FW1 - Mental Imagery
Look at the map
145 days before opening.
Many web sites are telling that it's not difficult to raise money. Don't listen them. It's very difficult to get money from other people and to say the truth the best way is always to work with your own money.
It means that you have to establish a plan and a strategy in order to raise the money. You cannot ask everybody, everywhere. You have to follow a fund raising program in beginning by the easier steps and going to the harder. What is more, you will have to use your skills regarding communication and negotiation!
Lesson: 1,5 hours
External readings: 1,5
Do it yourself: 40 hours
Total: 43 hours
Our objectives are to show you:
-How to estimate your savings and the money coming from family and friends
-How to raise money from biz angels
-How to obtain a bank loan
By the end , you will know the real money that you can expect for starting your business.
The first step is to know the amount of personal money that you can invest. It's a quite easy step! You can use the money set aside or sell some assets you do not need. We recommend to be cautious because many events such as illness can happen. You must always have a little bit of personal savings.
Go to www.pncbank.com . Click on "pnclearning link". This site shows how to deal with all the needs coming from events such as illness, wedding and so on. It could enable you to evaluate what is the real amount of savings you can dedicate to start a biz.
What is more, many people has no money at all. It means that in many situations, you have to find money from other people.
Real life example:
In developing countries, I have often observed that middle class people were very reluctant about the idea to raise money. They feared to look poor or to appear like beggars.
On the contrary, the wealthy people did not hesitate to raise money from other people. What is more, they were very cautious about their personal savings!
Consequently, we must recall the following basic notions:
-The business world is made up of companies.
-Why were these companies invented?
-Answer: So that people with ideas could find money.
You have an idea. You are therefore going to propose this idea to other people in order to create a company. We shall examine the strategy regarding private people (family, friends, acquaintances), business angels and venture capital, and finally the banking system.
2-HOW TO RAISE MONEY FROM PRIVATE PEOPLE
Private people mean your family, relatives, friends and the persons who are living around you. Regarding these people, there are some general rules to follow.
As you have not much money, your only asset is your idea. It consists in selling goods and services, but you must first "sell" your idea to collect the funds to start the business. It means that your idea must be attractive.
211-The idea must be attractive
Let's suppose that your project is very profitable because it must earn you $100,000 in 5 years for $20,000 invested. If your personal savings only amount $10,000, the idea must enable you to collect the $10,000 you are missing!
Your idea must satisfy an emotional or intellectual need for the people you are offering it. In short, your future business associates have their own vision, to which your idea must correspond.
Let us take two examples:
First example: Your project is to equip a trawler to fish for shrimps in the Caribbean. The world shrimp market is growing and your project could prove very profitable.
Second example:Your project is to create a luxurious hotel on a Caribbean island.
The first idea will be more difficult to "sell" than the second. The first makes you visualize sailors handling shrimps. It is not clean, it smells bad, it is not attractive.
The second idea on the other hand makes you visualize a 5 star hostel with beautiful people! This idea is pleasant to imagine. It will please more easily. It will be easier to sell in order to collect money.
In short, it is better if your idea calls money and luxury to mind rather than hard work in difficult conditions! Your idea must flash!
In our case, a toy fabric is in the medium between the two previous: Toys call for sympathy and many adults play with the toys of their kids!
212-You have to be a salesman
It isn't enough for the idea to flash. You have to flash, too!
In order to "sell" your idea, you have to transform yourself into a salesman with the relevant qualities.
-You must have a business plan
In order to convince your future partners, you will have to supply them with your business plan. In fact, use mainly your Executive summary that will form the basis for all your contacts. File the studies (market analysis, technical study, financial projections and so on) in folders with removable pages so that you can remove or add details depending on the person you are speaking to.
213-You must adapt your objectives
Associates participate in the risks and the profits made by the company. You share the equity and the losses, but you also have to share the profits.
In our example, if the capital of $20,000 is shared between yourself ($10,000) and two other associates who both contribute an additional $10,000, after 5 years you will earn $50,000 instead of $100,000!
To compensate this dilution effect, you have to find some tips: For example, envisage to increase your salary as manager in order to compensate the dilution of your capital!
214-You have to be cautious
Having to share the capital is not the best issue. This is just one more reason for you to be rigorous.
