When you hear the word “investor,” what do you picture?
When I ask most people this question, they describe a white man in a suit (or, if in Silicon Valley, maybe khakis and a button down shirt) in a fancy office spending every work day combing through pitch decks, executive summaries, and due diligence and barking tough questions at terrified entrepreneurs.
Most people picture the type of investor who I call professional investors. These are wealthy individuals and organizations, sometimes investing their own money and sometimes investing on behalf of others. They come in many flavors such as angel investors, venture capitalists, private equity funds, family offices, private foundations, wealth managers, etc.
When entrepreneurs think that professional investors are the only source of investment, many of them very quickly dismiss raising investment capital as a possibility.
They say things like this to themselves:
- Why would these people even consider investing in my business? I doubt I could give them what they’re looking for.
- I wouldn’t even know how to get my foot in the door with these people or even how to find them.
- Don’t these investors want to take control of the businesses they invest in? I’m not ready to give up control. Don’t they even sometimes fire the founder?
If you are limiting yourself to the tiny pool of investors who fall into the professional investor category, you may be right to have fears and concerns. These kinds of investors tend to follow a very specific investment model that is not a good fit for most businesses and may very well not be a good fit for you. The good news is that there are many sources of investment capital and even if professional investors aren’t right for you, I can almost guarantee that there are investors out there who ARE right for you. Just because you may not have the type of business that would be attractive to professional investors does not mean that you cannot raise hundreds of thousands and even millions of dollars from investors.
If you are limiting your business’ impact and growth potential by choosing not to even consider raising capital, you are selling yourself short and denying yourself a huge opportunity, not to mention depriving the world of the impact you could have if you achieve your business’ full potential by raising investment capital.
The amount of misinformation and confusion out there about raising capital from investors is staggering! I cannot tell you how many times I have been at a presentation by an “expert” and listened with amazement as he confidently informed the audience of “facts” about capital raising that were completely incorrect. If experts like lawyers and finance specialists are so often wrong on this topic, imagine how hard it is for the layperson entrepreneur to get the full and correct picture.
Since so many lawyers and other so-called experts seem to be too lazy to take the time to understand the full spectrum of capital raising options and since they also seem to be unwilling to admit when they actually don’t know something, entrepreneurs are constantly making huge mistakes with their capital raising efforts that can cost them time, money, and even their business. Even worse, they may not even consider raising capital because their understanding of the capital raising process makes them think that it is not an option for them.
Let’s Bust Some Myths
Let’s bust some myths about what it means to raise money from investors. Here is some of the conventional wisdom that you’ve probably heard or read on the internet:
- You can only raise money from investors if you are going to grow your business very fast and have a “liquidity event” [i] in which the investors make 30-50 times their initial investment.
- Try to delay offering equity to investors for as long as you can because that is the most expensive money you can get.
- Even though you have to give up a lot of ownership and control when you raise money, the good thing about it is that your investors have a lot of experience and contacts in your industry so they can advise you and make great connections for you.
- The investors set the terms of the investment – you are at their mercy.
- If you raise money from investors, you have to give up control and your investors become your boss.
- Once you have investors, you must put their interests first, above those of all other stakeholders, or you risk being sued.
- Investors consist of very wealthy individuals and organizations and they are all looking for basically the same thing and you need to tailor your business to fit what they are looking for.
While these statements are true for certain types of investors and investments, they are not universally true. In fact, in my experience (having helped my clients raise millions of dollars and having raised several hundred thousand for my own company), the following statements are true:
- The vast majority of investors are satisfied with a financial return that is much less ambitious than what angels and venture capitalists demand.[ii] And the vast majority of investors care about a lot more than financial return when making investment decisions.
- You can design the type of investment you offer any way you want to – it does not have to be “expensive.”
- It is possible to raise capital (equity or debt) without giving up any control.
- Investors can get healthy investment returns even if there is no “liquidity event.”
- Investors can get healthy returns from steady-state businesses (i.e. ones that do not grow explosively).[iii]
- The “smart money” that supposedly comes from professional investors (i.e. all that expertise that they supposedly have) is questionable. Some professional investors can be a huge asset to the companies they invest in, while others will take the company in the completely wrong direction. The founders often know a lot more about the right direction to take their business than an outside investor does.
- It is possible to design a company and its financing strategy in a way that makes lawsuits for failure to maximize investor return highly unlikely.
- The universe of investors is far larger than angels and venture capitalists and each investor is unique.
Let me quote one investor I know so you can really get a sense of how truly opposite of the stereotypical investor a real investor can be:
I lived at an anti-capitalist commune in Thailand and got really fired up about how capitalism was destroying people and the planet. I wanted to do something to fight capitalism. I found out that my family’s wealth was invested in huge evil mega-corporations that were destroying the planet and communities and extracting wealth in an unhealthy way. My friends and I use investment to shift control of capital to communities that are most affected by economic and climate crises, especially racialized wealth extraction. As a white inheritor of wealth, I want to invest back in the communities wealth has been taken from.
—Kate Poole, Regenerative Finance
Hopefully, you are starting to believe that raising capital from investors can be very different from the much-hyped pathway celebrated on the cover of Fast Company Magazine.
Based on my ten years of experience helping social entrepreneurs raise capital from investors, I honestly believe that any mission-driven entrepreneur, armed with the right tools, information, and mindset, can raise capital from supportive, values-aligned investors.
