You’ve heard that it takes money to make money? Attracting investors and convincing them to pony up is one of the unavoidable costs associated with raising capital. For the entrepreneurs out there who will actually cut the checks, here are the cold hard facts:
Raising money via Reg D is the easiest and cheapest way to raise money if:
You have an established business that is generating profit.
Your business has revenues, and operations can be streamlined.
You know an existing network of accredited investors who are interested in investing in your particular business (and agree to the terms both parties will accept.)
Basically, if you have a rich uncle, friends and/or network raising money for your business, using Reg D is the easiest way to attract investors. There is little to no marketing necessary. Most deals are closed over lunch or in small meetings. The paperwork for accepting funds from three to 10 investors is minimal and typically consists only of a Private Placement Memorandum (PPM).
If you meet the three requirements above and you already have a lawyer or law firm that you work with for other business matters, they should be happy to bill you $10k – $20k just for the PPM. With the PPM, you can raise unlimited amounts of money from your accredited investor friends, family and network with very few sunk costs. For instance, if you have a cash flow positive business (or want to do a real estate deal), a $15k PPM for a $100M deal is cheap. Your existing law firm is happy to draft that for you, as they value you as a long-time client and know that there will be more business coming down the line once you attract enough investors to secure that $100M deal.
Attracting investors via Reg D is inexpensive and hassle-free if you already have a monied network. However, for startups who are non-monied individuals, the ease of accessing networks in an attempt to raise funds comes with costs.
Old money does not invest in startups; old money invests in funds that invest in startups. Old money doesn’t talk to entrepreneurs; old money golfs with their financial advisors and bankers, who may, at less than a percent of their overall portfolio, advise them to invest in a fund that invests in startups. Why? Investing in startups is risky business, and they don’t know who the f* you are.
As humans, we naturally distrust strangers. If I don’t know you, I’ve no reason to like you. If a person doesn’t know and like you, the odds of them trusting you are about zero. If you are known and liked, the odds of them trusting you with their investment is slightly greater than zero, but not more than 0.91% for angel investments and 0.05% for VC investments. And even those odds come with an asterisk as fundraising changes for young startups.
But generally speaking, if investors don’t know who you are (or that you even exist), getting investments requires putting some money into getting noticed. So, when Angels, VC and accredited investors don’t know you or your product (as a startup, you may not be an established business with a product or revenue), you have a few hurdles to overcome:
Getting known by accredited investors
Finding said accredited investors
Overcoming the “stranger danger” of being a risky entrepreneur/startup that they don’t know
Hoping your startup aligns with their investment ethos or portfolio goals
Convincing them to invest in your startup
Agreeing with them on the terms of their investment
Accomplishing those seven steps has an average total cost of $46k in travel alone. The entire process may take approximately 21 months. However, these figures come with asterisks as well, because of all of the startup founders interviewed and data collected, we were only able to collect information from those who actually got funding. Remember how less than one percent of startups are successful at securing funding? That’s why.
It’s important to budget for the attracting investors phase. A pitch deck alone can easily cost $5,000. After 80 plus hours of labor, hiring a graphic designer, reviewing content with a lawyer and printing multiple decks for each meeting, it is easy to sink $5,000 into a pitch deck and not even realize it.
Now add the cost of a pitch deck to the following:
Anticipate a minimum of 50 meetings to get an investment. Remember, not all money is good money. In the above scenario of 50 VC meetings, your costs are $69,500, not including your video and printing cost. It’s always advisable to try and schedule two to four meetings per trip to reduce the total number of trips. If you can cut it down to 25 trips over a 21 month period, then you only have to beg for money in a suit about once a month.
If you’re a woman, double the number of meetings (and cost), and you’re still probably more likely to get struck by lightning in a basement on a sunny day than securing Angel or VC investment. The reasoning for this is super simple. You have a vagina and are being taxed for it. #vaginatax. I tease. Women get an astounding 2.2% of VC funding, despite women-led businesses being 35% more profitable than businesses led by men. Chances are that when women-led businesses are 70% more profitable than men led businesses, they’ll probably break the 5% mark of funding. #Goals
And no, living and San Francisco or NYC does not save you money in accessing capital. Yes, you won’t have to plan or take nearly as many trips. However, do you know how much it costs to live and build a startup in NYC or SF?
Last but not least, the above scenario only involves one founder. If you take your team to help you pitch to investors, multiply the cost by whatever number of team members you take. Yes, you can double up on hotels, but airfare is airfare, and even interns and COOs need to eat. The above scenario also doesn’t involve attending any conferences. A “good” conference, with actual investors, will cost you $2k just to get in the door. Whether it’s SXSW, Consensus or Money2020, $2k per conference ticket is pretty standard—not to mention all the other associated conference costs.
Here is the bottom line:
It still takes money to make money.
If you have an existing business with revenue and an accredited investor network, who would be interested AND willing to invest in your business, AND you can come to terms with them that doesn’t make you an employee, Reg D is the “easiest” funding option.
Otherwise, it still takes money to make money…particularly if you’re also paying a #vaginatax.
Under the JOBS Act Reg CF, for raising up to $1.07M, you should anticipate costs of at least $21k and up to $150k to execute a successful raise of $1M. For Reg A / Reg A+, you should anticipate a minimum of $150k and up to $500k or more in an attempt to raise up to $50M. Reg A / Reg A+ is designed specifically for people who don’t have direct access into a network of accredited investors but need to raise more than $1M, typically in the $2-5M range.
Last but not least. Crowdfunding may not be your best option. Also, all fundraising comes with risk and is a great way to lose all your money. Be sure to write down your cost and gain an understanding of what you’re really about to do. Cheers, and may the odds forever be in your favor.
[Editor’s Note: For more information on JOBS Act Crowdfunding, Williams recommends the following videos: What is Crowdfunding and How the intersection of ICOs / STOs and Crowdfunding impacts you. Also, check out these related webinars, which can be taken for Continuing Legal Education (CLE) credit, or simply for practical and entertaining education for business owners, Accredited Investors, and their legal and financial advisors: Raising Capital: Negotiating with Potential Investors and Crowdfunding from the Start-Up’s Perspective.]
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Samson is a classically trained anthropologist, finance and public health expert who advises Fortune 100 companies, Executives and startups in Dubai, Washington, DC and Dublin, Ireland. Samson’s focus is helping firms understand the latest trends in fintech, alternative investments, blockchain, AI, health and digital transformation, so that they can make strategic and profitable decisions for…
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