-Beware of false promises. Check that your future business associates are financially solvent.
-Always demand contributions in cash. Refuse contributions in kind, which are always difficult to evaluate.
-Follow the golden rule for partnerships: Always make sure that you or your family remain in control of the company
-Pay special attention to the company statutes. Always consult specialists in this area (lawyers).
We will now explain how to proceed to raise money from different categories of private people.
The simplest way of supplementing your equity is to call on members of your family. In many merchant communities, it's the traditional way to get money. If you do not belong to these communities, the task is more difficult.
Never borrow, but ask your parents, brothers and sisters to buy shares in the business.
You will need your mission statement and a preliminary project, since decisions in the family environment are often based on affection.
Down earth advice:
Be very careful since family relations are expected to last lifelong. Do not obliterate your capacity to inherit.
You have to think and plan your family fund raising. Avoid to ask your brothers or sisters: It could be a cause of conflicts. Avoid to ask your parents because you would have to bear their lasting authority.
On the contrary, favor the grand parents (Great Dad if you are a girl and great Mum if you are a boy). In large families such as in India, target the old uncle or aunt who have no child: Implicate them in a biz is a good way to get an inheritance that you would not have obtained by the natural filiation!
23-Friends and acquaintances
The second way to get money is to tap in your friends and acquaintances. It isn't as simple as that! You have to find people with money. You need money and not only acquaintances or friends!
Down earth advice
A common adage says that the best way to lose a friend is to lend him some money and reciprocally. In fact among the circle of friends, some of them can be eager to participate to a biz. It means that you must target people on the basis of their business awareness rather than on the quality of the friendship you have with them.
If your best friend mainly shares with you the passion of sea surfing, it 's not the most appropriate person to start a biz in selling pizzas!
Anyway, you have to ask yourself the following questions: Who and How?
In fact, there are people with money all around you and you already know some of them: Your doctor, your dentist, your notary, your lawyer, the key tradesmen from whom you usually purchase your daily requirements.
Down earth advice
This advice applies mainly in small towns or rural areas where everybody know everybody. If you live in a big town, you could find these persons through associations such as charities, college alumni, cultural groups and so on.
I already recommended you to apply for membership in the most associations you can and to make you visible in delivering voluntary activities and speeches on general topics such as ecology, economy and so on.
You can focus on medical and health care professions: These people make a lot of money but they are bored with their jobs. They are eager to find some fascinating opportunities!
Real life example:
As investor consultant, I met a lot of doctors, surgeons, architects and so on who want to invest their large personal savings in some business.
Most of the time, I realized that they were blindly ignorant about the business rules and nevertheless eager to enter in the most risky ventures (notably the women!).
Your idea must flash and be very profitable.
These people will only be interested in your project if you can persuade them that they can achieve very high financial rewards in a short time. In concrete terms, you have to convince them that they will multiply their investment by 5 or 10 within 3 to 5 years!
Remember the two following principles: No big money expected=No associates. No quick money expected=No associates
From a practical point of view, here's how to proceed:
-Contact people you know already either in person or by telephone and ask them to give you three minutes of their time.
-These people are no financial experts. For your initial discussion, you won't need a 60 page business plan. Your mission statement and preliminary project will suffice.
-On the other hand, you need to attract them by talking about the huge profits they could make. Attracted by the possibility of making big money, their judgment will be altered and they will be less demanding in terms of project content!
-Show them a simple graph describing how much $1,000 invested in your project now will be worth in 3 years.(Use the return on equity and the cumulative cash flow projections)
YEAR 1:------ $4,000
YEAR 2: ------$7,000
YEAR 3: -----$10,000
Compare this development with an ordinary business which would earn between 8 and 10% per year (i.e. $1,330 after 3 years compared with $10,000 with your project!)
Talk about your project as a treasure island! Don't be afraid to exaggerate. The bigger the bait, the easier your message will be accepted!
On the other hand, be prepared to answer the following question:
"How can I get my money back in 3 years time?"
You have 4 possible answers: 2 wrong answers and 2 right.
-Wrong answer: "You will be paid dividends every year". Do not make rash promises. The payment of dividends would reduce your available cash, and you will not definitely be able to pay such high amounts every year
-Second wrong answer: "You stay in the business, and your $1,000 might turn into $100,000 in ten years". Your prospective investor doesn't care about what may happen in 10 years. He wants to be sure that he can get his money back in 3 years.
