The Capital Raise Quandary

Lumps, Dumps, and Lessons Learned in a Start-Up Capital Raise

By Jay Taffet (, an entrepreneur, consultant and venture leader.

You can take any word associated with entrepreneurship that excites you, like opportunity, growth and success, and completely remove any pleasure it arouses simply by adding the prefix “capital”.

At least, that’s how it felt to me over the past year.  I had spent several years creating, what I considered, the perfect plan to disrupt a high-profile, established industry with a long-term solution that requires minimal capex, virtually no overhead and immediate start-up viability.  It was one of those “holy moly” moments once it all came together in narrative and numbers.  In fact, it was so compelling, I had friends and family asking to invest from the moment I revealed what had just emerged from my incubator!

But the friends and family capital component – my first generation “Angel Investors” – only got me a few strides into the $700,000 capital raise.  I had to identify the non-related Angel Investor prospects and $500,000-range Venture Capital/Private Equity groups to solidify the project capital piece.  I started the canvassing full of enthusiasm and, nine months later, I’ve kicked over every pebble on the beach without successfully finding that pot of gold.

I chose to write this article on my capital raise experience as of today versus post-script, as I don’t think I’ll have the same clarity of “lessons learned” if my final crop of investor prospects actually do come through in the next few weeks.  I think I’ll be too giddy with excitement and relief to formulate my perspective on what just happened, and this article will be just another fluff piece with a happy ending.  And fluff is no competition for harsh reality when it comes to underwriting serious learning value.

So, here are some thoughts and conclusions on my seemingly interminable capital raise that I hope will help you, my fellow entrepreneur, if you’re pursuing your own raise right now or planning one soon.  And, maybe more importantly, this might be a valuable script and Rx towards a healthy outlook on the process from day one.

Compulsion is King

I am extremely meticulous and thorough when it comes to business planning.  I appreciate the value of the “story” as much as the financial model that validates the plan.  Both pieces – the narrative and the numbers – are equally important, and there is no short-cut to creating a viable business plan without both spheres.

So, if you’re not a right-brain/left-brain kind of entrepreneur, but you have the “killer” concept that deserves its day in capital court, then you need to recruit the participants that can complete your plan.  It’s your choice if these participants will be consultants or team members in the venture, but you can’t overlook the importance of having all the requisite skill sets at the table from the start.

Why?  Well, as you might know from experience or assumption, you only get one chance in front of a prospective investor.  Either you tell the “whole truth and nothing but the truth” at your initial inquiry or you’ll be filed away quickly.  That is to say, if your lead-in pitch doesn’t fully answer the core questions of “Opportunity, Management and Exit” in your first reach, most prospective investors have enough project depth on their bench to simply move on without asking why.

Defend Assumptions, not Omissions

So, what is that complete package to entice a prospective investor?  It’s a compendium of assumptions, narratives, models and exhibits with more heft than a doctoral thesis, but boiled down to 5 or less pages that can be digested in 3 minutes.  Pretty tall order.

You start with a detailed narrative of the why, how, where, when and who, and reduce that to a one-page summary that hits the highlights from each section.  You build a financial model that looks like it was prepared on Wall Street, complete with a summary of assumptions, capital budget, capex burn schedule, year 1-3 income statement (cash and accrual), balance sheet and cash flow model (by months), and boil that down to a one-page financial highlight that is encapsulated on the one-page narrative summary.

Next, you attach all relevant exhibits that underpin the full venture plan, including your resume, vendor agreements, the proposed entity operating agreement, collateral samples, and applicable industry research that validates your assumptions.  And then you reduce this entire soufflé to a separate slide presentation that hits the highlights from every component of the venture plan, giving the investor a format choice in the review process.

Finally, you take all these dishes you’ve just prepared and wrap them in professional branding and graphics (yes, hire a designer if it’s not your forte), and add a link to a professionally designed website (and intro video, if applicable) that tells your “post-capital raise/now a business” story to your customer.  And then put all these components – the full business plan, the financial model and the presentation – in a Dropbox folder that you can share via link in your initial email inquiry.

So, that’s the Full Monty of a promising venture plan that might make it to the review stage with an investor.  The key here is not to be asked to create something by a capital prospect. Demonstrate at the introduction that you are the most meticulous entrepreneur on the planet that has thought of everything! Let the rejection be based on your conclusions, not because you appear to be half-baked.

Better yet, make your conclusions so air-tight and the plan components so complete that the only rejection a prospective investor can offer is that the venture is too small, too early, and/or outside their target industries.  In the world of start-up capital, that’s a very loving rejection.

Convert Rejection into Referrals

Unless your venture is in the sweet spot of tech, code and connectivity that dominates the investment capital world today, it’s most likely going to be a long, challenging road to the promised land.  There’s plenty of investor prospects out there, but, like in any societal revolution (read: Gold Rush), there’s always a disproportionate number of capital sources congregated on the same narrow turf searching for the next big break-through.

Thus, you’re going to have to canvass like a grass-roots political campaign, going door-to-door in search of your supporters.  Sure, there are formulaic approaches to the capital raise – identifying the Angel Investors, Venture Capitalists and Private Equity based on investment range and target industry – but why should that limit you?  Your plan just might be the compelling platform for an investor prospect to widen the scope and take a chance on something new.

