How did your capital-raising experience differ from what you expected?

One reason entrepreneurs are so highly lauded is that they are asked to expose themselves to criticism, rejection and doubt in dosages that average mortals cannot bear. At no time is that more true than when an entrepreneur finds that he/she needs someone else’s money to start, maintain or expand the company.

In the spirit of knowledge transfer and sparing others when it's their turn to present themselves to investors, please feel free to share a specific learning point during the process of raising capital. For example, "I spent $1000 having someone help me put together a 50-page business plan and at my meeting with an angel investor, he asked me for something less than ten pages."

I just listed a few types of funding below for response reference point purposes.

Bootstrapping – This is a broad term that essentially means doing whatever you can to get the company up and running or to keep the company going. Types of bootstrapping include:
• Funding from friends and family
• Consulting on the side
• Vendor and/or supplier special arrangements such as extended terms for payment, consignment, leasing
• Bartering
• Strategic partnerships with companies or people who do what you need done next
• Capital management discipline and strategy

Private placement – Selling shares to individuals based on established deal terms. Federal and state laws govern all sales of securities so make sure you know what you are doing before you take on a private placement. If you want to get access to capital and not necessarily sell ownership in your company, you can try to issue convertible notes. This gives you cash and when the notes mature (are due to be paid back) you can pay them off in cash, with the interest, if you have it and not lose any ownership interest in your company.

Angels – These are individuals with a high net worth (typically falling under the “accredited investor” definition of the SEC’s Rule 501) who fill the gap between bootstrapping and being ready to approach venture capital groups. Motivation for investing can be as varied as the individual but this relationship tends to be more personal than the relationship you’ll expect with VC and PE money. Be very clear on what information the angel will receive and how much participation they will have – this relationship can become challenging.

Commercial banks – Typical debt financing that can include credit, term or revolving loans. As you know, banks tend to have an aversion to anything other than low-risk lending based on debt-to-equity ratios of 2-3 or lower.
Asset-backed lenders – There are a number of companies that will loan you money based on the liquidation value of assets in your company. A common form of this type of lending is borrowing against your accounts receivable.

Private equity (PE) – This term is used to broadly group funds and investment companies that provide capital to private companies. Institutional investors (think pension funds or endowments) typically allot a portion of their portfolio to private equity vehicles to meet diversification requirements. Venture capital (VC) is a type of private equity. The single aim of investment by PE is to make as large a return on investment as possible. It isn’t uncommon for PE investment to take a controlling interest in your company.

Venture capital – A form of private equity, venture capital companies tend to invest in earlier stage companies with significant growth potential. Because the odds of getting a substantial return on investment (ROI) are not in the favor of the VC firm, they tend to want a controlling interest in your company to leverage their experience to get the most favorable odds of gaining the best possible ROI. In addition, it is not uncommon for VCs to sit on your board and exert management controls and reporting. I plan to put together another posting on VCs and what you need to know about them, in as much as such information can be distilled in a useful way.

There are several more options not mentioned here in detail, such as corporate venture capital, government agencies, community development funding, merchant banks, mezzanine funds, etc.

NEVER RAISE CAPITIAL IF YOU DONT NEED IT Its easy to be enticed with the idea that your product / startup will be the next google, facebook or crocs. Chances are it will not.

When it comes to raising capital, investors look for one thing usually are solid return on their investment. Most seasoned investors, (for startups) will invest in 20 -30 ventures expeting only one to be profitable. The profits from that product are used to make up for the losses on the other 29 and cash out. You as the entrepenuer are usually left with nothing.

Bootstrapping - BEST APPROACH... Bootstrap. Show that you are willing to invest your own $$ and time in your product. Once its profitable you can always attract investors at a lower rate, get a loan against your sales, or attract investments by offering bonds rather than shrares.

Angeles - An angel is really a smart investor that wants to do the following. Lets say your company or idea is smart, and worth 50k. An angel will give you the 35k, and babysit his investment. He / she is well connected to vc firms. Angels get in, take a nice percentage of your stock, and then when you need more funding introduce you to their VC buddy. This is their exit strategy. A VC firm will invest after this incubation period buying the majority of angels share for 5x to 50x their investment.

VC Firms - Will rape you, but gently so you dont realize it. Most VC firms are accountable to their investors and could care less what is created. They are in bed with other Bigger VC firms and follow the scenario above. The big ones will get you an IPO for them to hit the lottery.

By the time you go the investment route your vision, product, and stake in your company will be fully diluted. The best case is to START SMALL. FOcus on a NICHE. Use your own CAPITAL. Never Borrow a dime you dont need. And when investors approach, tell them to beat it. That usually only sweetens any loan you may get later.

The other perspective I've heard on this issue is that entrepreneurs should never risk their own capital. If you can achieve this while minimally diluting your holding, I think this would be idea. Or is this the holy grail for a startup?