-First right answer: "The market is very competitive. In 3 years time, we'll sell the business to a big company for 10 times its starting price"
-Second right answer: "In three years, we'll float the company on the stock market and you'll be able to sell your shares for 10 times as much as they're worth now".
You can choose between the 2 right answers depending on the person you're speaking to. For example, don't talk about the stock market to somebody who has never speculated!
Real life example
Be very careful about the time and money you spend in contacting these people. People always agree to meet you when you invite them to have dinner in a fine restaurant. Most of the time, they only pay you with lip service.
I knew a poor guy who had organized cocktails and lunch with a lot of people during one year without having collected a single dime. By the end of the year, my guy had spent more money in lunch than the funds he expected to get for completing his equity!
3-BUSINESS ANGELS AND VENTURE CAPITAL
After the relatives, the friends and the informal relations, the biz angels are the main resource for funding.
About business angels, it is currently said that their available money is more abundant than existing business ideas: You have just to tap in it. Be careful. It's not so easy and with the Dot-com crash, business angels are becoming very cautious!
Keep in mind that an average of 100 projects are examined for every one selected.
All that we have said about the private persons are enhanced regarding the business angels: Your project needs to be profitable in a very short time and you will need to prepare the two right answers about how they can get their money back.
What is more, you are dealing with professionals who know more about business than you do. Consequently, you must present a complete and irrefutable business plan. If you do not satisfy these three conditions, your project is very unlikely to be selected.
32-How to join them?
Clubs of business angels or venture capital exist all over the place. You can find their addresses from your local chamber of commerce and on the web: ( See "other links by the end of the course).
Although most of them are in the US or United Kingdom, don't hesitate to send them your summary even if you are living in India or other countries.
Nevertheless take the time to read carefully the advices they give on their web sites: Some are specialized by sectors and it's fruitless to send them a biz idea outside the sector they cover. Some are specialized by geographical areas. If you are living in India, do not apply for a biz angel who only covers the middle west! Some indicate the minimum or maximum amount of money they could invest. Take notice of these information's.
Down earth advice
As it's difficult to be selected, take the time to carefully target the business angels according to the characteristics they indicate on their web sites.
Be reasonable in your capital requirement. If you have only invested $10,000 don't ask $10,000,000!
Anyway, Business angels focus mainly on 3 facts: The idea, the gross margin, and the quality of the team. Put these facts in good place in your presentation.
You can also join the biz angels through some directories but I think that the best way is to look for a direct contact.
33-What is the process?
Most of them agree to receive the executive summary by e-mail. More they receive, and more they have a big choice to select the best.
Down earth advice:
Try to get a first appointment before sending you executive summary. For example, make a cold call and say " I am calling you because I have your name from X or Y". It should give the feeling that you already belong to the biz community!
Thanks for this prior meeting, you can tackle with that your biz angel is expecting. Consequently, correct your executive summary before sending it. What is more, if your idea is bright, it's better to expose it shortly face to face, instead of taking the risk to be rejected on your writing skills!
They shall read your executive summary and you can expect a quick answer. If their opinion is positive they will ask your complete business plan.
If they feel that your project is worth to be examined, they will call you for a meeting. You have to negotiate and finally you can get a positive and final decision. Be aware that all this process could get a bit of time.
Down earth advice:
You will meet either young golden boys or old crocodiles. In negotiating, be a tough guy. They don't care for you. They just want to benefit from your idea. There is not any room for good feelings in business!
Be speedy. Do not implore them. Do you finance my project: Yes or no? If they can't make up their mind, do not lose your time. Give up and look for another biz angel.
Compared to family and friends, the great advantage of business angels and venture companies relies on their ability to provide you with "smart money". It means that beside the money, they can also bring experience in management or in other fields useful for your biz.
Go to www.iversonsoftware.com and click on "success tools" and then on "How to raise money for starting your business".
Then go to www.powerhomebiz.com and click on "financing your biz". You will find here some information's about "free money" that is to say grants distributed by public agencies in order to help small biz.
These two web sites will provide you with a lot of complementary advices. Scroll the two entire sites because their content is specifically adapted to small biz needs.
