(-Written by Mumtaz Afrin) : - The majority of business owners are aware that if a company's fundamentals—its management team, its market potential, it's operating systems, and its controls—are strong, there is probably money out there. It might be thrilling to face the task of raising money to expand a business. However, as thrilling as the search for money may be, it also poses a hazard. There are some harsh realities built into the process that can badly harm a firm. Although they cannot be avoided, entrepreneurs may at least plan for them if they are aware of what they are.

 

Entrepreneurs shouldn't be reluctant to look for the funding they require. Even though they may be negotiating with professionals who regularly close deals, they may still take efforts to make sure they acquire the cash they require when they require it on terms that do not limit their options for the future. Being aware of the drawbacks of the fund-raising procedure is the first of these stages.

 

Raising Money Costs a Lot

 

Founders grossly underestimate the time, effort, and creative energy needed to generate the cash in the bank because of the allure of money. Perhaps the least acknowledged component of fundraising is this. In early-stage companies, managers frequently focus up to half of their time and the majority of their creative energy on seeking to raise outside funding throughout the fundraising cycle. Founders have been known to forgo almost everything else they were working on in order to raise money and share their tales.

The lengthy and arduous procedure is caused by the interested investors' "due diligence" investigations of the entrepreneur and the proposed company. A yes can be obtained in as little as six months, while a no can take up to a year. While this is going on, the emotional and physical toll leaves little energy for managing the company, and money is leaving rather than coming in. While the founders are attempting to raise money to finance the following growth surge, young businesses may go bankrupt.

Performance always takes a hit. Customers detect neglect, however subtly and unintentionally; employees and management receive less attention than is necessary or customary; minor issues go unnoticed. Sales level off or decline as a result, and cash flow suffers as well as earnings. Additionally, morale suffers and important personnel may even depart if the fundraising attempt eventually fails. The consequences might ruin a struggling fledgling company.

One startup started looking for venture financing when the founders saw the potential to start a business in a sector connected to telecommunications after nearly 10 years of gaining the necessary knowledge and building a reputation in their industry specialty. In order to create a business strategy, the three partners invested $100,000 of their own hard-earned money as seed money. They then set out to raise an additional $750,000. Eight months later, their seed money had been used up, and they had exhausted every avenue for obtaining cash, including more than 25 venture capital firms and a few investment bankers. The would-be founders had given up lucrative jobs, committed their savings, and worked nonstop for a business that was doomed from the start.

The business owners might have made various time and money decisions. We enquired as to how much more they would have sold had they used the $100,000 seed money during the previous 12 months to acquire their first clients. Their response? Dollars one million. The founders had not anticipated having to shift so much of their focus away from starting up the operations. The viability of the business is much more dependent on closing sales and collecting payments than it is on raising capital.

Out-of-pocket expenses might be quite substantial, even when the hunt for cash is successful. The costs of going public, which include the fees for lawyers, underwriters, accountants, printers, and regulators, can range from 15% to 20% of a smaller offering and in certain cases can reach 35%. Additionally, a public business must pay additional expenses after the issue, such as administrative and legal fees that rise with the requirement for more thorough reporting in order to satisfy the SEC. Directors' fees and liability insurance premiums are additional expenses that will likely increase. These costs frequently total $100,000 or more each year.

The valuations of goods and receivables may also need to undergo rigorous audits and independent reviews for bank loans over $1 million to confirm that they are legitimate. All of these expenses are borne by the recipient of the monies. It is impossible to escape the time and financial obligations. The temptation to underestimate these costs and the failure to plan for them are two things that entrepreneurs can avoid.

 

You Have No Privacy

 

It takes a good sales job—and information—to persuade a financial backer to part with cash. When looking for funding, you need to be ready to answer questions from 5, 10, or even 50 different people, including whether you rely on a single brilliant technician or engineer, what management's strengths and weaknesses are, how much ownership you have in the business, how much money you make, and your marketing and competitive strategies. Additionally, your personal and business financial statements must be turned over.

Entrepreneurs feel uncomfortable—and it makes sense—when such well-held secrets are revealed. Although the majority of possible sources respect the secrecy of the project, information might occasionally escape unintentionally—and with disastrous results. In one instance, a British startup team created a brand-new automatic coin-counting machine for banks and big-box stores. The business model was solid, and the product held out a lot of promise. The main investor shared the company idea with a potential investor who ultimately decided not to invest when he was looking for investors. Even though the sale was completed, the founders later learned that the investor who had opted out had given the business plan to a rival.

One reason to ensure you need the money and are getting it from highly reliable sources is the inherent risk that information will get into the wrong hands when looking for cash. While you cannot completely eliminate risk, you can reduce it by talking with the principal investor about the matter, avoiding some sources that are close to rivals, and only speaking with reliable sources. By speaking with business owners and respected professional advisers who have interacted with them, you should essentially perform your own "due diligence" on the sources.

 

Experts Can Blow It

 

Choosing how much money to raise, where to get it from, whether to use debt or equity and on what terms limits management in some way and results in obligations that must be met. These obligations can be fatal to a developing company, yet managers are eager to hand off their fund-raising plans to financial advisors. Sadly, not all advisors possess the same level of expertise. Of course, the entrepreneur must bear the consequences—not the impartial outsider.

