This article, that I co-authored, was republished on Corporate Finance Law 360 in October 2009 (http://www.Law360.com). It was originally published in Minnesota Business

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Raising Capital In A Down Economy Can Be Done
Law360, New York (October 21, 2009) -- Today, the press and investment community
regularly announce that “no capital is available.” But there is hope. Entrepreneurs who
focus on the basics and go beyond the traditional steps of a capital raise with research,
rigorous diligence, modeling, business plan and the “pitch” can be successful. Today’s
capital-raising process requires entrepreneurs to focus on these important points:
Develop Good Habits When You Form Your Business
Investors are looking for businesses that control their cash expenditures, often called
the “cash burn rate.” They are looking for lean businesses (i.e., able to moderate
expenses) that will survive over time.
Business owners seeking capital create credibility by stretching every dollar and frugal
behavior is often rewarded by investors. A long-term, detailed business plan that
demonstrates a clear path to profitability with worst-case, best-case scenarios and
highlights upside potential, is a necessity.
“No Prisoners” Mindset with Realistic Timeframe
Most entrepreneurs underestimate the amount of time needed to raise capital. In
today’s environment, that time frame is stretched and it is feasible that it could take
anywhere from six months to a year of “hitting the pavement” to ensure a successful
outcome.
An absolute commitment to succeed is essential and refusal to fail is imperative —
particularly with respect to identifying potential investors. Keep in mind that in today’s
market, the rejections will increase, but it usually only requires a few acceptances to be
successful. Think of the process like a funnel — 100 investor contacts, 25 request
additional information, 10 meetings, three discussions about term sheets and one
investor.
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2. Focus On Integrity and Analysis of Your Value Proposition
The marketing process remains essentially unchanged. Investors continue to look for
companies that are realistic about their value, as well as companies that lower costs,
create efficiencies, create savings or exploit a niche, or a combination of each of these
items.
More than ever, investors are looking for companies with solid fundamentals.
Entrepreneurs who highlight the unique attributes of their business and the innovative
aspects that set their business apart from other investing opportunities are at an
advantage.
Avoid disingenuous proposals as those claims will kill a presentation almost as fast as a
spendthrift or nontruthful founder. Articulate the assumptions driving your future
financial statements, which gives an additional level of credibility and comfort level to
investors.
Lastly, what investors are really looking for in entrepreneurs is the ability to ”under-
promise” results and “over-deliver” on those results.
Ask For Assistance
Business advisors and luminaries often can assist in opening doors and pointing out
potential pitfalls of your business plan as well as lend credibility to your capital raising
efforts.
Legal, accounting and investment banking professionals have extensive capital-raising
experience, which will create a good sounding board as well as prove crucial in
providing unbiased advice and alternatives.
Keep an Open Mind
Right now it is an “investors market” and businesses may need to accept
unconventional alternatives to successfully raise capital.
Whether it is an equity line-of-credit, multiple liquidation preferences, participating rights
or convertible bridge financing priced on future financing rounds, alternatives have to be
considered and businesses should focus on attracting the right investor.
Many entrepreneurs have become enamored with valuations from a year or two ago.
However, don’t get locked into transaction-specific structures or valuations as it will
likely be a “turn off” to potential investors.
Investors now have the leverage, and with a little bit of creative negotiation and drafting,
transactions can be completed. Keep in mind that often the structure agreed to can be
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3. revised at a later date or adjusted once the environment changes and the business is
performing as promised.
Be Enthusiastic and Persistent
Enthusiasm and persistence are infectious. These traits appeal not just emotionally, but
also intellectually, to prospective investors. Most astute investors know that these traits,
when combined with focus, can often save a business in difficult situations.
Highlight your traits and don’t back down until it is clear that your efforts are best utilized
elsewhere. Many great businesses have been and will continue to be built during
challenging times. There’s still money out there, it will just be hard won.
--By Philip T. Colton (pictured), Winthrop & Weinstine PA, and Robert B. Castle,
Northland Securities Inc.
Philip Colton is a shareholder with Winthrop & Weinstine in the firm's Minneapolis office
and chairman of the firm's securities and finance practice group. Robert Castle is
managing director with Northland Securities in the firm's Minneapolis office and leads
the firm's technology and financial services investment banking practices, as well as
heads public equity origination for the firm.
The opinions expressed are those of the authors and do not necessarily reflect the
views of Portfolio Media, publisher of Law360.
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All Content Copyright 2003-2009, Portfolio Media, Inc.