In most countries, flotation on the stock is monitored by regulatory authorities. In general, a small company cannot be listed on the stock exchange unless it starts out with a large capital and is already very well known. On the other hand, even if you can't yet be listed on the stock exchange, you can collect money from the public by using modern Fund raising methods.
The principle is as follows:
Instead of asking for large amount of money from a few persons, collect big money by asking for small sums from thousands of individuals contacted by advertising. Be aware that regulations in certain countries forbid this type collection.
In practice, proceed as follows:
-You pay for an advertisement in economic / financial newspapers, backed up by a direct mailing sent out to self employed professionals and key tradesmen. Information you supply should include: Your mission statement, prospect of making a profit, shares people can buy: 100, 500, 1 000$, where you can be contacted: Phone, e-mail, fax.
-Invite everybody who has replied to a luxurious hotel and present them your business using diagrams and graphs, just as you did previously for the private persons. (Insist on the prospect of making a profit, present your business as a one-off chance that only comes along once in a lifetime etc.) After the meeting, register share reservations.
You can organize this type of meeting in several different towns so that people don't have to travel too far.
-Invite everybody who has made reservations to meet your lawyer. This is when they will pay for their shares.
The method appears simple and seductive, and is often used for charities. Let us suppose that we want to finance a dispensary worth $50,000 in Mali. We spend $100,000 on advertising. We obtain $150,000 worth of donations, and are able to put the dispensary in place with our margin of $50,000.
However, in your case, you aren't trying to finance a dispensary! If you spend $100,000 on advertising to collect $150,000 worth of contributions to your equity, your accounts will have to show $150,000 equity and $100,000 expenditure on advertising. In concrete terms, this means that you will record a loss of $100,000 for this attempt to increase your equity. With methods like that, you'll be bankrupt in no time!
In fact, you must never spend on advertising more than 10% of the amount you want to collect.
Now, if we consider that:
-For every 1 000 people affected by your advert, even though it was targeted, only one will end up paying you any money in the notary's office,
-In order for 50 000 people to receive your targeted mailing, in the USA you would have to spend approximately $50,000 (1 dollar per letter),
-At most, you can expect 50 people to be present at the notary's office.
-Each person must therefore pay $10,000 to complete the operation:
$10,000 x 50 = $500,000 collected for $50,000 worth of advertising.
Note that an operation of fund raising like this is a project within your project. It requires market studies and several consultations with advertising agencies and legal firms.
Down earth advice:
I don't recommend such a method: The campaign cost is definite. The result is always random. If you fail, you will have wasted your money on nothing but hot air.
If you are nevertheless curious about fund raising go to www.raise-funds.com . You will find here a complete web site dedicated to this fascinating topic!
4-BORROW MONEY FROM BANKS
We advise you about the risks of borrowing money from your parents or friends. Consequently, we will restrict ourselves to borrowing from banks.
The advantage of taking out a bank loan is its lever effect. If you borrow money at 10% and if your return on investment is 50% per year, then it's obvious that the more you get into debt, the richer you will become! Although sharing your capital decreases your prospect of making a profit, as we have seen (the dilution effect), getting into debt increases it.
If you aren't making results, the lever effect turns into a bludgeon effect and you are in danger of not meeting your payments. This would be the case if, for example, your return on investment is only 8% whereas you are paying the bank 10% interest.
Real life example:
The dot-com and telecom companies have made an extensive use of the lever effect! As a result, they are today heavily indebted.
As their expected profits have turned into big losses, their stocks are currently falling down and they must fire a large part of their staff. There is a perfect illustration of the bludgeon effect.
Working with money belonging to other people is always tempting, but you must remember that a new company always has problems getting bank loans (statistically your chances are 1 in 100).
Observe the following notions:
-The rule of 1 for 1: There is no point going to see a banker if you're going to tell him: "My project costs $100. I've got $20. Lend me the $80 I'm missing".
A banker always applies the 1 for 1 rule. I'll lend 1$ for every 1$ the promoter invests in the business. What is more, the banker analyses all the company's needs:
Let's take a toy factory as an example:
There are $10,000 worth of investments. You pay for equipment and salaries all year round, but sales are only made at Christmas. You therefore require a cash flow of $15,000 until Christmas.
