One of my friends, who is also a client, has been going through a difficult period with his business recently.

Its a start up, and it is still very early on in its evolution, and it is entirely self-funded. There are revenues, but not enough to cover overheads yet. In a business that is self-funded where your net profit isn't covering
your overheads it is inevitable that you will go out the back door at
some time.

So he has been trying to raise money.

Of course, the global financial markets have made a lot of people very nervous about investments that are high risk, and any business where there isn't positive cash flow is inherently high risk.

So what do you do?

As they said in “Hithiker's Guide To The Galaxy” – Don't panic!

The obvious thing that my friend has to do, which he has a problem coming to terms with, is to understand that his valuation is off for the amount of money that he is trying to raise, and for the risk profile of the business.

He has been trying to raise enough cash for the business to be operational until his planned point of profitability – approximately 2 years. In the current climate it is just not reasonable to expect people to take that level of risk.

My advice to him was to wind back his overhead as much as possible and get clarity on what his overhead is going to be quarter by quarter over the next year, and what his sales targets are going to be over that same period, and then to raise enough money to last for the next two quarters. I explained to him that the investors who are going to get involved in a bridging play such as the one that he needs are likely to want to come into the company at a huge discount to the valuation that he is trying to prop up, but that survival is more important at this stage than a fictitious number. (I learned from a good friend who has been in the M&A business for years that a share in a business, like a house, is only worth what someone will pay on the day).

My buddy wasn't too keen on this advice for several reasons – 1. He didn't want to deal with the possibility that his company isn't worth the number that he has put on it. (And that by the way has got to be one of the reasons that he hasn't been able to close an investment). 2. He didn't want to deal with the prospect of having the distraction of continuous fund raising over months and months.

My response to that: Welcome to the real world. In the real world what you absolutely need to do, when raising money, is to understand that most shareholders don't invest with a view to seeing the business turn into a profitable business at some future time at which point they will be able to make money from the sale of the business at a significant value uplift. They want to see value uplift all the time. They get to see that by seeing that new money is coming into the business at a higher price per share than they paid in the first round. Everyone is a momentum investor nowadays. And everyone expects that the entrepreneur is going to need more money than he or she could have possibly imagined at the beginning.

So the big rule for entrepreneurs – and I see them making this mistake again and again – is to understand that when someone has their cheque book out, just get them to write the cheque. And give them a share in the business.

Then your question is not how much money would you like to raise, but how much money do you absolutely have to raise in order to keep going for the next quarter. And what are you going to do with that money to enhance value in the business and reduce risk? Because if you can achieve those objectives you are going to find it easier to raise money the next time.

This is the reason it is so important to have a written business plan. For people who have done this sort of thing time and time again, the tactical objectives may have become locked into their dna. For people who are building significant sized businesses, and who need substantial amounts of working capital that they can't supply themselves, a business plan is essential. It crystallizes the objectives and will enable the shareholders to hold the entrepreneur's feet to the fire.

Fund raising is hard work, but it is fun once you get the first closes in place. That's why its always useful to target family and friends first. They are more forgiving when you lose their money. But you are always going to try harder to NOT lose their money…

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