Academic journal article New England Journal of Entrepreneurship

Entrepreneurial Financing-Alternatives for Raising Capital

Academic journal article New England Journal of Entrepreneurship

Entrepreneurial Financing-Alternatives for Raising Capital

Article excerpt

Most entrepreneurs are continually concerned about their finances. Their companies perhaps not yet profitable, they may have a fear of "running out of dry powder? These entrepreneurs often have fallen in love with their company's technologies, products, and potential markets, but they require more resources. Invariably these emerging ventures shroud their fear of the grueling capital raising marathon by presenting voluminous business plans to potential investors. They often flaunt their "optimized business models" Investors, however, typically want to know why the potential investment is such a good deal The entrepreneur often wants guidance regarding what to say to whom in a changing financing environment.

In this article, our "Practitioner's Corner" associate editor Joe Levangie collaborates with a long-time colleague Paul Broude to address how businesses should "make their capital-raising initiatives happen." Levangie, a venture advisor and entrepreneur, first worked with Broude, a business and securities attorney, in 1985 when they went to London to pursue financing for an American startup. They successfully survived all-night drafting sessions, late-night clubbing by the company founder, and even sheet shooting and barbequing at the investment banker's country house to achieve the first "Greenfield" flotation by an American company on the Unlisted securities Market of the London Stock Exchange. To ascertain how the entrepreneur can determine what financing options exist in today's investing climate, read on.

We start with a quiz:

January 26, 1983, a date that forever altered how startup companies went about the grueling process of raising capital. Was it:

A. A spectacular rise or fall in the prices of NASDAQ stocks?

B. A dramatic change in securities laws governing the sale of stock?

C. A seismic shift in the Federal Reserve Board's interest rate policy?

The answer is "D, None of the Above." January 26, 1983, was the day Lotus Development Corporation released its first version of Lotus 1-2-3®, encouraging would-be entrepreneurs everywhere to create 50-page spreadsheets that forecast the successful growth of their fledgling enterprises. The process of obfuscation was set in motion: too much data with too little meaning. Worse yet, entrepreneurs started to believe that these spreadsheets were the "truth!"

Keeping It Simple

Fast-forward to 2006: The numbers still count, but today's entrepreneurs need to have more-and less-than an extensive Excel® spreadsheet to raise capital. Across all types of financing-and we'll examine current trends in various capital markets-businessowners seeking capital need to focus on three core questions that define the business opportunity.

1 .What is the problem the entrepreneur is trying to solve?

2. What is the company's solution to the problem?

3.Who is the buyer for the company's product or service?

The concept of an "elevator pitch" is a bit of a cliché, but in reality it has become very difficult for companies to raise capital unless management can concisely identify-generally in five minutes or less-the market opportunity, its solution, and its customers. Most financing sources are less interested initially in seeing a 50-page business plan with full-blown financial projections than in a PowerPoint® slide deck that succinctly lays out why customers need the company's new product.

The entrepreneur should try to think about these three core questions in their most basic terms-the more easily the product advantages can be explained to potential customers, the easier they will be to explain to investors, and the more likely it is that these money people will grasp the opportunity. Two Boston-area companies illustrate this KISS (Keep it simple, Sid) concept.

* Embo-Optics, LLC, based in Beverly, Massachusetts, has successfully raised startup capital from friends and family and angel investors. …

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