Your total financing requirement is therefore:
Cash flow:--- $15,000
If we apply the 1 for 1 rule:
You contribute: -------$12,500
The bank will lend you: $12,500
-The rule 1,5 for 1: For a new company, the bank generally demands guarantees worth more than the amount they will lend you.
If the bank lends you $12,500, they will require guarantees worth $18,000.
Since the company is new, it does not have many guarantees: Its land and machines may be worth $6,000. So you have to expect the bank to ask you for an extra guarantee of $12,000 on your personal goods: a mortgage on yours and your spouse's house.
Here is our advice in this situation: Never give personal guarantees and consequently do not approach banks for financing the start up of your business. Go to banks only once your business is 2 or 3 years old.
Real life example:
Too often along my banker career, I have dealt with poor guys heavily indebted, unable to repay and who had given personal guarantees such as their family house. It was like a tragedy not only for the borrower but also for his spouse and kids.
A new biz is always a very risky deal even when all has been carefully evaluated. You are required to invest your savings and may be the savings of some private fellows and relatives. Don't engage any more! It's a good bit of advice! Try to recall it.
If you follow this advice, you can take out a loan only when your biz is three years old either to increase your production capacities (investment) or to finance short term cash flow requirements.
We will now look at these two objectives.
42-Target your goals
Firstly, you have to clearly define what you want and what the banker is expected to want. As you shall see, some of the objectives are quite opposed!
You want to:
-Find the financing you're missing
- Find it at a cost (interest rate) that does not burden the profitability of your business,
-Find it quickly
-Avoid giving any guarantees that are higher than those the company can offer.
422-The banker's objectives
The banker is generally a senior executive. What is his motivation?
-His management has given him objectives to achieve in terms of turnover. He must therefore negotiate as many loans as possible.
-He has objectives in terms of margins. He has to lend money at the highest possible interest rate.
-He must take as few risks as possible. He must therefore ask for as many guarantees as possible.
-He must justify to his management that his decisions are founded. He therefore requires detailed, thorough, extensive studies that he probably won't even read.
Considering these banker objectives, there is at least one that you can easily satisfy: Product many surveys. The more documents you give him, the happier he will be. It's the nature of bureaucrats to be reassured by paperwork!
Time is coming to apply that you have learnt in the "negotiation module"
You have several trump cards:
-There are more and more banks having to compete against each other
-Your company already exists (Recall that it's our hypothesis in this case). Your company's accounts are already with this bank. You are well known there. You have a good reputation (You are always smiling, always polite to the staff, you give them little presents at the end of the year and give chocolates to the secretary whenever you come in etc.)
-You have the largest possible file to support your demand. Do not attempt to exaggerate prospects for making a profit. Unlike an associate or a business angel, a bank executive is not interested in becoming rich. Figures that look too promising could even make him jealous and less favorable to your request
-On the other hand, stress how careful you are, and emphasize the lasting nature of the company, its financial solidity, the serious way in which it is managed, its earnest social policy etc.
Then, You present your file: Watch your banker's reaction closely:
-He shows a degree of interest: "Your project seems interesting. I'll take a look at it".
-He is reserved: "Write me. Send me more information's on paper".
In the second case, give up. Do not get dragged into interminable delays. Withdraw your accounts from this bank and go somewhere else.
432-Content of the loan:
Your loan must be suited to the object it is financing.
Let us look back at the example of the toy factory. For example, you need $10,000 for extra investments and $15,000 for cash flow requirements.
The 1 for 1 rule still applies, but it can take into account the equity that already appears in your results. The banker will demand a contribution of 50% for the investment, i.e. $5,000 but in view of your previous accounts, he may accept to finance the bulk of your cash flow requirements.
However, let us suppose that the 1 for 1 rule is applied strictly. The bank's $12,500 loan will then has to be split in two according to the following diagram:
Question: Why not finance the entire investments yourself and use the whole bank loan for your cash flow requirements?
Answer: The money financing the investment is stuck for a long time. The money financing the cash flow requirement is repaid at Christmas when sales are made. In order to avoid immobilizing too much Cash, you have better to use a part of the bank loan for your investments.
433-Term of the loans:
-Check that the term of the loan is equal to the life time of the investment it is financing.
