Raising capital

Hello again and welcome back. I'm Ed Addison with NC State University. This series of talks is on managing new product launches. This is Session 9 on raising capital.

Raising capital is a complicated subject and it involves many things. This session will be an overview of things that people who develop products need to do to raise capital whether internal or external. First, I'm going to talk to you about preparing and sending your business plan. This is to be done before you have your presentations. Typically an investor will ask for a pitch deck sometimes an executive summary, not usually a full business plan.

The materials that you need in order to raise capital are listed here. You'll need a cover letter that you'll adapt to each investor that you reach out to. You will need an executive summary and a pitch deck. Some investors prefer to see an executive summary first. Most prefer to see a pitch deck first. You'll need a full business plan however, it's not usually asked for at the pitching stage. It's often asked for during due diligence. If you don't have it that could be an impediment after you have succeeded in attracting an investor. You'll also need a product description or a technical pitch because usually the second meeting asked for after showing interest from an investor is more detailed information or a deeper dive on your product.

There are many sources of capital and it's important to be familiar with the range of available sources of capital. Not all businesses are suited for venture capital in fact 97% are not. So, let's talk about the sources of capital and how you can obtain that capital. The best kind of capital is revenue. It doesn't cost you any equity and it's proof of your business to the extent that you're able to go after early sales sales from early adopters and sales from corporate partners early on in the game. This gives you credibility and it gives you cash. The downside of that is you may have to do it without being paid until you get your first customer landed, but in the end of the day it's going to help you if you delay raising dilutive capital A second source of capital is government support. Small business innovation research or grants or grants from foundations. These are also non dilutive capital and these sources of capital tend to come in earlier than investors do. The downside of grants is that it's hard to get them. If you write a proposal you might have a 10% shot if you do a good job depends on who you wrote the proposal to. The other downside is it often takes anywhere from three months to a year to get the money in your hands from the time that you write the proposal. So, to the extent that you can get this source of capital, it's an excellent source of development money and early stage money. But you can't rely on it totally unless you have another source of capital along the way because there are gaps and delays in acquiring these sources of funds. Third source of capital is what I'll call F, F, and F. Friends, family, and fools that's tongue in cheek, but this source of capital is often the earliest source of capital for a novel business. If you're talking about an external business. If you're talking about a business internal to a large company instead of F, F, and F, you'll go to your R&D manager and look for internal R&D money. Which is the corporate version of friends and family. This is the earliest money. You won't get a lot of money in this category, but you'll get some seed monies to get to the initial starting point. Sometimes you can use this to cover your period of time while you're selling the first two capital. Then there's angel investment. Angel investment is the word angel is used to denote typically a cashed out entrepreneur who wants to stay in the game and has plenty of money. These investors are hard to find when you get one, they're very nice to have. But there's a second category of angel investor and that's more the wealthy individual doctors and dentists and professionals who make a lot of money who would like to put 25,000 or $50,000 into a venture. This latter group is typically will invest through private placements or through crowd funding sites or through angel groups. Angel investment sometimes comes from angel groups which are like venture capital groups, but it's just to syndicate angel money for individual deals. These angel groups have companies come to present to them at each meeting that they have. The downside of the angel group is that there are hundreds of companies clamoring for only a few speaking slots. It's very difficult to get in. Then there's venture capital. These are formal funds. Typically venture capital is a source available to you after revenue begins after you've proven your product and proven that people will buy it. Venture capital is not for everyone. Venture capitalists like to get in and out fairly quickly as typically five years. They like a high return. They like tech products more so than low-tech. They're looking for unicorns which means that they're going to put in a little bit of money and make a huge return. As said previously, only about 3% of startup companies are really good fits for venture capital. If you're not in that category, then it's best to rely on all of the previous sources of funding that I mentioned.