entrepreneur, Eric M. Jackson is the CEO/co-founder of CapLinked, an online service that gives companies and investors tools to network, manage a capital raise or asset sale, and exchange updates. Eric previously served as PayPal's first marketing director and is author of the award-winning book The PayPal Wars.
Follow Eric M. Jackson on Twitter: www.twitter.com/ericmjackson