Tuesday, August 16, 2011

Raising money: 3 cases

I personally know 3 companies that are in the process of raising money. By this I mean equity capital. One is a clothing wholesaler that serves a niche market and has a US-based manufacturing, eco-friendly positioning. Another is a convenient health food product company that now has a presence in some Whole Food stores. Yet another is a much larger company that needs equity capital to expand its IT infrastructure without increasing its debt load and stressing its margins. In the latter case, they want to increase their capital expenditures and amortize the costs over several years instead of expensing the costs in the year incurred. (There is some tax accounting or law involved here but that has little impact on what the company wants to do.)

Buying_business
The first two companies are revenue generating startups so they are seeking angel capital. Actually, the first company I mentioned has raised $1.5 million from a large number of small angels and one larger investor. This company now seeks a large angel investor with strategic ties and contacts in its industry. Or it would like a strategic investment from one of the larger companies in its industry. Why? Whenever people tell me they need to raise capital, I ask them why. What do you need the money for? In this case, the company wants to increase its distribution channels, raise its industry profile, and eventually become the go-to wholesaler...before other eco-friendly competitors with a US manufacturing base enter the frey. Because this is what they want the money for, they know they are better off pursuing one large investor or company than the numerous small investors they previously sought.

The health drink product company is bootstrapping as much as possible. They have raised some equity capital and want to raise more but they have also relied on their strong banking relationship to obtain a lot more debt than the average startup would typically have access to. It doesn't hurt that one of the co-founders successly sold a company a few years ago. This company is looking for angel capital that is not greedy. The founders are quite willing to retain a huge portion of the financial risk but they do need some additional equity capital to shore up the balance sheet a bit so they are seeking a few angel investors willing to work a bit to ensure their investment is a success. They've also used a lot of creative financing, getting friends and business associates to provide services or products or introductions that enable them to save their cash. For example, they need a PR push to help them get noticed by the companies they are pursuing. I found a PR firm willing to barter and am helping them get college PR interns. (I'm joining their newly formed Board.)

I'll cover the 3rd case in my next post.



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