You’re an entrepreneur with a great idea. But your business needs money. So, do you max out your credit cards, borrow from friends and family, and do everything yourself? Or do you make a devil’s bargain with some venture capitalist who’ll demand a tenfold return and could easily take your business out from under you?
No and no! You don’t have to bootstrap, and you don’t have to sell out! Jenny Kassan says the landscape of investment capital is far larger and more diverse than most people realize. She illuminates the vast range of capital-raising strategies available to mission-driven entrepreneurs and provides a six-step process for finding and enlisting investors who are a match with your personal goals and aspirations. The plan you create will inspire you, excite you, and help you achieve your dreams!
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About the Author
Ro Khanna is the United States representative for California’s 17th congressional district.
Read an Excerpt
busting the myths
FORGET EVERYTHING YOU THINK YOU KNOW
The amount of misinformation and confusion out there about raising capital from investors is staggering! I cannot tell you how many times I have been at presentations by "experts" and listened with amazement as they confidently informed the audience of "facts" about capital raising that were completely incorrect. If experts like lawyers and finance specialists are so often wrong on this topic, imagine how hard it is for the layperson entrepreneur to get the full and correct picture.
I have been on a mission for years to rectify this situation, which is why I wrote this book. Because so many lawyers and other so-called experts seem to be too lazy to take the time to understand the full spectrum of capital raising options and because they also seem to be unwilling to admit when they don't actually know something, entrepreneurs are constantly making huge mistakes with their capital raising efforts that can cost them time, money, and even their business.
Why am I so well qualified to give you the truth about capital raising? Due to an accident of my career path, my approach to capital raising is different from that of most lawyers.
I started my legal career as in-house counsel at a nonprofit organization in Oakland, California. While I was there, I worked on lots of very interesting projects, such as building a mixed-use transit-oriented real estate development and starting and running businesses that were subsidiaries of the nonprofit, with the goal of creating jobs and wealth in the low-income community where the nonprofit was based. After eleven years, I left to join a small boutique law firm that focused on helping mission-driven businesses (aka social enterprises — any business that makes a positive impact in the world through its products or services, its contribution to its community, its treatment of its workers and suppliers, and/or its commitment to caring for the environment) start up and raise capital. The founder of the law firm was one of the nation's top securities lawyers. I barely knew what securities law was! He taught me that securities law is what governs how businesses can raise money from investors. I started to learn about securities law, and found it fascinating. So, even though I had eleven years of experience as a lawyer, I approached this area of law with a beginner's mind. I had never learned all the conventional wisdom about how securities law is practiced. (Luckily, the founder of the firm was very open minded and entrepreneurial, so he didn't fill my head with the conventional wisdom either.) Though I didn't know it at the time, I was approaching securities law in the way described by Dorie Clark in this quotation from her book Stand Out:
Every field has useful guiding assumptions. Received wisdom saves time — you don't have to reinvent the wheel ... but it can also be a trap, preventing you from exploring new ideas ... You don't succeed by following the rules and thinking exactly like everyone else; you need to ask "what if?" and "why not?" ... What would [an outsider] make of how things are typically done? ... Might there be a new or different way of doing things?
This attitude allowed me to see possibilities that other securities lawyers didn't seem even to be aware of.
Most lawyers try several different practice areas and find that there is one area of law that they really enjoy. For me, that was securities law. There was something about it that I found fascinating, fun, and exciting. I was completely hooked on learning as much about it as I could. I read every book I could get my hands on, talked to every securities lawyer I could pin down, and read the actual statutes, rules, and case law. Believe it or not, a lot of lawyers never bother to do this. It is amazing all the things you can find when you really read this stuff. I'll give you a nerdy example of this: There was a young aspiring lawyer who was apprenticing for me. I asked her to look something up in the California securities statute. She said, "Jenny, have you ever noticed Section 25102(e) of the statute? It is a provision that exempts privately offered debt from the usual compliance requirements!" We were both really excited to discover this little nugget in the law that would make it a lot easier for some of our clients to raise capital.
I spent years studying the law of capital raising. I assumed that all securities l awyers knew the same things I did, but I found out that many of them don't. This is because there is a certain well-worn pathway for raising capital that is relatively easy for lawyers to follow for their clients. This is the pathway used by businesses that are raising money from professional investors like angels and venture capitalists. Most lawyers don't bother to learn any other pathway. This is a real shame, because there are many others. I love to help entrepreneurs figure out the exact right one for them.
So forget everything you think you know about raising capital from investors. I promise you that this book contains legally correct information and contains basically all of the legally correct information about how small businesses can raise money from investors — not just the truth, but the whole truth. Of course, as I noted earlier, the law does change from time to time, so please check the readers' resources website for updates. (See the resources section at the end of the book for details on how to access it.)
