Do you have a great offering that needs funding? Fantastic. Does it have an experienced operator and solid returns for investors? Awesome, love it. In securities lingo we call this the “deal-side”.
The problem, of course, is so does everyone else. Every business, every platform, every participant in this space is passionate about the offerings they are putting together.
So the trick is finding investors, aka the “buy-side”.
And yes, they are out there, as evidenced by the $1 trillion+ (yep, with a “t”) annual investment in 506(b) and (c) offerings. You need to rise above the noise and get them to take a look at you.
A. Getting someone else to sell your deal
There are a lot of people who make a living helping people raise money. Some are the real deal. Some are charlatans. Let’s discuss these:
Consultants – there’s no shortage of people who are not professional funding platforms nor registered broker-dealers but who hold themselves out as experts in helping get you funded. I’ve met hundreds. And a couple of them were actually the real deal. The rest were predatory, extracting huge fees from desperate entrepreneurs and ultimately delivering no value. Be very, very careful. The general, but not absolute, rule of thumb is if someone asks you for cash upfront based upon unsubstantiated stories and promises…run.
Upside: you might get introduced to investors who will fund you.
Downside: it’s very possible that they will take big guaranteed payments (not based upon them successfully getting you funded) and at the end of the day you are a lot poorer and still have no funding.
Platforms – a number of platforms have demonstrated that they can get deals sold. CircleUp in the consumer goods space, iFunding and RealtyMogul in real estate, CollectiveSun in solar energy, FundersClub and AngelList in technology, and others. They have spent years and huge resources to develop a base of investors who are interested in the kind of deals they allow on their platforms.
Upside: if they choose to promote your deal, there’s a decent chance you’ll get funded.
Downside 1: getting them to choose you can be tough and very competitive, some of these platforms only choose 1 out of 100 offerings pitched to them. So you may spend a lot of time and ultimately be back at square one if they don’t accept you onto their platform.
Downside 2: Most operate an “SPV” (Investment Adviser) model and as such you may never know who the investors are, and thus never develop the capability to self-fund in the future (this matters to some, but not to others).
Retail & Investment Banking Broker-Dealers – are capital markets specialists who earn their living by getting deals funded. There are 4,000 broker-dealers in this country, with 650,000 registered representatives. However they each have different regulatory-approved business lines and permitted activities. So you need to find the one(s) who:
i. Are active in selling, aka “banking”, private placements and alternative investment products,
ii. Have a direct retail and/or institutional salesforce that is proactive in reaching out to investors to pitch deals and that is compensated (motivated) accordingly,
iii. Are interested in your industry/sector,
iv. Are interested in your offering in particular, and,
v. Will make time for you to personally speak with their registered reps, including visiting their branch offices to pitch your deal and get the reps engaged.
Upside: these guys don’t like to waste time, and they get no cash upfront, so if they accept your deal then they are betting they’ll get it sold. They will also make sure your offering details are truly in compliance with regulatory requirements as by “underwriting” your deal that burden now in many ways falls upon them as well as you.
Downside: brokers get their pound of flesh, it doesn’t matter whether you are a small business or a follow-on offering by Google or Apple. Fees average between 8% – 10% in commissions plus another 10% in offering warrant coverage. And what if you get lucky and find a broker that lets you negotiate their fees down to 3% – 5%? Then it’s extremely likely that you just found a broker who’s wasting your time and is probably going to ask you for some upfront fees (see “Consultants” above).
B. Selling your deal directly and finding investors yourself.
Who has the most riding on your success? You. Who is the most passionate about your business? That’s obvious. Let’s discuss different ways you can get out there and make your own luck.
Doing it yourself – this provides you with the greatest flexibility and control, but will still cost you time and money.
How do you find investors?
i. Put your deal on your website so it’s easy for people to see and…more importantly…share.
ii. Start with your existing investors. Let them know you’re out raising money for another round (or another project).
iii. Ask your existing investors for referrals. There’s a good chance they’ll already be sharing your deal with their friends (since its online that is easy for them to do). But you want to be proactive here.
iv. Use social media. Have friends on Facebook? Let ‘em know and send out a link to your offering on your website. Instagram some pics of the thing/project you need the cash for. Post comments to articles and blogs on industry related websites, with veiled/indirect references to your fundraise.
v. Involve employees, vendors and customers. They have a deep, personal interest in your success and they believe in you. Get them to help spread the word and ask them for referrals and introductions.
vi. List your offering on angel websites. Try and get your company and your deal listed on Angel.co, Gust, and other sites that cater to angel investors.
vii. List your offering on aggregation websites. Some sites, such as DealFlow.com list offerings as a service to investors who want a centralized place to view a lot of deals.
viii. Attend family office conferences. Wealthy investors have what are called “family offices” that manage their investment portfolio. And they have conferences all over the country. Lots of them.
ix. Buy mailing lists. Zacks and other firms specialize in putting together mailing lists of accredited investors. Since you’re using general solicitation this is something you can now do.
x. Buy ads on search engines. Very specific, targeted Google AdWords might result in some investors coming your way (I’ve heard mixed results with this, mostly not good).
xi. Network. This is, by far, the best way to find investors. It’s tough on shy personality types, but it is your best shot at finding funding. People almost always prefer to trust those they’ve met. So ask people for referrals to investors, to angel groups, and to anyone who might help. You are selling yourself and your deal, so be passionate. Expect a lot of “no thanks”, but even then you might turn that into a referral to someone else.
Upside: The financial costs may (or may not) be lower than you would have spent with a professional platform or a broker-dealer, depending upon how much you spend on travel and advertising. However, the investors are now yours. And in the future they may pitch in for your next deal(s). And now that they have a vested interest in your success they are very likely to refer their friends the next time you need money (so, to state the obvious, make VERY SURE you communicate often and take good care of your current base of investors).
Downside: It can cost you a lot of time, as it might take a while to find investors who will fund you. And you’ll be so engaged in the fundraising process that the distraction may prove costly to your business, since you won’t be focused on running it. Financially, this isn’t free either since you’ll spend money on travel, entertaining, networking, and advertising. The fundraising process is pretty much a full-time job in itself, so be prepared for that (and make sure your employees are prepared for you to be gone while you’re doing this).
C. Sidegates and Syndication.
There is a new, evolving concept in fundraising – enabling direct issuers (raising money yourself) to pool investors for mutual benefit. For smaller issuers this can make a lot of sense.
=> Lets say you raise money for 6 or less projects a year, and you have a base of investors who have helped fund your past deals but you’d like to expand that base a bit (heck, more investors = more competition for your deals = lower costs).
=> And lets also say that you are realistic about the fact hat your investors have more money to put to work than they give you (what, you mean they don’t give me all their money? that they cheat on me with other peoples deals?)
=>Well it turns out you aren’t alone.
So there are people who are creating technology to enable similar types of operators to pool/share investors. Thus a solar, real estate, energy, or entertainment firm in San Diego could pool investors with similar-but-not-directly-competitive firms in San Francisco, Chicago, Austin and New York. It provides investors with deal flow in the sector they like while at the same time keeping them close and within a framework of a trusted group of associates. Thus “a rising tide lifts all boats.” We should start to see these types of syndication or, to use a term coined by Joel Block, a leading real estate professional, “sidegates” start to appear in mid to late 2015.
Now Go Raise Capital!
Whichever fundraising avenue you take, I wish you the best of luck in getting the money you need to move forward and build something amazing. And of course FundAmerica is here to handle the “plumbing” so you can stay in compliance with securities regulations and provide a frictionless and easy process for investors!
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. You should contact your attorney and tax professionals to obtain advice with respect to any particular issue or problem.