The Cost and Process of Raising Capital
Make no mistake about it, raising growth capital is a time-consuming and costly process. For this reason, many entrepreneurs choose to grow slowly instead, depending exclusively on internal cash flows to fund growth. They have a basic fear of debt and of giving up, to investors, any control of or equity in the company. Unfortunately, they may act so conservatively that they actually stifle growth. It's important that entrepreneurs understand the nature of raising money so that
their expectations will nut lx unreasonable. The first thing to understand about raising growth capital (or any capital, for that matter) is that it will invariably take at least twicc as long as expected before the money is actually in the company's bank account. Consider the task of raising a substantial amount of money— several million dollars, for instance. It can take several months to find the financing, several more months for the potential investor or lender to do "due diligence" and say yes, and then up to six more months to receive the money. In other words, if an entrepreneur doesn't look for funding until it's needed, it will be too late. Moreover, because this search for capital takes an entrepreneur away from the business jusrwhen he or she is needed most, it is helpful to use financial advisers who have experience in raising money, and it is vital to have a good management team in place.
The second thing to understand about raising growth capital is that the chosen financial source may not complete the deal, even after months of courting and negotiations. It's essential, therefore, to continue to look for backup investors in case the original investor backs out. If they do complete the deal, second-round investors will often request a buyout of the first-round investors, who typically are friends and family. The rationale is that these early investors have nothing more to contribute to the business and the second-round flinders no longer want to deal with them. This can be a very awkward situation, because the second-round funder has nothing to lose by demanding the buyout and can easily walk away from the deal; there are thousands more out there.