Tough Money – Raising Capital in a Tough Economy

There’s no denying it: we’re in the midst of a very difficult economy. As credit markets seized up and the IPO and M&A markets slowed to a crawl, sources of entrepreneur financing such as SBA lenders, angel investors, and venture capital funds slowed just as dramatically.

Credit is tight – unless you have nearly perfect credit, are willing to personally guarantee payment, and can offer 100% collateral, you can probably forget about getting that loan.

This doesn’t mean that financing has dried up completely.

The good news: equity financing is still available for good opportunities. Equity investors – angels and VCs – make their money upon an exit event such as an IPO or acquisition. These events usually take place five or more years after they make their investments. The fact that we have a difficult market today certainly doesn’t mean that we’ll have a bad market in five years. While many skittish investors are sitting on the sidelines, more rational ones appreciate that the value of their investments will improve with the economy and are on the lookout for good opportunities that are being passed over.

The keys to obtaining financing in today’s environment are the same as they have always been – you just need to execute even better than ever before:

1. 1. Have a compelling opportunity. This means you need to demonstrate all of the traits that investors have always wanted to see: an innovative solution to a painful problem in a large and growing market, with demonstrated demand, with sustainable competitive advantages, great financial potential, backed by a committed management team who’s been there and done that. If all you have is an idea, then forget it – stick with your day job.
   2. Tell your story in a clear, compelling way that stands head-and-shoulders above the crowd. A downturn is generally a good time to start a business, but that means there will be a lot of entrepreneurs competing for a shrinking pool of capital. To succeed, you need to put a lot of time and effort into perfecting your investor communications, including your elevator pitch, presentation, executive summary, business plan, financial forecast, and website.
   3. Persevere. Even in the best of times, raising money isn’t easy. A process that once took three to six months might now take as long as a year. For some entrepreneurs, it might make more sense to spend this time seeking customers rather than investors.

We’ve been through tough times before, and there will be others in the future. If you keep a level head and stay abreast of the big picture, chances are, you’ll land on your feet.