One of the biggest obstacles for entrepreneurs is raising funds for their ideas. But many small business owners overlook possible capital sources or just go about attracting investors in the wrong way, according to corporate attorney Alonzo Llorens, author of The MBE’s Guide to Raising Capital, a financial guide explaining the various stages of the capital raising process and the steps Minority Business Enterprises should consider. Llorens, who is a partner with the national law firm of Gordon and Rees LLP in Atlanta, offers some tips for new business owners in need of financing.
TNJ: What does it take to raise capital?
Alonzo Llorens: Raising capital primarily requires a few things:
First, the company must have a business model that is attractive to investors. Second, the company must do its homework and know the investors that invest in its particular industry and at its stage of development. Finally, the company must be prepared to persevere throughout the process, as it can be long and challenging at times.
TNJ: Where should people look for sources of capital?
AL: I recommend that companies begin with their service providers (e.g., their accountants and attorneys). Typically, these professionals know the industry and have relationships within the investment community. There are also networking events where investors meet with companies that are looking to raise capital. Finally, the company can consider retaining an investment bank to help it raise the capital.
TNJ: Share with us the top five tips on sources of capital that people might overlook?
AL: The Top 5 are:
1) Angel group – many angel investors are also members of angel groups, which are multiple angels that are part of a group that make investments in deals on a joint basis.
2) Small Business Innovation Research – these are government programs that fund companies in various industries.
3) Incubators – these are programs where startup companies have an opportunity to physically house their operations in a location that provides it with the support it needs to grow and often include a small investment as well.
4) State venture funds – these are venture funds operated by the respective states.
5) Community Development Venture Capital Funds – these are venture capital funds that have an obligation to invest in certain geographic areas and with certain groups that have been disadvantaged in the past.
TNJ: How can entrepreneurs position their companies to lure capital?
AL: First, create a solid management team. Second, position your company with the right people to assist you in meeting individuals within the investment community. Finally, check your emotions at the door. In negotiating these transactions, you must understand that this is a business transaction that, at the end of the day, is intended to help your company grow. Once you accept someone else’s money, you have a responsibility to your shareholders as well.
TNJ: What are some mistakes people make when trying to raise capital for a new venture?
AL: First, not understanding the relationship between the value of your company and how much money you’re trying to raise. Also, not understanding that once you begin to raise capital, the company’s corporate governance structure becomes even more important. Lastly, providing financial projections that are unreasonable.