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Wednesday, January 11, 2012

How to Raise Money for Your Startup

Raising capital for a startup venture during these difficult economic times has been a major obstacle for many aspiring entrepreneurs. But it's not impossible.

There are several steps budding business owners can take to get in front of prospective investors and to help make sure they pony over the cash you need, says Asheesh Advani, author and co-founder of CircleLending, a peer-to-peer lending service that was acquired by Virgin Money USA in 2007. He now serves as CEO of asset management services company Covestor. Advani was a speaker at Entrepreneur's Growth Conference here on Jan. 11, 2012.Raising capital for a startup venture during these difficult economic times has been a major obstacle for many aspiring entrepreneurs. But it's not impossible.

Here are Advani's best tips for landing the money you'll need to get your business off the ground:

Know the different types of investors. There are three types of people who might invest their money in your business idea: friendly investors, hobby angels and professional investors. Friendly investors are the people you know personally, namely friends and family. Hobby angels are individual investors who are most likely professionals themselves who have some money to spare. Professional investors, of course, include venture capitalists, angels and banks. "Professional investors care most about the economics of your business," Advani says. "Whether they understand your business or not, they're required to consider your business idea, as well as countless others."

Make a list of prospects. Scour your industry and your professional network to put together a first group of people and test your business pitch, he says. If the people in this initial group appear to be interested, expand your list of prospects from there.

"When I started my businesses, I wound up raising money from 75 different investors," Advani says. "Not because I wanted to. I needed to."

He suggests keeping track of your contacts, your meetings and your goals for each of the meetings. Keep in touch with the contacts throughout the pitching process.

Set a closing date. Determine a specific, official date for when interested professional investors need to get you the money they promised -- and hold them to it. When dealing with friendly and hobby angels, Advani suggests a "rolling closing date," meaning that you'll accept the investment money as soon as they're willing to give it. Also, be sure to be clear with friendly investors about what happens if the money they invest isn't paid back on time or at all.

"These are people who are close to you, so do everything you can to maintain a good relationship," Advani says.

Use middle men carefully. Third-party groups can be great for two things, Advani says. They can help connect entrepreneurs to individual investors they didn't otherwise know. Examples include peer lending and investing sites Lending Club and Prosper.

Crowd funding sites are another option. These services -- including Pro Founder andPeerbackers -- can help entrepreneurs collect numerous investments from people via social networks.

But be careful about sharing your business idea online, Advani warns. "Before you post a profile on any of these sites, remember that everyone will know what you're planning to do," he says.

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