Show Me the Money, Venture Capital Article

Capital

You can look for money in all the wrong places. Or you can take our quiz

Most business owners know when their companies need money. But it's much harder for entrepreneurs to judge what type of financing is most realistic for their businesses. The capital markets can be confusing for small-business owners, so it pays to do your homework before trying to raise money. If you're in the market for cash--or just want to start preparing for future capital needs--spend 15 minutes on the test below.

For the sake of simplicity, we've included some broad generalizations about the levels and types of financing business owners tend to require. You may not find an exact description of your situation, but the quiz should help you clarify your needs and identify some of the most appropriate sources of capital. It might even spare you some snooty advice or painful rejections from the wrong type of financier.

Directions: For each question, select the answer that best approximates your current business situation, even if the details of your case differ. (If you're torn between two choices, choose the option with fewer points.) Then add up the points from your answers. Once you have your score, look at "Where to Look for Money," at the bottom of this page.

Quiz

What Kind of Capital Should You Seek?

l. How much cash does your company need?

a. Anything would help. I can't pay myself or the landlord right now. (5 points)
b. We've got a great product or service. Now if we just had $10,000 to $25,000 to help fund some of the additional expenses of growth... (10 points)
c. For our business to keep expanding,we need additional capital to purchase this piece of machinery or real estate--somewhere between $50,000 and $200,000. Otherwise, we can manage just fine, thank you. (15 points)
d. We're ready for hypergrowth; to really rev up the engines we need something between $500,000 and $5 million. (20 points)
e. We've already made the Inc. 500, and our next goal is the Fortune 500. With the kind of opportunities we face, the sky's the limit on money raising. Besides, after everything our company has achieved, we deserve a reward. (25 points)

2. What can you offer investors or lenders?

a. Eternal thanks (5 points)
b. A three- to five-year repayment schedule, with a competitive interest rate--and my personal guarantee (10 points)
c. Plenty of collateral and a history of paying off my loans on time (15 points)
d. Stock warrants or interest now--plus the chance for a big payoff in a few years, when I buy them out, do an initial public offering, or sell the company (20 points)
e. A chance to own stock in the next Microsoft (25 points)

3. Is your company's financial house in order?

a. Do you mean the shoe box that holds all my personal and corporate receipts? Let's see if I can find it. (5 points)
b. We've never had an audit by a certified public accountant. But our bookkeeper is pretty diligent about tracking cash flow. (10 points)
c. With help from our new financial officer (or our new CPA), we just upgraded our financial controls and software. (15 points)
d. We recently moved up to a big-name accounting firm, and we get audited annually. (20 points)
e. Our key executives receive daily, weekly, monthly, quarterly, and annual financial reports, tracking every financial ratio we've ever heard of. Does that answer your question? (25 points)

4. Investors and lenders may scrutinize your personal finances as closely as your company's. How would you describe your personal financial condition?

a. I've poured everything I have into this company. Do bankers really care if I can't afford to pay myself yet? (5 points)
b. My paycheck is small, but at least the company pays regularly. I've got a few assets outside the company, so a banker might value my personal guarantee. (10 points)
c. Now that the company's finances are stabilizing, I'm finally able to start giving myself raises and bonuses. I'm building up assets. (15 points)
d. I'm doing well, thank you. My salary is comfortable but not so high that it will ever irritate the IRS or a potential investor. (20 points)
e. My paycheck is niiiiiiice! And nobody's going to persuade me to take a dime less. With profit margins like ours, why should I? (25 points)

5. How comfortable do you personally feel about raising capital?

a. It's preferable only to jumping out of a 30-story building. (5 points)
b. I can't say I have much experience raising money, but I do have a lot of confidence in my company's prospects. (10 points)
c. I persuaded a local banker to give me a credit line, so I guess I'm ready to tackle whatever comes next. (15 points)
d. Our company has a solid banking history. I've come to think of investors and lendersas just another type of potential customer--and I know I can sell anything. (20 points)
e. I'm raring to go. Anyone would be lucky to get a chance to invest in a company with this track record. (25 points)

Where to Look for Money

Raising capital for an entrepreneurial company usually isn't easy or fun. Neither is rejection.

To maximize your chances of finding the financing you need while minimizing the number of painful rebuffs you'll face, start with the capital sources that best fit your category, listed below. If your answers place you near the border of two categories, be sure to investigate both, with some guidance from your accountant and your lawyer.

25 to 40 points: Sorry. You're not really ready to tackle the formal capital markets. You could always try maxing out your personal credit cards, but that's a risky way to go. Your best bets are family and friends.

45 to 65 points: You're probably taking your first steps into the capital markets, but those first steps can sometimes pay off. Try a microloan program if any nearby banks offer one, or apply for seed capital from regional nonprofits with economic-development goals.

70 to 90 points: If you have a good banking history and some basic financial controls in place, you've probably got real options, especially if you're seeking a loan that can be easily collateralized. To increase your chances of successfully shopping for low rates and attractive terms, concentrate on banks with a strong interest in supporting your industry. If your company continues to prosper, your next step might be a well-heeled angel investor.

95 to 115 points: You and your company sound like the kind of entrepreneurial package private investors gravitate toward. So take an aggressive stand about seeking the kind of financing that meets your long-term goals. Private-placement deals offer a lot of flexibility and the potential to stay private if that's what you want. If you're interested in a future initial public offering, consider an association with a top-quality venture capitalist.

120 or 125 points: If your company's really as great as you say it is, you'll stand your best chance of raising a fortune by going public. Conduct a reality check first by consulting top-quality underwriting and investment-banking firms to make certain your corporate history, earnings potential, and personal style will get you the payoff you expect. Keep both your ego and your compensation in check, lest you alienate potential investors.