For years, I have consistently watched people in our startup community try to raise seed startup capital the hard way. I’ve fallen into the same trap myself from time to time. I’ve also raised capital several times, the EASY way. From now on, I’m sticking to the easy way, and you should too.
The Hard Way
Many people in our startup community encourage a very difficult way to raise capital. Here’s the general gist of it:
1. Go to lots of entrepreneurial events and meetups. (This is not a bad thing. It’s great to make connections and network. Occasionally, you also may meet someone who is interested in investing.)
2. Get in lots of pitch contests and tell people about your idea. (Again, this is not a bad thing. Pitch contests can really help you get better at pitching your company. However, it very rarely results in landing investors, and it takes up a lot of time that you could actually be using to raise capital.)
3. Pitch angel investor groups. (I really appreciate angel investors groups. When they invest in companies, they do make a difference to the community. However, they rarely invest. Putting too much effort into pursuing these investors is a big time waster.)
4. The bottom line of the “The Hard Way” is that you are seeking to “find a rich person” to be your lead investor. Well-meaning startup “experts” will tell you that this lead investor will help you get set up, help you raise all the capital you need, give you great advice, and help you set up your company for a successful exit. Does this happen? Yes, it does, sometimes. Does this happen often? No, it does not.
The Easy Way
So let’s look at the easy way to raise early seed capital. I’ve done it this way several times. Most successful startup entrepreneurs I know have done it this way. In fact, I personally witnessed one of the richest guys in our area raising capital this way to get his company started.
1. First, set up your corporation. Most attorneys will recommend that you use an LLC. A quick Google search will help you find the necessary steps to set up a corporation in your state, or you can work with a local startup attorney.
2. Once your corporation is in place, file for an exemption with the SEC (probably a Regulation D 506b or a Regulation CF). A Regulation D 506b is about a two page form that you can file online. A Regulation CF filing is a little more complicated and takes a little longer, but it is not difficult. These exemptions simply notify the SEC that you are going to take on investors and that you don’t wish to be a “public” company.
3. Write a short business plan that makes it easy to understand how your business will make money and return money to your investors.
4. Obtain the necessary documents to create a Private Placement Memorandum (PPM). You can start with boilerplate documents, then have an attorney help you finalize. A PPM is basically a disclaimer that protects the company and helps investors understand their risk.
5. You also will need a Subscription Agreement. This is the document that investors sign when they hand you a check. The document explains the relationship between the investor and the corporation and provides protections for each of them. Again, you can start with a boilerplate document and work with an attorney to finalize. (Metro Startup Launcher is working with local attorneys to create boilerplate documents that you soon will be able to use.)
6. Now you’re ready to raise capital. If you’re using a Regulation D 506b exemption, all you need to do is network, network, network! You can’t publicly advertise to sell shares under a 506b exemption. However, it’s easy to learn how to network with your current contacts, LinkedIn, etc. You simply tell people about your idea with passion and ask them to invest small amounts ($5,000 to $50,000). [There are certain restrictions about who you can sell shares to, so you will need to learn more about this.]
7. If you’re using a Regulation CF exemption, you actually can advertise to sell shares in your company. You need some marketing skills to pull this off. (Metro Startup Launcher is working to build an all-Louisville area crowdfund that will advertise for you!) With the CF exemption, and utilizing some great online resources, you also can automate the capital raise and take on investors who invest as little as $100!
8. Raise your funding and get your startup started!
So what’s the primary difference between the HARD and the EASY way?
When you try to find a rich person to be your lead investor, you have to get extremely lucky. You have to find someone who is rich, who loves your idea, and who is looking for something to do. Most rich people already are involved in too many things. You will spend lots of time with rich people who “overanalyze” your business, totally wear you out, and then back out at the last minute. They also may invest but completely take control of your company. There’s a steady stream of entrepreneurs in our area who have tried this process over and over again. Then, totally exhausted, they limp back to their old career in the corporate world.
When you raise capital in small amounts from multiple people. It’s totally different. It takes time; however, if you’re passionate about your concept, the investments start to trickle in pretty quickly. You have no idea how much each investor will invest; however, it keeps coming. Next thing you know, you’ve raised your startup capital, and you’re up and running!
Believe me, when you raise capital the EASY way, in most cases, you’ll have your capital, and your company will be up and running LONG before you even land the first angel investor pitch meeting utilizing the HARD way!
If you want to learn more about raising capital The Easy Way, join us for an entrepreneurs only meeting on Sept. 27 from 5:30pm to 7pm at Red e App in NuLu (216 S Shelby St, Louisville, KY 40202).
Click here to sign up: https://www.eventbrite.com/e/raise-capital-for-your-startup-the-easy-way-tickets-27412122396