Are you an entrepreneur with a great idea, a carefully-produced business plan and a first-rate team, yet you’re having difficulty raising a substantial amount of funds? No matter how promising your business, if it is in a field that is not a typical one for venture capital investors, your route to getting funded may require some additional steps.
If your business is not an app or a website or a life sciences one, and particularly if it is a capital-intensive one such as manufacturing or machinery, many venture capital firms may hesitate to invest simply because your business does not match prior investments. If so, here are some ideas as to how to find funds.
1. Find a Chief Financial Officer (CFO) with industry experience
You might think that your business is too small to need a CFO. However, a CFO’s skills and contacts are invaluable for raising funds. A CFO’s principal responsibilities include finding investors and closing investments, so a CFO who has a lengthy career in your industry should have significant contacts with investors in your industry and experience in preparing the financial reports that they want and handling pitches to them.
Find a CFO who works in your industry, particularly someone with a long career, and ensure that he or she can make introductions to investors and help with investor pitches. If you don’t need a full- or part-time CFO as an employee, offer him or her a position on your advisory board, which is suitable for someone who can devote some time to your business but works elsewhere. Ideally, the CFO should be able to help prepare financial statements, although you can also hire a “temporary CFO” firm, often at an hourly rate, to handle cap table and other financial statement preparation if needed.
2. Find individual investors with industry experience
Focus on finding investors who work in your industry, since they are more likely to understand your business and its prospects as an investment than people in another field. Senior and retired executives in your industry make ideal investor prospects, since they have cash to invest and advice to offer.
To find investors such as these, network. Have your advisory board members use their networks as well, and your and their contacts from school, past jobs and more are bound to generate good prospects. In addition, attend industry conferences can also generate good leads, although a warm introduction to a prospect from an advisor or other person who you already know may be more efficient.
3. Have customers and other business partners pay for your product development or otherwise invest
If your business is capital-intensive, you may face investors’ desires to see a product prototype before they invest, yet you need investors to fund your business in order to develop a product prototype.
One way to overcome this obstacle is to have your customers or business partners, such as distributors, fund your product development. For example, if you are willing to develop your product to meet a potential buyer’s specifications, the buyer may be willing to provide an advance. Similarly, a proposed distributor or other business partner may be willing to make a standard type of investment in your company, such as buying a convertible note.
4. Find government grants
Federal, state and local government agencies in a variety of fields offer grants to spur innovation and accomplish other goals. State and local grants often require that a company maintain its headquarters, employees or material operations in a specific state or location. Federal grants, such as from the National Science Foundation or other agencies, often target specific projects and are merit-based.
5. Stay safe
Whatever strategies you use, be sure that your methods of obtaining investments, and your investment terms, do not derail your chances of obtaining venture capital investments.
Don’t violate securities laws
For example, despite recent changes in securities laws that widen the ability of companies to use the Internet and other methods of finding investors for privately-placed securities offerings, most venture capital investments are still done pursuant to Rule 506(b) of Regulation D under the Securities Act of 1933, as amended. Rule 506(b) requires that “general solicitation”, such as advertisements to the general public, not be used to find investors. In addition, investors in Rule 506(b) transactions are usually limited in practice to “accredited investors” who meet minimum income, asset or other criteria.
Talk to your counsel about your plans to market your company to investors before you proceed so that you do not run afoul of these limitations. You will not want your or your investor’s counsel to discover, just before closing an investment transaction, that your past actions prohibit the transaction from being closed due to securities law problems.
Don’t agree to nonstandard investment terms
In addition, don’t close the door to venture capital investments, however difficult obtaining them may seem. For example, the terms of your investment documents should not contain provisions that could drive off venture capital investors. When venture capital investors want to invest in your business, they will want to make investments on terms similar to ones that they have done before, such as by investing in a convertible note or preferred stock, using market-standard documents.
If you have offered nonstandard terms to prior investors, such as exclusive licensing agreements, restrictions on your ability to engage in business in any market, the ability of an investor to maintain a set percentage of ownership in your company without having to make any additional investments, and the like, venture capital funds may either require that you re-work the terms of prior investments, which can be expensive and time-consuming, or they may refuse to invest.
You don’t need to have counsel take part in every meeting, but before signing a term sheet, and especially before finalizing any investment documents, run them by your counsel, who can advise you of non-standard terms and their consequences.
In closing, remember that whatever type of business you have, there are many businesses who have faced similar challenges and overcome them, and you can too. Also remember that members of your team, including your advisory board, your counsel and your accountant, are happy to share their experiences and insights to help you succeed.