Many emerging businesses are having a difficult time raising money in this post-September 11 economy.  First-time entrepreneurs usually lack significant personal resources. Bank loans are usually unavailable to businesses with no financial history; and venture capitalists, which provide less than 9% of all early stage capital, are an unlikely source of funds.

In fact, many venture capital funds now are spending an inordinate amount of time managing existing portfolio clients instead of seeking new investments. As a result, most entrepreneurs are now turning to traditional sources for seed-stage capital, namely, family and friends or angel investors.  This means that the entrepreneur will need to spend much more time thinking about the fundamentals of the business model and the needs and wants of the “angels” or other “investors who will fund it.  A “back-to-basics” approach to fundraising is now essential. This approach generally includes consideration of the following:

       Effective Teambuilding -- The entrepreneur has to understand that he or she cannot do it all. The entrepreneur should identify and utilize a variety of advisers and professionals (such as an accounting firm, business counsel, and patent counsel). Often, accountants and business counsel can provide an introduction to financing sources or professional advisors for the new business.  

Teambuilding requires a certain receptivity to the ideas of others and an acknowledgment that the talents of specifically and differently skilled individuals are necessary to grow the business. A part-time chief financial officer, for example, can assist with developing financial projections while a part-time marketing consultant could be tapped to help with the establishment of a beta-site or the launch of a new product.  Full-time employees in these areas may be added when circumstances and finances permit.

      Every Step That Is Taken Toward Creating a Financiable Business, i.e., a business plan, creation of management team, will enhance the entrepreneur's ability to raise capital.

         Financing Sources Often Have Specific Needs: Sensitivity to those requirements is absolutely critical - Different categories of and sources of financing are available, each with specific needs. 

For example, venture capitalists often invest only in a specific industry or market segment while looking for dramatic performance over a 3-5-year term.  (Indeed, most venture capitalists pursue less than 3% of all business proposals submitted.) 

Underwriters for an IPO, on the other hand, require the probability of dramatic near-term performance; the corporate strategic partner may be looking solely at the acquisition of technology or new customers; and the individual investor, friend or neighbor of the entrepreneur will place more emphasis on their warm feelings about the entrepreneur and his business than on immediate results. 

The entrepreneur should understand, for example, that some venture capitalists will not consider financing a proposal that is outside of their industry. Additionally, some venture capitalists with preference for a $5‑$10 million “first round” financings will reject a $2 million fundraising target because the size of the offering does not fit their usual proposal. Entrepreneurs must understand that just as they must target market their product or technology to customers, they must also carefully tailor their specific fund raising plans to attract capital.

         Financing to Benchmarks Is the Most Realistic Approach - Many entrepreneurs have a comprehensive vision for the development and marketing of their product or technology.  What most don't realize is that several rounds of equity or other financing are necessary to truly launch the business. 

Some entrepreneurs fail to pursue financing effectively because they perceive a need for more capital than might be necessary to satisfy near-term goals. The better approach is to estimate how much is needed to reach a business benchmark, i.e. the establishment of two beta-sites, the hiring of seven tele-marketers.  Entrepreneurs will find that they will give away less ownership (equity) with this approach while conveying to investors a sense of organized and measured growth.

         Knowledgeable Advisers Can Be Invaluable -- The entrepreneur's business counsel and accountant are often instrumental in raising money expeditiously on favorable terms. They can assist with planning and structuring investments, and in some cases, identifying investors.  Mailing out (either electronically or by more traditional means) 100 business plans to dozens of individual investors or venture capitalists, for example, is the wrong approach.  Such a mailing would fall within state laws (called "blue sky" laws) that have very specific requirements about soliciting business investments. 

The entrepreneur should consult his or her legal advisor before undertaking such an effort.  Additionally, such a "shotgun" approach is likely to be ineffective.  Many financing sources generally like to pursue only "qualified leads."  For example, in most cases, venture capitalists will weigh a proposal referred to them by a lawyer or accountant much more seriously than one that was sent to them without introduction.

         The entrepreneur may or may not use outside consultants or finders and he should be wary of any finder arrangement that requires a substantial up front cash payment to the finder for consulting or other services without a guarantee of results. Such arrangements are usually most effective when the finder's compensation is pegged to the amount of money raised. 

Additionally, the entrepreneur must consult with his or her business counsel to determine whether the finder should be a registered broker or dealer under state securities laws. Failure to comply with such legal requirements can prove devastating to the entrepreneur's future financing plans.

         Government and Non-Equity Sources of Financing Should Not Be Overlooked - Entrepreneurs should consult their advisers about other traditional sources of funds, including Small Business Association ("SBA") guaranteed loans, Small Business Innovation Research ("SBIR") grants, state venture capital resources, venture leasing arrangements, corporate strategic partners, and other investments that require a return of future royalties, for example.   

For example, SBA loans are generally made by banks in amounts up to $500,000 based on SBA guarantees of 80% or more of the loans; SBIR grants are available to fund technically innovative small business proposals geared to specific research and development needs of government agencies; and venture leasing usually involves an investor purchasing office and manufacturing equipment and leasing it back to the entrepreneur's business for cash payments or royalties.

      The Entrepreneur Should Pursue Financing Sources in Parallel, NOT Serially - Expressions of interest are just that until an agreement or letter of intent is signed.  Simultaneous discussions with different investors or potential strategic partners should be the rule, not the exception.

            Financing Sources Are Market-Driven - Not Technology Driven - Some entrepreneurs tend to get caught up in fine-tuning their product or technology, disregarding whether or not customers or clients will actually want (or want to pay for) the product or the "next generation" of the product.

Unlike the entrepreneur whose focus tends to be on the technology or the product, investors will focus on how the product will be marketed and sold and on what the target market or ideal customer is expected to be.  Entrepreneurs must have good answers to these basic questions.  Marketing - rather than technology - is more than 75% responsible for any successful financing.

            Building the better mousetrap is only the first step to starting a successful business. To take the idea or prototype from concept to development and on to sales and profit, the entrepreneur must take immediate steps to develop a financiable business.