March 16, 2000
Top 7 Things Nobody Will Ever Tell You About How To Raise Capital And Start A New Business But Later Wish You Had Known
Over the last several years, I have undertaken a shift in the direction of my business focus from running a highly profitable health care consulting practice to founding two private equity funds -- one which relates to the acquisition and turnaround of troubled HMOs and the other that deals in first-stage health
care technology, medical devices, and every-commerce companies. Having managed health care start-ups and turnarounds for fifteen years did not prepare me for the venture capital climate of the early millennium.
To all of you would-be entrepreneurs with your ideas and ideals held high, I hope the following lessons save you at least one more night's good sleep.
- Just because their business ideas and reputed expertise are great, don't go into a start-up business with people you don't already know and have faith in. Relationships are hard enough to build when all of the components that lead to the
relationship are stable. Getting together with a few people who have good ideas and try to create a business will usually leave at least one of the prospective owners resentful, believing he or she was left out, and at his or her lawyer's office.
The rule is, as with mergers, if the cultures/people don't necessarily fit or have interpersonal synergy, the excitement over the business deal or opportunity itself will not make it with this void.
- Never believe that people will invest in an idea in any amount beyond $10,000 without a business plan. Even if you believe that the plan is so obvious or that you are the greatest salesman or woman since P. T. Barnum, you can't do it without a focused, concise document that makes the case why people should invest in you rather than put their money into the stock market for what has proven to be almost guaranteed returns.
- Unless your product or service involves the use of the Internet or e-commerce (and this premise too will change), be prepared for lots of rejection, well-meaning but crushing criticism, cynicism, rudeness, and unkept promises. Successful private equity investors put up money for between every 100 and 250 deals they review on average. That means there are a lot of would-be entrepreneurs being pounded upon before they make it.
- Finding the necessary capital is ten times harder than conceptualizing, starting, and growing your company. Yes, there is lots of money out there, but it always seems that it's going elsewhere. I have found that raising money always takes a minimum of six months, and possibly up to two years longer than I would have expected. In this climate, there is lots of money for a small number of brilliant ideas.
- Don't confuse access with accomplishment. There are many folks who will listen to your business proposition or idea for an interesting new product. Even the big private equity firms will listen to you, ask lots of questions, and maybe show some alleged real enthusiasm -- prior to writing you a check. There is an old principle of the equity financing world that we call
"SHITS" (Show High In-Thusiasm, Then Stall.) The real interest, as opposed to the platitudes, only starts when you have a term sheet in your hand for financing, and then the fun of negotiation really begins.
- Be very wary of self-styled investment advisors or bankers who will just about guarantee that you will have no trouble raising money, but who tell you you need to hire them first. "Investment advisor" is too often becoming the new version of the chain letter hoax.
Before someone or some company asks you to pay them a retainer to either "introduce" you to capital sources or to help you with your business plan or idea, ask one question: Who are the people for whom you secured funding, in what amounts, and can I call them? We all still want to believe in the goodheartedness of the person who says: "I can get you the money." Maybe they can, more likely they won't. Unfortunately, this may also include a number of lawyers/erstwhile investment advisors who should probably stick to practicing law.
- Be prepared emotionally to accept and then overcome the rejection from those who will tell you any one of the following things:
If you can't face the thought of being humiliated, facing endless self-doubt, not sleeping, or being irritable with just about everyone around you that you care about, think real hard about attempting to raise money to start a business.
- You don't have the necessary track record for funding!
- Your business is undercapitalized!
- You have ten competitors in existence already much larger than you will ever be!
- Your concept is a great idea as a "lifestyle" company, meaning it will support your lifestyle but not with their money!
- Don't be astounded at what people expect to own in return for their investment, hence, the percentage of your company that they will demand for a seemingly small investment. Most people who start up businesses intend to remain in control of them, otherwise, why would you start one up in the first place. But when it comes to serious money (for example, over $100,000), you will too often find that the usual and customary formula for that green stuff is fifty to eighty percent of your business for being willing to part with it.
Too often, people get so desperate to get their ideas launched that they will give up just about everything, only later bemoaning the fact when they discover that too often, they have still been working to a large extent for somebody else.
- Don't also be astounded at the return on investment that people expect, hence, why so many business ideas don't get any funding beyond sympathetic family and friends. Equity investors are seeking a minimum of a thirty percent return per year from their investment, compounded. So what that means is if you are asking somebody to give you a hundred thousand dollars in 2000,
and if they are a sophisticated investor, they will be looking to see how their investment reasonably has a good chance of being worth about $350,000 five years later. That means that the company has to either grow very fast or that the would-be investor needs to own a high percentage of the company to ensure that, when it succeeds, he or she gets a return on his/her money.
- Don't abandon your ideas after hearing all of the reasons your shouldn't try to raise money in connection with starting your own business. I have been involved in two capital fund start-ups in the past three years. Both of them have caused more to doubt my creativity and sanity, have made me irritable with my colleagues, friends and family, and have had me convinced
that I should have never started down this road in the first place. But proving your idea and testing your mettle to the world and to yourself is the most stimulating, energizing, and challenging activity in which you can ever engage. Zig Zigler is right: "There is always room at the top."
Artilce by Barry S. Scheur, President and founder of Scheur Management Group, one of the nation's largest health care consulting firms specializing in operations, management, and strategic business planning. He is also chairman of Catalyst Health and Technology Partners and is chairman and founder of Venture Health Partnership Group, a health care acquisition firm focusing on purchasing and turning around distressed provider-owned HMOs and reshaping the practice of managed care one health plan at a time.
Although blinded at birth, his career as lawyer, health care executive, and corporate president is testimony to an unquenchable spirit, a zest for challenge, and an ability to spot, develop, mentor and motivate talented people. Barry is a successful author and lecturer using a combination of charisma, energy, and technical knowledge. For more information, contact SMG Public Relations at email@example.com