Targeting Value Added Banks and Equity Investors

Robert Calvin, Adjunct Professor of Entrepreneurship and Marketing at the University of Chicago Booth School of Business — Robert Calvin, Previously Adjunct Professor of Entrepreneurship and Marketing at the University of Chicago Booth School of Business

Most entrepreneurs and small business people spend the largest portion of their time in raising debt and equity funds for their venture plus selling/marketing their products or services. By understanding value added sources of debt and equity most appropriate for each stage of your business, seed, early and growth, entrepreneurs can save time in fund raising so they have more time for revenue generating sales and marketing activities. Value added sources are those that already have experience in your industry, which saves you time in persuading them, and those that can help grow your business through key customer or employee contacts plus those that can also provide future rounds of financing.

Just as you have a marketing plan for your venture, the entrepreneur needs a 5 year fund raising plan, which targets appropriate sources of debt and equity for each future stage and equity round. If you do the early rounds correctly the later rounds are easier.

For example sources of debt financing in the seed stage include credit cards, asset based lenders and leasing. Then in the early and growth stages sources shift to banks, government agencies, micro loans, better supplier terms and possibly customers. For equity financing in the seed stage, rounds one and two, the best sources are friends, family, founders and proper pricing to maximize cash flow. Then in the early stage, rounds 3 and 4, the sources expand to include employees, angels and crowd funding. In the growth stage, round 5, professional investors such as private equity and venture capitalists become sources along with a possible public offering and overseas investors.

Equity investors are most interested in management’s industry and entrepreneurial experience, management’s ability to execute, market size and growth, scalability, competitive differentiation and pricing power. On the other hand, lenders are most interested in cash flow, collateral, capital, character and competence of management and industry conditions such as markets and competition.

To learn more about how to raise funds for your business, consider taking my next course in October, entitled Funding Your Entrepreneurial Venture, where you’ll get more insights and have an opportunity to meet and collaborate with peers. I look forward to having you in my class.