Raising Capital For Your Business
How Long Does It Take?
So now you have a VC-quality business plan, a great set of reality-based pro forma financial statements, and an engaging investor presentation. Now the money will just roll in the door, right? In reality, while some companies do get lucky and get financing right away, more often than not, this process will take anywhere from six months to a year to complete. And, you can be sure that it will take up a good portion of your time during this period. While a business plan may take about 200 hours to complete, finding financing can take anywhere from 500-1000 hours to accomplish.
Just because you have a business plan completed does not mean your work with it is done. You should constantly be fine tuning it based on market information and investor feedback. And, you should identify a good business attorney to help you put together an offering memorandum and other due diligence materials.
The next step is to identify a targeted prospective investors list and begin making contact with these investors. Typically, the process involves submitting inquiries along with a copy of your stand alone executive summary. Investors who are interested will request a copy of the full business plan. From there, you should be prepared for requests for additional due diligence materials.
Developing a comprehensive investor list is also very time-consuming. There are thousands of potential investors, each of whom has very different appetites regarding the kinds of ventures that interest them. Some invest by industry, others by development stage, and others by geographic region, and most are a combination thereof. Many hours must be dedicated to determine which investors are suitable for your venture. You should create a list of these investors, visiting each investor’s website to get a feel for their investment criteria to see if you are a good match.
If you have progressed this far, it’s time to make your pitch in person to the investor(s). You should be prepared that they will challenge your assumptions, and you must be able to defend them. Once you have convinced the investor of the validity of your plan, the negotiations process begins.
On average, only one in four prospective investors who show an interest initially will progress to due diligence. Only a small percentage of those investors will actually progress to an offer of funds, and only a small percentage of those will actually result in an investment transaction. So completing a financing transaction requires contacting between 150-200 investors, on average.
The due diligence process can also be very time consuming for the company. Investors often request many documents, such as personal financial statements, tax returns, customer lists, actual financial statements, customers lists, etc.
Too many companies fail to raise capital since they are unaware of the significant time requirements to do so. Those firms who understand these requirements and budget accordingly are the ones most likely to persevere and end up with the capital they need.