Raising Money and Proper Budgeting

(This article originally appeared in the December 2011 Edition of BizNess Magazine)

Proper Budgeting & Raising Funds

In the past few articles we talked about where do good ideas come from and how to know if your idea is good, but today we will discuss one of the most important parts of launching a business; money.

First we’ll discuss the importance of having enough money and then we will discuss ways to raise money.

About 18 years ago I fulfilled one of my entrepreneurial dreams and opened a pizza restaurant in Meah Shearim called “Gamzoos”.  I was both the first and last Pizza Place on Rechiv Meah Shearim that had the Badatz Eideh HaChareidis Hechsher. I was very happy to be the first and also understand why I was the last J.

I originally came into the business as a partner and back then it was more of a sandwich place that also sold bottles of soda, candy and Abadi Baked Goods. My partner took me in because he was suffering from a bad case of mono and so I bought him out about six weeks later.

Now although I was happy, the place needed a lot of work and I also wanted to make it more into a proper pizza place then what it was now, especially since I was less than a 5 minute walk from the Mir. To make a long story short I found an investor who was willing to put in the cash I (thought I) needed. I remember writing down everything and putting a price on it and then trying to work the amount down even more. I had only one show with the investor and I did not want to scare him off with two high a number. In the end I got the investment down to about $13,000.00 which he readily gave me and the next thing I knew Gamzoos was opened for business. But I made one HUGE mistake and that was that I did not ask for enough money. Sure I had money for new tables, chairs, a new Pizza Oven, painting etc. But I had zero money for buying the materials to make the food. I had no money for Coke or for Cheese etc. I had no money to pay for any salary for myself and I had no money to pay for any marketing! I also did not have any money to weather any unforeseen circumstances such a rioting over grave sites that left the streets of Meah Shearim disgusting for weeks and so kept the tourists away. I was so focused on trying to get the investment that I ended up hurting myself and after a year of just breaking even selling the restaurant for a loss.

So the first rule in raising money is to be very realistic in what you need and that includes rent, salary, cost of goods etc. You want to have a long run rate, meaning you want as many month covered up front as you can in case you don’t make any money. The general rule is to try and give yourself at least a year. That means you have money in the bank to cover everything for a year assuming you will make no money. It is of course a must to sit down with your accountant and with someone with business experience to make sure you are not missing any key expenses or tax issues.

So now that you know how much money you need, now the question is where to get it. We’ll list a few of the options below and then go a little more into detail. One thing to keep in mind is that there are hundreds of different businesses and the startup financial needs are different amongst them.

• Self Funded
• Friends And Family
• Angel Investors
• Venture Capital (VC’s)

Self Funded

Self funded means that you use your own money or equity instead of from others. Now the number one rule in investing is to never invest anything that you can’t afford to lose. When you make an investment you need to look at it as something you may never get back, and if you can’t afford to do without the money, then don’t invest it. I have heard of many people that have gotten second mortgages or took large loans from banks or even worse took out tens of thousands of dollars on their credit cards and ending up losing it all. Now I’m not saying that you shouldn’t take a risk because in order to be a successful entrepreneur you need to be able to take risks, but just don’t bet the house on it.

The good thing about investing your own funds is that you have no one you need to answer to and you also own 100% of the company.

Friends And Family

You know that rich Uncle you have been meaning to call? In all seriousness family and friends are a great way to raise some initial funds. Investors invest in people more than they invest in the idea, so it makes sense that the people who know you best and care about you the most are the ones most likely to give you some initial funds to get started. The tricky part about raising funds from F & F is that if Chas V’Shalom your business goes under, it could cause strain in the family. Always remember like what I stated above, before you take anyone’s cash, make sure it is clear to them that they can lose it and that they need to be able to take the hit. Some good points about F & F money is that it is usually easier to raise and they don’t ask for any control of the company and it is also a fast way to raise money.

Angel Investors

Angel Investors are people who invest their own funds. They are usually successful or retired business people and like the idea of helping out other entrepreneurs. There are two main types of Angel investors. Type one are professional investors and type two are not professional investors, but they have had success and like to invest their wealth in other ideas as opposed to just interest from a bank. There are both good and bad points from the two types of Angel investors.

Professional Investors:

• Have access to other funds if you will need more cash
• Depending on the amount being invested may ask for a board seat
• Have lots of connections and will use them to help you succeed
• Will ask for more equity in your company then non-professional investors
• They are harder to find and they take longer to commit and have a longer due diligence process

Non Professional Investors:

• May only invest once in you
• In most cases won’t ask for a board seat or any type of control
• May not have much added value in terms of connections and experience to share
• Will take less equity than professionals
• Shorter commitment and funding time and need less from you in order to make a decision

Angel investors are a great way to raise money for your start-up as they often have more cash available then friends and family and many of them will continue to invest with you as you show success. Also their contacts are very important and can make a huge difference in your success.

Venture Capital (VC’s)

Venture Capital Firms manage other people’s money in what is called a fund. Most funds are usually in the hundreds of millions range and funds range from helping startups from their seed round all the way till exit. VC funds are looking for the big hit and even though there are many of them in Israel, it is very hard to close an investment with them. In today’s economy especially most VC’s are only investing in companies that have unique defendable Intellectual Property (IP) or already have a lot of success and need the funds for growth.

This is but a brief overview of different types of ways to raise money. There are literally books written on each of these ways so as with everything else do your research!

The one topic we did not talk about in terms of funding is bringing in a partner, but that will need to wait till next month’s article.

Nachum Kligman is a Serial Entrepreneur and speaker. He is the Co-Founder & CEO of SportsFan.me and is the Founder of Qoof/ViewBix , Ideago –StartUp Lab, and the Co-founder of PeerBid.com, TeesAtRisk.com, KidsOutlet.com, amongst many other Internet startups. He is also a partner in Cellar 18, a new boutique wine store located in Ramat Bet Shemesh.

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