Get rid of VCs and Angel Groups: raise funds for your business on your own

So he put his money, his ego, and his pride on the line and started the business of his dreams. You have the trading strategy that will make you rich. All you need is the cash to take your business to the next level. His plan is to seek financing from venture capital (VC) firms or angel investor groups. Not so fast.

Venture capitalists and angel groups are like the movie stars of the financial world. Stories about the “hot” venture capital market and how venture capitalists are practically throwing money at companies that sell financial newspapers like Brangelina sells copies of US Weekly. The reality is that the average entrepreneur has about as much chance of closing a deal with a VC as they do of getting a date with Angelina or Brad.

Here’s the scoop: Venture capitalists and angel groups fund just two of every 2,000 companies they survey. Increasingly, venture capitalists are acting like tier one investment banks and angel groups are acting like venture capitalists. Competition for investor capital is fierce, and institutional-style investors such as venture capitalists and angel groups can afford to be choosy. Given these odds, what can you do?

Many of my clients are startups and early-stage businesses and have been asked the same question. I have been advising my clients not to waste their time buying their deal with VCs or angel groups unless they can answer yes to at least three of the following questions:

o Do you, or does anyone else on your management team, have a proven track record of building companies and taking them through a liquidation event such as an IPO or merger?

o Does your business have any income?

o Is your company in the “loved” industry sector of the month?

o Do you know what the favorite industrial sector of the month is?

o Do you personally know someone who is a venture capitalist or member of an angel investor group who invests in your chosen industry, or at least someone who can introduce you to someone who does?

Instead, I have advised clients to raise money through a self-directed public or private offering. By using this technique, you directly target individual investors to get the money you need to grow your business.

“That’s impossible,” you say, or maybe you don’t know anyone who can invest. And while I agree that raising money from individual investors is not an easy task, neither is getting a VC or group of angels to write you a check, closing that big account, finding a deal with a big supplier or hire an outstanding executive. For your business to be successful, you will need to sell your product or service in the market, and raising money from individuals is not that complicated. In fact, we believe that the average entrepreneur is much more likely to get the funds they need from individual investors than they are to close a deal with a VC or angel group.

Clients I have helped raise funds from individual investors have experienced:

Faster capital injection. Searching for a deal with a VC or angel group can take months. The only time limitation on raising money in a self-directed securities offering is how hard you’re willing to work. The earlier you start, the faster you can raise funds. Additionally, while venture capitalists often invest large sums at the closing of a transaction, by targeting individual investors, you can quickly “leak” investment funds into the company to cover immediate expenses such as legal and accounting fees, business planning, and research. and development.

Maintaining significantly more control of your company. When you work with a VC or an angel group, you can often give up a large part of your company. Worse yet, you may be forced to take on one or more of the board members you may not want to work with. Additionally, your ability to take any material action, such as changing your business strategy or raising additional capital, will likely require prior approval from your new funding partner. In a self-directed offer, you state the valuation of the company and the terms of the offer. Consequently, you are likely to give away less of your company and retain more managerial control.

Rapid and exponential expansion of your network of professional relationships. Raising money from individual investors requires meeting with many people. Our clients take advantage of the relationships they establish while seeking investors in an unlimited number of opportunities with potential clients, suppliers, investors and strategic advisors.

Keeping the terms of the deal simple. Venture capitalists and angel groups often require complex deal terms, including convertible preferred stock with liquidation preferences, dividend rights, anti-dilution rights and other terms that can make deals difficult in the future. In a self-directed offering, common stock is often the only security sold, making the company’s capital structure simpler and easier to manage.

This is not the time to “play securities lawyer”

Like most of my clients, I am also an entrepreneur. I have sometimes been guilty of “can do it myself” business bravado, usually to my detriment. Conducting a self-directed offering is not something you should do without the guidance of an experienced securities attorney. The offering will need to comply with federal and state securities laws, and even the simplest mistake could cost you tens of thousands of dollars or could derail your business forever.

Can I pay someone to do it for me?

It is generally illegal to pay any person a commission or compensation in connection with the successful sale of your company’s securities, unless that person is registered with the NASD as a broker or dealer. In addition, there are strict rules about who can offer your company’s securities to investors, how the offers can be made, and to whom. Again, be sure to work out these issues with your attorney before raising any money.

The techniques used to raise funds from individual investors are very powerful. In fact, I helped a client, the CEO of a software developer, raise over $10 million in two years through self-directed private offerings. My client eventually left your company and used his experience to land a fundraising job for a top-tier hedge fund. Using the exact same skills he learned while raising investment money for his company, he secured $100,000,000 in offers from institutions to invest in the fund. With determination, hard work, and persistence, you can too!