How to Fund Your Business Without Selling Your Soul
A message from Diane…
In this post, special guest — and Yale-educated securities lawyer — Jenny Kassan pulls back the curtain on ways to raise funds that other people don’t talk about.
When Jenny first began practicing law more than 25 years ago, she knew nothing about the world of startup finance, so she didn’t have any preconceived notions. This allowed her to approach fundraising in fresh, creative ways… and her clients benefited by securing funding that most entrepreneurs didn’t even know was available to them! Only later did she discover that this wasn’t the norm.
This is why I invited Jenny to share her experience with you :-)
You have more fundraising options than you realize.
When I talk to founders about the idea of finding investors, I hear many of the same concerns raised over and over again:
- I don’t have the type of business that anyone would want to invest in.
- What if I can’t pay my investors back? I would feel awful!
- I don’t want to give up control of my business.
- I don’t know any investors.
These and many other limiting beliefs hold back entrepreneurs from getting the funding they need to grow their businesses in a healthy and sustainable way.
Don’t believe everything you hear about finding investors.
My clients and I have raised hundreds of thousands and even millions of dollars for businesses that those in the mainstream startup world would say are not fundable.
Some of the truths I’ve learned over the years include:
- Any business can secure funding from investors if it has:
- A viable business model for reaching profitability
- A passionate committed founder
- It is not required that you give up control, even when you have equity investors.
- Investors are motivated by many things — not just the desire to make a financial killing. Some of the most successful fundings I’ve seen have been very high risk and have offered a relatively low financial return.
There are ways to raise funds that other people don’t talk about.
The key to finding the right investors for your business and raising funds on your own terms is thinking outside the box and being creative. This can be a little scary because there is so much advice out there about the “right” way to raise funds.
BUT almost all of this advice is written for businesses that are on a very particular trajectory: scale (or grow) incredibly fast, then sell to a larger company… ideally within 5-7 years.
If that’s not your plan, you have to ignore all of this advice!
Not every business wants to be a high-growth tech startup.
Ignoring the “experts” can be challenging, especially when they seem so confident that they have all the answers! But think of it this way — if you were building a cozy cabin in the woods, would you use blueprints for a skyscraper? Of course not!
Sadly, even though less than 1% of businesses are on that skyscraper path, 99% of the advice and resources out there are designed for that tiny group.
You need to proudly declare that you are building something different and forge your own path.
The good news is that you’re not alone. There is a growing movement of entrepreneurs that refuse to be pigeonholed into the high-growth unicorn tech startup model.
The hard part about this path is that you can’t use a cookie-cutter approach or download template documents from the internet. You have to be willing to get creative and design a strategy custom-built for your particular business and your goals and values.
“Over half the US adult population are actually investors. However, professional investors (e.g., active angel investors and those who manage other people’s money) only make up 0.3% of the total population of investors.”
Your fundraising strategy: The 6 things you’ll need to address.
Here are the six pieces of the puzzle you’ll need to address when developing your fundraising strategy:
1. Get clear on your goals and values.
You should be super honest about what you want from your business so that when you raise funds you can stay true to what is important to you. Don’t let anyone else define success for you!
2. Identify your ideal investors.
The key here is to understand that in the US, over half the adult population are actually investors. However, people who call themselves investors — like fund managers, active angel investors and people who manage other people’s money — only make up 0.3% of the total population of investors. I call this tiny group “professional investors” aka “the usual suspects.”
Professional investors are far more likely to want to invest in companies that promise super high growth and an exit (usually a sale to another company) within 5-7 years. They also generally expect you to give up control and want to see a fair amount of traction before they invest.
If you decide to focus on these investors, your chances of success are relatively low — especially if you are a woman or person of color.
If you broaden your pool of potential investors, you’ll find that there are many investors out there who are far more open-minded.
Design your investment offering.
This is where you decide exactly what investors will get — equity, debt or a convertible instrument like a SAFE or convertible note. This decision needs to be based on a realistic evaluation of how investors can be reasonably compensated without requiring you to sacrifice your goals and values and without putting the business at risk from unrealistic commitments.
Yes, there are off-the-shelf documents you can find online, but I urge you not to use them! The possibilities are infinite and if you take the time to customize your offering to your particular situation, you’ll have the best chance for a happy long-term relationship with your investors.
Community Foods Market was nothing more than a dream when they first started. They needed to raise money to get their idea off the ground, find a location and secure real estate for it. They raised about $1.7 million by offering non-voting preferred stock with a 3% annual dividend that would not be paid until the business became profitable.
The Force for Good Fund was a high risk impact investment fund supporting highly mission-driven businesses with minimal track records. They raised about $1.1 million in the form of unsecured debt, with the investors getting paid back by receiving a percentage of revenues over a period of eight years.
4. Choose your legal compliance strategy.
Depending on your target investors and how you plan to reach them, you will need to choose a strategy for complying with state and federal securities law. The good news is that there are many options to choose from – some of which are cheaper and easier than others. Just be sure to work with an experienced attorney who can guide you properly.
5. Design your investor enrollment strategy.
When it comes to persuading people to invest in your company, you can find a lot of advice online — there are tons of sample pitch decks to download. But those pitch decks are designed for businesses that are raising funds from the usual suspects.
You can (and should!) be much more creative and authentic because your ideal investors will want to invest in your business when they see your passion and commitment. What creative tools can you use to demonstrate to your ideal investors that this is a great fit for them?
For example, I’ve found that investors often say yes without even seeing a pitch deck. This can happen when you meet for a conversation and do a lot of listening to the potential investor about what is important to them and then share from the heart what you are working on and why you care about it.
These kinds of authentic, relaxed conversations can lead to investment much more readily than a stressful pitch crammed into three minutes where you’re expected to show the same 10 slides that every other entrepreneur shows.
6. Prepare to address obstacles along the way.
Knowing that limiting beliefs may get in your way along the journey, make sure you have a support system and tools to address them if and when they come up.
Don’t let myths and biases influence your funding goals.
Unfortunately, we live in a world that trumpets the successes of high-growth tech companies as if anyone other kind of business is a second-class citizen.
Those of us who live in the real world know that all kinds of businesses contribute to our health, well-being and happiness. And it’s important to know that most of those tech startups that raise millions from the usual suspects end up failing and losing all of their investors’ money.
A business with a more realistic growth plan and a clear path to sustainability is far more attractive to many investors. Don’t let myths and biases stop you from getting the funding you need to grow your business to its full potential!
Jenny Kassan has helped her clients raise millions of dollars from values-aligned investors and raised over $2 million for her own businesses. She is the author of Raise Capital on Your Own Terms: How to Fund Your Business without Selling Your Soul (Berrett-Koehler, October 2017), and you can find her at jennykassan.com. Jenny earned her J.D. from Yale Law School.
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