An established corporation in the fiber optics sector spun off a start-up under the fictional name Opti-Com. The management of the start-up companies was capable and trustworthy despite not being big stars. Their goal was to grow the business to $50 million in sales in five years (the "5-to-50 fantasy"), so they hired a sizable, reputable accounting firm and a legal firm to counsel them, assist with the creation of their business plan, and help them develop a strategy for collecting money. The ensuing strategy suggested raising $750,000 in exchange for around 10% of the common stock.

Four months after the advisor advised the owners of Opti-Com to submit the business plan to 16 prestigious, mainstream venture capital companies in the Boston area, they had already received 16 rejections. Contrary to traditional advice regarding fund-raising, they were then instructed to visit venture capital firms of comparable caliber in New York as the others were "too near to home." The founders were still having trouble succeeding a year later and were almost out of money.

The founders of Opti-Com had a dilemma since they naively trusted their advisors to know the area and produce outcomes. The search excluded any of the smaller, more specialized venture capital funds, individual investors, or strategic partners that were more likely to support that type of business, despite the fact that the business idea wasn't a conventional venture capital deal. In addition, the sale was three to four times overvalued, which likely turned off investors.

Opti-Com eventually hired a new consultant. A modest Massachusetts fund was particularly established to provide risk funding to start-up businesses that weren't strong enough to attract traditional venture capital but were crucial to the state's economic revitalization. The company approached the fund under different instructions. This fit perfectly. Instead of the 10% that the founders had proposed, Opti-Com was able to raise the funding it required at a valuation that was more in line with the market for start-up deals: around 40% of the business.

The idea is to choose your outside advisors carefully rather than to avoid utilizing them altogether. As a general rule, pick people who are actively involved in raising financing for businesses in your industry or technological sector that are similarly capitalized and at your stage of growth.

 

Money Isn’t All the Same

 

Your fundraising endeavor is driven by money, but potential financial partners can also provide other resources. You risk undervaluing yourself if you disregard factors like the partner's reputation, contacts with potential suppliers or clients, and industry experience.

Another important factor is sometimes how quickly the investor can react. A management team had four weeks to finance $150 million to acquire a vehicle phone company before it was up for auction. It lacked the time to draft a comprehensive business plan but sent five leading venture capital and LBO companies a summary instead.

 

The Search Is Endless

 

Cash-hungry and naive entrepreneurs are quick to assume that the business is done with a handshake and letter of intent or executed terms sheet after months of hard work and difficult talks. They stop talking to potential sources of funding and loosen the street-smart caution they have up till now. This may be a serious error.

A business owner was in negotiations with a number of venture capitalists, three or four strategic partners, and the provider of a bridging capital loan at the same time as one of his vice presidents. The company had only 60 days of cash left after around six months, and the potential investor who was most interested in the sale was aware of this. It offered a 12% loan on $10 million with warrants to buy 10% of the company as a take-it-or-leave-it option. The managers believed they had few options because none of the other conversations had progressed to that serious a stage, even if the offer was not cheap compared to traditional venture capital.

However, the business owners were able to cover up their weaknesses in negotiations. The company founder made care to plan a follow-up meeting that same afternoon that was set several hours after each round of discussions. He fabricated the appearance of a more heated discussion than there actually was elsewhere. The creator left the investors wondering how solid their position was by claiming that he had to leave for Chicago to continue his conversation with venture capitalist XYZ.

 

Lawyers Can’t Protect You

 

Why should you be required to undertake legal and financial paperwork when you can pay specialists high fees to handle it for you? Considering that you are the one who must coexist with them. Deals can be set up in a variety of ways. The terms, covenants, conditions, duties, and rights of the parties to the transaction are spelled out in the legal documents. The money sources engage in transactions daily, therefore it stands to reason that they are more accustomed to the procedure than an entrepreneur who is engaging in it for the first or second time. Even skilled and diligent lawyers cannot know for sure what conditions and restrictions the company will not be able to withstand, and covenants can deprive a company of the flexibility it needs to respond to unanticipated situations.

Take the example of a modest public corporation that we'll call Com-Comp. The final paperwork was delivered after more than two months of difficult discussions with its bank to change an unsecured demand banknote for more than $1.5 million into a one-year term note. One paragraph hidden deep in the agreement, among the various covenants and conditions, stated: "Said loan will be due and payable on demand in the event there are any substantial events of any sort that could negatively influence the performance of the company."

Because the clause was so ambiguous, it gave the bank, which was already antagonistic, a loaded gun. Any unforeseen circumstance might be used to call the loan, which would have dragged a company that was already having problems into bankruptcy. The agreement was changed after the founders studied the contract's fine print and immediately realized the provisions were unacceptably restrictive.

A capital infusion, whether in the form of debt or stock from institutional or private sources, can propel a business to new heights or at the very least help it get through a difficult time. Small business owners should not be scared to use the many funding options available to them. However, they should be ready to put in the time and money necessary to conduct an exhaustive and comprehensive search for capital. The act of raising money itself is expensive and time-consuming. It cannot be assigned or done carelessly. It also has inherent hazards.

There is a strong incentive for entrepreneurs to learn as much as they can about the process—including the very things they are probably least interested in knowing. This is because no deal is perfect and even the smartest entrepreneurs are at a disadvantage when negotiating with people who strike deals for a living.