LET'S BUST SOME MYTHS
Let's bust some myths about what it means to raise money from investors. Here is some of the conventional wisdom that you've probably heard or read on the Internet:
1. You can only raise money from investors if you are going to grow your business very fast and have a "liquidity event" (sale of the company or initial public offering [IPO]) in which the investors make thirty to fifty times their initial investment.
2. Try to delay offering equity to investors for as long as you can because that is the most expensive money you can get.
3. Even though you have to give up a lot of ownership and control when you raise money, the good thing about it is that your investors have experience and contacts in your industry, so they can advise you and make great connections for you.
4. The investors set the terms of the investment — you are at their mercy.
5. If you raise money from investors, you have to give up control, and your investors become your boss.
6. Once you have investors, you must put their interests first, above those of all other stakeholders, or you risk being sued.
7. Investors consist of very wealthy individuals and organizations. They are all looking for basically the same thing, and you need to tailor your business to fit what they are looking for.
Although these statements are true for certain types of investors and investments, they are not universally true. In fact, in my experience (having helped my clients raise millions of dollars and having raised several hundred thousand for my own business), the following statements are true:
1. The vast majority of investors are satisfied with a financial return that is much less ambitious than what angels and venture capitalists demand. (Note that studies of the venture capital industry demonstrate that actual returns are much lower than the hype would suggest.) And most investors consider a lot more than financial return when making investment decisions.
2. You can design any type of investment offering you want — it does not have to be "expensive."
3. It is possible to raise capital (equity or debt) without giving up any control.
4. Investors can get healthy returns from steady-state businesses (i.e., ones that do not grow explosively). A liquidity event is not required for investors to get paid back.
5. The "smart money" that supposedly comes from professional investors (i.e., all that expertise that we are told they have) is questionable. Some professional investors can be a huge asset to the companies they invest in; others will take the company in the completely wrong direction. The founders often know a lot more about the right direction to take their business than an outside investor does.
6. It is possible to design a company and its financing strategy in a way that reduces the likelihood of lawsuits for failure to maximize investor return.
7. The universe of investors encompasses far more than angels and venture cap ital ists, and each investor is unique.
Let me quote one investor I know, Kate Poole, so you can really get a sense of how truly opposite of the stereotypical investor a real investor can be:
I lived at an anti-capitalist commune in Thailand and got really fired up about how capitalism was destroying people and the planet. I wanted to do something to fight capitalism. I found out that my family's wealth was invested in huge evil mega-corporations that were destroying the planet and communities and extracting wealth in an unhealthy way. I organize other young people with wealth to shift control of capital to communities that are most affected by economic and climate crises, especially racialized wealth extraction. As a white inheritor of wealth, I want to invest back in the communities wealth has been taken from.
I hope that you are starting to believe that raising capital from investors can be very different from the much-hyped venture capital model celebrated on the cover of Fast Company magazine.
In the next chapter, we will dive into determining how ready you are to raise capital.
are you ready?
You may have been bootstrapping for a while now — using your personal resources to fund your business and hoping that eventually you will be able to break even and start paying yourself and buying the things your business needs out of revenues.
You probably picked up this book because you are getting tired of bootstrapping. You're tired of working long hours because you can't afford a web designer or bookkeeper, forgoing a salary, and monitoring every penny your family spends. You're tired of not being able to give the best possible service to your customers because you can't afford the highest-quality equipment and suppliers or because you're so busy dealing with administrative issues that you don't have time to stay on top of new developments in your field.
You're quickly coming to the realization that an under-resourced business is a nightmare for the business owner and her customers alike.
Now don't get me wrong. I know that almost every entrepreneur needs to make sacrifices during the start-up ph ase. But there must be an end in sight. If you go on too long with a business that is keeping you overworked, overwhelmed, and broke, you will burn out and fall out of love with the entrepreneurial journey. And your customers may get tired of dealing with an exhausted, burned-out service provider who is trying to wear all the hats in her business.
Going for too long with too few resources is a leading cause of business failure. And you may get so tired of living like this that you decide to give up and look for a job.
This would be a real shame, because the world needs as many people as possible to turn their big, bold difference-making visions into reality.
Don't ask yourself what the world needs. Ask yourself what makes you come alive and then go do that. Because what the world needs is people who have come alive.
— howard Thurman
You owe it to yourself, your family, and all the lives you have the potential to touch with your business to figure out how to get the resources you need for your business to thrive. And the sooner you start, the better. Finding the right funding for you can take many months. Start now so that you get the resources you need long before you start to feel desperate. Raising money when you're desperate is one of the hardest things an entrepreneur has to do. Congratulations — you have taken the first step by picking up this book.
