Financing an early stage company

by John Leighbody

There are numerous definitions of an early stage company, but the common factors are as follows: the company has raised initial seed money, it has a product or service that may or may not be ready to go to market, and the company is probably less than three years old.

In other words, the company is looking for financing to achieve a positive cash flow within a period of months. The questions for the founder or founders of the company are, "Are we in a position to begin raising money?," "How do we begin the process?," and "Where do we go for funding?"

In order to be positioned to raise funds you will need the following:

* A concise business plan on how you are growing the business over the next 24 to 36 months

* Size of the market and how you are different

* Strategy you will implement to achieve your objectives

* Financial projections for this time period

* The amount of money you want to raise and the source and use of these funds

* Overview of management team and outside advisors.

* Are you looking to raise debt, equity or a combination?

Many company founders do not, understandably, have the expertise to write a business plan. If this is your situation, ask your lawyer or accountant for a recommendation. Please be advised that this process will cost you some money, but it is money well spent.

Once you are properly positioned to raise funds, you can begin the actual process of raising money. One way would be to do it yourself through on-line research, funding seminars, and symposiums to present your business plan to potential investors. Expect this to take considerable time and be prepared to feel emotionally drained and discouraged at times.

If you are not comfortable doing it alone, talk to your lawyer or accountant and bring them up to speed on where you are in your funding quest. They can give you recommendations to companies that specialize in raising capital or can provide you with resources within their firms.

If you choose to hire a consultant to assist you, discuss their fees. Most firms require a monthly retainer and a percentage of funds that are raised. Typically, the fee on funds raised is 2.5% to 3% for debt and 4% to 5% for equity. If the firm you are speaking with charges more than these rates, continue looking!

While there is plenty of pent up money in the marketplace, please understand that raising funds is difficult and time consuming. One of the most common mistakes we encounter is that most owners do not ask for enough capital. Oftentimes it is actually easier to raise a higher amount than a lower amount, because there is actually less competition for funds higher up the ladder. This is why it is critical to make sure you have your sources and uses on target.