But, even if you don’t convert an incongruent investor prospect, the most important reason to cast the biggest net you can is that every target is a potential referral source.  That’s right, even if your venture is sub-$1 million, pre-revenue and in an outlier of an industry, you should still go after the Private Equity firm that advertises its investment preference at $2-5 mm revenue, growth capital and focused on industries remote from yours.

You have to remember that these seemingly unapproachable investment firms are comprised of people, individuals who may be struck by the creativity and ingenuity of your plan and willing to pass your information on to someone that is a better fit.  In my experience over the past year, my most interested prospects originated from referrals, not my direct reaches.  Plus, if you’re successful in your capital raise, all these firms that declined at this stage are now warm leads for next-stage growth capital.

Think of your capital raise as a relationship effort, not a placement.  You want to build the largest network you can of investor prospects that will be open doors for future discussion if the answer is “No” today.  It’s hard to see it that way when you’re navigating the swamp of unanswered emails and rejections, but it’s the reality of the capital raise.  You’re raising your entrepreneurial flag and generating attention, and this visibility will pay off somewhere down the road.

Finally, gratitude.  Every investor prospect that answers your email with a polite rejection and possibly a referral, deserves a hearty thank you.  But, take it one step further:  If a prospect refers you to another potential investor, regardless of the outcome, you need to express this gratitude on a grander scale, like a hand-delivered gift basket or something along those lines.

A referral is the ultimate compliment as it validates your worth as an entrepreneur and venture leader.  You may, at times, feel worthless during the capital raise as you amass a mountain of rejections and unanswered reaches, but no one knows this but you.  Always project the confidence of an entrepreneur that knows success is imminent, and the world will respond accordingly.

Remember that gratitude is your calling card to the investor community.  It’s not your plan or your pitch.  It’s your confidence to say “thank you” for the opportunity to share my idea.  That’s what people will remember well beyond the potential of your plan.

Capital at the Right Cost

There may be points in your capital raise when it almost takes a turn for the surreal:  When you successfully recruit an investor and you step off the pitch path only to discover that you hooked the wrong prospect.

It happened to me twice over the past year.  I found two investors willing to take down the entire capital piece, and, within a month, it became very apparent that this capital came with strings and restrictions that were unacceptable to me and, more importantly, the venture.  There were partings and, despite extreme frustration, I continued along the vein of gratitude, thanking these particular investors for the opportunity to explore a potential partnership.

No one can tell you what’s a good fit for you when it comes to investors, just like no one can pick out your spouse.  You have to roll with the current on your own and make your decision.  Is it hard to walk away from guaranteed capital, even with the unappealing conditions?  Yes, very difficult indeed.  But you have to remember the primary goal in your capital raise:  Find investment partners that share your vision, your enthusiasm, and your perspective on how the venture will translate into value.

If you don’t have these critical connection points with your investors, you’re going to fall out of love with your venture very quickly.  And that loss is much more painful than the loss of capital opportunity, I promise you.

Create Your Own Investor

So, what is the easier path to finding capital, if canvassing a sea of rejections from established investors is almost guaranteed?  Create the ideal investor profile that’s most likely to have a strong interest in your plan and find that person!

Sound too simplistic?  Well, it is, but it’s simplicity that almost always finds the best results.  I guess it’s time to reveal my venture and how I created my own investor, which, as of this writing, comprises my last – and most promising – set of capital prospects for my project.

I’ve created a scheduled air shuttle service that connects cities underserved by the airlines and offers the flying public the “private air experience at the cost of an airline ticket”.  The business is called “City-Connect Air Shuttle”, and the venture plan has been developed all the way down to in-flight hospitality logistics and fuel/services at the host private air facilities.

City-Connect is partnered with an established air shuttle operator so there is no equipment/infrastructure and no aviation liability.  It’s a “paper airline” with virtually no overhead, no staff, and only contingency operating expense – the service only incurs cost when the jet is loaded with passengers and flying its routes.  It’s a market disrupter bypassing TSA and airline terminal hassles, and represents long-term opportunity for minor air service markets that are overlooked by traditional commercial air carriers.

So, who is my ideal investor given that the dreaded “A” word (aviation) is part of my equation, thus disqualifying me from about 99.9% of the traditional capital sources?  It’s someone who is a pilot or owns a jet; a community leader that cares about the business prospects for the city; a maven of contacts that can generate immediate visibility – and market education – for would-be passengers; and a successful entrepreneur that understands the commitment, risks and rewards of the venture process.

I did a simple Google search using the key words “pilot, civic leader, entrepreneur” and, wouldn’t you know it, I found the guy in one sitting!  I contacted him and his assistant and navigated my way into a personal meeting in his office.  A hell of a meeting with mutual discussion and enthusiasm, and why wouldn’t it be?  We share aviation, entrepreneurship and community service, and my plan is the embodiment of these passions.

I don’t know if he’ll be the one, but, either way, it was so nice to finally have a mutually energetic discussion about my venture plan!  I should hear from him this week with the move-ahead decision.

So, my message to you is create your own investor first and go after that person.  Do the capital canvassing in parallel, but pursue this meeting with a true like-minded prospect at the start, and I guarantee you’ll walk away (if he/she is not the one) with enough enthusiasm to last you through the winter of rejections and unanswered reaches.

Remember, it’s your enthusiasm that gave birth to your venture plan, and it’s your enthusiasm that will attract the capital.  You’re the entrepreneur:  It’s up to you to create the opportunity, and the capital, that will bring your good idea to life.