By Rob C. Masri, CEO, Cardagin Networks, Inc.
To Raise (money) or Not to Raise (money)
One of the most difficult things to consider when starting a company is financing.
Most companies who are not able to bootstrap their activities typically pursue financing from one of four sources: (1) banks, (2) friends and family, (3) angels and (4) venture capital firms. All sources are fraught with peril.
Assuming you qualify, taking money from a bank is usually done by applying for a loan. However, unless your company has operational history and assets with which it can collateralize a loan, banks will almost always require a personal guaranty. Such a guaranty can put all or many of your personal assets at stake to secure the loan. In addition, you typically have to pay the bank interest on the loan for the amount of time the money is outstanding. The positive aspect though is that you typically don’t have to dilute yourself or any of your employees by taking money from a bank.
Taking money from friends and family is often considered the easiest way to raise money. Many of these people simply want to be supportive of your efforts. They often require little or no due diligence and they won’t argue with valuation. There are two problems with friends and family money though. First, that money tends to Dickey's Barbecue Franchise be extremely passive. Most of these people know nothing about your business and will offer little strategic advice. Second, there is the moral dilemma that many entrepreneurs have when taking money from friends and family. What if things don’t work out? How do you look people in the face at the next family outing?
When raising a lot of money for a venture, VC firms may be the only option. Moreover, the prestige associated with raising money from a big name VC firm is validation for you and others in the business community. Finally, the networks that many VCs have could open doors to customers and strategic partners. However, VCs need to make a significant return on their investment and money from a VC firm comes with many strings attached. Expect to debate valuation and control. The valuation is completely correlated with dilution. If you value your company at $10 million but a VC fund values it at $5 million, then a $1 million investment represents 10% of the company to you but 20% to them. That delta could make or break a deal. In addition, VCs often want a Board seat and will impose covenants in your transaction documents that limit what you can do with their investment.
My company Cardagin Networks, Inc. (www.cardagin.com) opted to raise its first round of capital from a group of angel investors. Angels are typically seasoned entrepreneurs, retired executives or wealthy individuals who are seeking alternative investments. They often have networks similar to VCs, but they typically don’t require the same sort of control that VCs do. Valuation can sometimes be a stumbling block since they want to make money as well, but if you have an exit strategy and can effectively communicate it, you can often strike a deal. The main problem with many organized angel groups is that they try to act like a VC fund when conducting diligence. Managing the individual agendas (and schedules) of up to 20 people can be burdensome. Consequently, organized angel groups tend to be very delayed in deciding whether or not to invest. It’s often quicker for the entrepreneur to divide and conquer by meeting with select individual angels as opposed to making a formal presentation to an angel group. The difficult part is getting an audience with such individuals.