How do you know whether you're ready? Turn to Are You Ready to Raise Capital in the assessments section at the back of the book to help you determine how ready you are and what you may need to do to get ready. The more questions you can answer with an emphatic yes, the more ready you are to raise money from investors.
For each of the questions in the assessment, make sure to write detailed notes about the answers in your journal. For example, saying you know who your competitors are and what makes you different from them is a lot less powerful than making a list of your competitors and writing down how you differentiate yourself from each one.
If you are limiting your business's impact and growth potential because you don't think that you're ready to raise capital, you are selling yourself short and denying yourself a huge opportunity, not to mention depriving the world of the impact you could have if you achieve your business's full potential.
Right now, you may be saying to yourself, Do you seriously believe that any business that can answer yes to most of those questions can raise money from investors? That can't possibly be true!
You're absolutely right. I do not believe that any business can raise money. To put a finer point on it, I do not believe that any business can raise money at any point in time. A business that is ready to raise money now may not have been ready one year ago. But I do believe that any business that isn't ready can get ready. So I take it back: maybe I do believe that any business can raise money from investors!
Maybe you answered yes to quite a few of the questions in the assessment, but you're still having doubts about whether you can successfully raise money from investors.
In this book, I will share examples from real life entrepreneurs I've worked with who (to the untrained eye) looked like extremely unlikely candidates for bringing on investors and reaching their capital raising goals. I'll admit that even I have been surprised when some of my clients reached their goals! But I have been amazed time after time as I've seen so many entrepreneurs of incredibly diverse backgrounds, geographies, and industries use the steps that I am going to share with you in this book to raise the money they needed from investors who were incredibly supportive.
On the basis of my ten years of experience helping entrepreneurs raise money, I honestly believe that if you follow the steps in this book, you will reach your capital raising goal. Will it be easy? Probably not, although it may be. Many of my clients have approached the capital raising process as though they were throwing a big party. So much of what the experience is like for you will depend on how you approach it and your beliefs about it. If you approach it with the belief that it will be really hard, it probably will be. If you approach it with the belief that it will be a fun and exciting process, it is more likely to be that!
All I ask right now is that you put your skepticism aside, as well as anything you may have read or heard about raising capital, and approach the capital raising journey as you would anything else in your business: as a challenge to be greeted with ingenuity and a sense of adventure and without assumptions that limit your creativity.
It is natural to be nervous and maybe even terrified at the prospect of raising capital. Every entrepreneur experiences those fears and doubts. The key is to (1) know the options, (2) choose an option that fits your situation, and (3) feel the fear and do it anyway. As you move forward step-by-step, your confidence will grow.
Raising capital has many benefits beyond the obvious one of having more money.
I believe that raising capital is a major growth experience. When you finish, you will not be the same person you were when you started.
You will be stronger, more resourceful, and better able to see the value of what you are building as an entrepreneur. You will take on more leadership roles and take bigger leaps toward fulfilling your dreams for both your business and every other part of your life. You will be less likely to settle for things that are not working for you.
If you, like so many entrepreneurs I know, have always had trouble really believing in the value of what you offer, the process of raising capital will help you confront this limitation and grow your confidence.
Beyond that, if you follow the steps in this book, your investors will become a tribe of committed supporters whom you can call on in good and bad times.
Raising capital for your business provides greater tangible and intangible benefits than almost anything else you can do as an entrepreneur. It is an endeavor worthy of some serious attention, time, and energy. So let's dig in!
Excerpted from "Raise Capital On Your Own Terms"
Copyright © 2017 Jenny Kassan.
Excerpted by permission of Berrett-Koehler Publishers, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
A Note to Readers, vii,
Introduction: You Can Raise Capital on Your Own Terms, 1,
PART ONE setting the stage,
Chapter 1 Busting the Myths: Forget Everything You Think You Know, 13,
Chapter 2 Are You Ready?, 20,
Chapter 3 The Legal Framework: What Your Lawyer Probably Won't Tell You, 25,
PART TWO create your customized capital raising plan,
Step 1 Get Clear on Your Goals and Values, 33,
Step 2 Identify the Right Investors for You, 51,
Step 3 Design Your Offer, 63,
Step 4 Choose Your Legal Compliance Strategy, 117,
Step 5 Enroll Investors, 148,
Step 6 Address Obstacles Head On, 175,
Conclusion: Pulling It All Together — Your Go-to-Market Plan, 187,
Readers' Resources Website, 199,
Are You Ready to Raise Capital?, 201,
Capital Raising Decision Tool, 203,
About the Author, 231,