Equity Raising Strategies, Myths, and Cold, Hard Facts

John Vinturella

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Start-ups and early stage companies are generally not attractive to institutional investors. Even in today's favorable climate, start-ups are basically just too risky for these sources of capital. The primary exception is where it is a proven entrepreneur starting another venture.

For start-ups, the capitalization plan should request the minimum amount of equity capital needed to bring the firm to $3-$5 million in annual sales. If you need $1,000,000 to accomplish that goal, you might consider raising 40% in equity capital through private placement, and apply for the remainder from a commercial bank.

Venture Capital

In many ways, the term Venture Capital is a misnomer. VC's are seldom adventurous; they generally search out syndicate deals to lessen their risk while maintaining their propensity for producing large returns. A syndicate example would be where a very successful company needs $100 million to assist in handling the costs and disruption associated with preparing an Initial Public Offering. It may require 100 VC firms at $1 million each to make the deal.

The Small Business Administration and the Venture Capital Institute of New Hampshire have estimated that, on an annual average, less than 1.5% of all start-up firms searching for capital receive their needed funding through any equity capital source, including institutional sources. The competition for this type of capital is far greater than most entrepreneurs realize.

If you are within the lucky 1.5%, the capital source will generally dictate the terms of the deal and will most often demand control. You may give up substantial equity and upside participation to seal the deal. The source of capital may also dictate your compensation and overhead allocations.

Securities Offerings

One way to dictate the terms of the deal and maintain control of your firm’s destiny is to conduct a securities offering. This requires producing and marketing a securities offering document. If the proper documentation, filings and or registrations are not in place you may be in serious violation of Federal and State securities laws. Be careful, simply making presentations to a few wealthy people may constitute a securities offering.

Prior to structuring the deal, producing the proper offering documentation, and conducting a full securities offering effort, one should research the market of private capital contacts. Three of the most popular forms for this approach are: a royalty financing contract; a short term first mortgage note, 3 to 4 year, offering with an equity opportunity for the lender; and preferred stock.

As with a new product launch, to successfully launch and close a securities offering requires capital. If you do not have enough operating capital for the securities offering, you may want to break it into two phases. The first might be for $25,000 to $100,000, in order to prepare for the second phase, $1 to $10 million. Richard Wulff, Chief of the Office of Small Business at the Securities and Exchange Commission in Washington, DC estimated that “ If you’re trying to raise $5,000,000 in a private offering you’ve got $100,000 in expenses, printing, lawyers, phone calls, etc…. ”

If you contract with any entity to fulfill the solicitation and sales function of a securities offering and that entity is not properly registered with the appropriate regulatory authorities it is an unlawful transaction. You, the issuer, are liable not only for regulatory compliance violations, but for the unlawful transaction, which may constitute a criminal offense.

Most entrepreneurs are under the impression that their technologies, inventions, patents, processes or trade-secrets offer investors a great opportunity, whereas investors are often skeptical based on today’s fast paced high technology fields. Should a competitor introduce superior technologies into the marketplace, it could decimate the entrepreneur’s products or services. Further, many entrepreneurs assume that their venture will generate sufficient operating margins to expand rapidly. Even Microsoft needed substantial amounts of outside capital and had to “go public” to achieve the goal of continued growth.

John B.Vinturella, Ph.D. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com , and maintains business and political blogs.


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