-Choose the lowest possible interest rate. If the rates are high, choose a shorter loan in order to avoid interest payments.
-Prefer an authorized overdraft facility that limits paperwork and gives you more freedom.
-Watch out for rates that are excessively high. Negotiate as hard as you can, or you will find yourself working for the bank!
-Limit the guarantees to those that can be given by the company. Mortgaging land and securing machines for a medium term loan; for a short term loan, bank domiciliation for invoice payments and securities in its favor
-Check all the clauses of the bank loan thoroughly: Refuse any obligation to buy new equipment
-Refuse any obligation to take out full risk insurance for equipment and vehicles.
-Read attentively all the conditions regarding loan installment payment. If they are any restrictive clauses, refuse to sign and see another bank! You have already lost a lot of time on paperwork and formalities trying to get a loan. You should not lose any more time obtaining the funds
Real life example:
It happens that the bank manager comes to a decision that makes the clerks unhappy because their unfavorable advice has not been followed.
In this case, I have often observed that they had fun in writing specific conditions which practically prevent the customer to withdraw the funds!
435-Before signing the loan contract, ask the opinion of a lawyer.
44-Relationship with your banker
Loans are based on trust. In order to maintain this trust, you must have a permanent relationship with your banker.
-Show him round your company. Clerks are always happy to get an opportunity for leaving their desks and make a promenade!
-Go and see him regularly and chat with him. Ask him for advice every time you visit him. He will be flattered, and you don't have to take the advice he gives you.
-At the same time, give him information about the market situation or about the competition. Avoid being overly critical of your competitors!
Real life example:
Every banker considers his customers just like a school mistress considers her pupils! I recognize that I ever indulged for customers who currently visited me to talk about the market situation.
In fact, they usually told me horrible stories about their competitors but when one of them was also my customer I was happy to hear about some facts that I ignored because he never visited me ( the typical bad pupil!)
-Before he even asks, provide him with studies, management data charts, provisional or definitive company accounts.
-In case of difficulties, go and see him immediately. He is there to advise you.
1-The first step is to know the amount of personal money that you can invest. We recommend to be cautious because many events such as illness can happen. You must always have a little bit of personal savings.
As you have not much money, your only asset is your idea. It consists in selling goods and services, but you must first "sell" your idea to collect the funds to start the business.
2-Firstly, you can target your family, friends and local or close relation. You must target people on the basis of their business awareness rather than on the quality of the friendship you have with them.
3-After the relatives, the friends and the informal relations, the biz angels are the main resource for funding. Keep in mind that an average of 100 projects are examined for every one selected.
What is more, you are dealing with professionals who know more about business than you do. Consequently, you must present a complete and irrefutable business plan.
4-Working with money belonging to other people is always tempting, but you must remember that a new company always has problems getting bank loans (statistically your chances are 1 in 100).
Never give personal guarantees and consequently do not approach banks for financing the start up of your business. Go to banks only once your business is 2 or 3 years old.
DO IT YOURSELF
1-Follow the action plan outlined below:
(1) If we apply the rule of 1 for 1
You provide:--------------------------------------- $20,000
The bank will lend you:------------------------------$20,000
Finally, You started out with 1$ and have attained 4$.
It's difficult to predict how much time you will need for getting this money.
Family and close friends or private relation: 1 month. It means about 40 hours of contacts, meetings and formalities.
It's the only figure we can retain in our global program. Once again , I encourage you to start with your own and private saving.
No matter you start small but it's very important to start quickly because it is quite impossible to keep a high mental pressure on a period over than one year. Afterwards you risk to despair or just to change your mind!
Business angels: 3 months
Banks (first contact): 6 months.
Useful links: URL:
www.zizzoo.com/guides/venturecapital/index.php : Learn how to acquire venture capital for your business. Help your business grow by giving it the funding it requires.
www.us-government-money.com : Free money grant and loan information resources. Helpful resource for obtaining a grant or a loan for small business.
Fund Your Business From Your 401K or IRA. Pension Transfer Advisors offers
an IRS-approved plan which allows you to fund a new business with monies
from your 401k or IRA account - with no taxes or early-distribution penalties.
Never despair. Constantly expand your vision. Never forget that it is your main weapon. Visualize!
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