Will it be easy? Probably not, although it may be. Many of my clients have approached the capital raising process like they were throwing a big party. So much of what the experience is like for you depends on how you approach it and your beliefs about it. If you approach it with the belief that it will be really hard, it probably will be. If you approach it with the belief that it will be one big party, it could well be that!
It is natural to be nervous and maybe even terrified at the prospect of raising capital. Every entrepreneur experiences those fears and doubts. The key is to (1) know the options, (2) design your strategy to fit your situation, and (3) feel the fear and do it anyway. As you move forward step by step, your confidence will grow.
Raising capital has so many benefits beyond the obvious one of having money.
I believe that raising capital is a major growth experience. When you finish, you will not be the same person as the one you were when you started.
You will be stronger, more resourceful, and better able to see the value of what you are building as an entrepreneur. You will take on more leadership roles and take bigger leaps toward fulfilling your dreams for both your business and every other part of your life. You will be less likely to settle for things that are not working for you. You will be a lot less likely to feel “lesser than” when in a room full of successful entrepreneurs.
If you, like so many entrepreneurs I know, have always had trouble really owning your value, the process of raising capital will help you confront this limitation and grow to realize your true potential. This is what makes raising capital from investors both a huge challenge and a major growth experience.
Beyond that, your investors, if you raise money the right way, will become a tribe of committed supporters who you can call on in good and bad times.
The tangible and intangible benefits of raising capital for your business are probably greater than almost anything else you can do as an entrepreneur. It is an endeavor worthy of some serious attention, time, and energy.
How to Tap the Most Abundant Yet Overlooked Source of Business Funding
There are six basic steps to create a capital raising plan that is customized to your particular situation. You must design a capital raising plan that fits who you are, your goals, and your values. Using a one-size-fits-all approach to bringing on investors is one of the surest ways to make your life a living hell. You want to create as much alignment as possible between what you want and what your investors want. Don’t rush into raising money. First, get clear on the plan that works the best for you so that you can pursue a strategy that creates more peace, joy, and prosperity in your life.
Never trust anyone who tells you there is only one way to raise capital. There are infinite ways and there is at least one that is right for you. I take my clients through a six-step process to create a customized plan –one that inspires them, excites them, and is in complete alignment with what they want for their business and life.
Step 1: Get clear on your goals and values
Your goals and values are the foundation for your capital raising plan. To some, this may seem obvious but it amazes me how many entrepreneurs attempt to find investors without any thought to whether their potential investors’ goals and values are in alignment with their own.
Step 2: Identify the right investors for you
Investors are incredibly diverse. More than 50% of the population of the U.S. is an investor. There are millions of potential investors out there and you only need a few.
Step 3: Design your offer
There is literally an infinite number of investment opportunities that you can offer to investors. The basic categories include equity, straight debt, revenue-based debt, convertible debt, and agreements for future equity.
Within each of these there are numerous provisions that can be customized to your particular situation. For example,
- do your investors have voting rights and if so what are they specifically?
- do you regularly share profits with your investors and if so how much and when?
- how does your legal structure and tax status affect what you offer?
- do you want to plan ahead for how your investors will exit from their investment (i.e. get their original investment back) or do you want to leave that open-ended?
- does valuation matter and if so how do you get one?
Step 4: Choose your legal compliance strategy
In the early years of the 20th Century, the states and Congress passed a lot of laws designed to protect people from making investments without knowing all the relevant facts. These laws are collectively called securities law. It is a bit tricky, but once you understand the basics, you should be able to choose the strategy that fits you best.
The strategy you choose will affect who you can make your offering to, who can actually invest, and how you can get the word out. Before making an offering to any potential investor, it is essential to choose your legal compliance strategy.
Step 5. Enroll investors
Once you know what you’re offering, who you’re offering it to, and how you’re going to reach investors, it’s time to work on your enrollment skills. There is no one-size-fits-all way to communicate with investors. Your enrollment strategy will depend on who your target investors are.
Step 6: Address obstacles head on
This step is one that many entrepreneurs skip but I have come to believe it is perhaps the most important of all. This step involves stepping up your mental game to prepare for and stay on track during your capital raising journey. No matter how amazing your business and how great your offering, unaddressed mindset obstacles can make raising money almost impossible.
Your Going Forward Plan
Entrepreneurs are some of the most creative and innovative people on the planet, so why should they accept a standardized, cookie cutter funding model? Especially if this model forces them to sacrifice the very reasons they started their businesses in the first place?
There is nothing more important than for you to live your dream and create a business that you love. Go out and get the capital you need to make it happen.
Democracy Collaborative Fellow Jenny Kassan has over two decades of experience as an entrepreneur and attorney. Jenny is the President of Community Ventures, a nonprofit organization dedicated to promoting the economic and social development of communities. She also co-founded the Sustainable Economies Law Center, a nonprofit that provides legal information to support sustainable economies. To learn more, please visit jennykassan.com
[i] A “liquidity event” means something that happens that allows your investors to cash out their investment – the two main liquidity events are a sale of the company and an initial public offering (IPO).
[ii] Note that studies of the VC industry demonstrate that actual returns are much lower than the hype would suggest.
[iii] Some people in the world of entrepreneurship call businesses that do not intend to grow super-fast and then have a liquidity event, “lifestyle businesses.” The term is generally used as an epithet. I do not use this term. It implies that high growth businesses are the only ones worthy of attention and respect which is ridiculous. There are millions of non-high growth businesses that make major contributions to their communities. If they all disappeared tomorrow, believe me, the world would not be a nice place to live. Yes, we could all still send each other chats on our smart phones, but where would we go to have coffee with a friend or get our dog groomed?