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How do you raise money for a new business in tough times?
 

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Writing a Business Plan mentor Rhonda Abrams responds:
Looking for money for your new business? Good luck. These are tough times to be out there pounding the pavement.

Venture capital investment goes in cycles -- some years money flows freely; other times money is hard to get. For the last few years, we've been in a market when any good -- or not-so-good -- idea could raise a bundle. Now we're living with the backlash to those giddy days.

Some of this reluctance is merely psychological: irrational exuberance has been replaced by irrational gloom. After all, there's lots of venture money still around. By my estimate, about $250 million is being invested in new companies every day. Yes, every day. Many venture capital firms still have hundreds of millions if not billions of dollars. But the venture community has become more timid, and the types of enterprises they're willing to back more limited. They're funding a lot of what I call "plumbing" -- technology infrastructure companies: pipes, chips, networks.

But some of this reluctance is also real -- especially from "angel" investors. Angel investors are private individuals who invest their own money in new businesses. With the downturn in the stock market, these angels have seen the value of their portfolios shrink dramatically, and they're feeling a lot poorer and less eager to take chances.

So, if you're sitting there with a terrific business plan, where does this leave you? First, recognize it's going to be tougher than it used to be back in the good old days (last year?). Expect it to take much longer to get funded and expect to get a much lower valuation of your company (which affects the percentage of equity you'll have to give up for every dollar you receive). That's reality. You won't be able to drive as hard a bargain in negotiations.

On the other hand, there is some good news. If you do, indeed, have a terrific business plan, there's still a lot of money out there and very few deals funders feel comfortable with. If they like yours, there's a better chance you'll get a committed funder, able to provide add-on funds in later rounds and help you grow.

In these cautious days, what will make a funder more willing to take a chance on you?

  • Defensible new technology: When the going gets tough, the funders go to technology. If you've got patents, gee-whiz software or hardware, you've got a better chance of getting money.
  • Really great people: if you've got an absolutely top-notch team of proven, experienced entrepreneurs or technologists, someone will give you money. But I mean PROVEN management: it doesn't matter that you know you're wonderful, you've got to have an impressive track record.
  • Sales: Nothing takes the risk out of an investment as much as showing you have actual, real customers and dollars.
  • You're not in a segment they're scared of: No matter how good you are, how terrific your technology, some industry segments are considered untouchable right now. You're going to find it almost impossible to raise money for e-commerce businesses, for instance.

Answer Copyright © 2001 Rhonda Abrams

Last updated: Mar 29, 2001




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