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Raising money  doesn’t have to be hard even in the economy we have today.  This article discusses some of the points to consider when preparing to raise money.

Raising Money For Your Business In A Troubled Economy

In a down economy, when raising capital to fund operations may seem like a Herculean challenge, convertible debt may present an attractive alternative to equity financing for early stage businesses and their prospective investors. Convertible debt financings may be applied in a variety of contexts and may avoid some of the cumbersome issues of early stage equity financings. Convertible debt financings may be an ideal investment vehicle for raising capital to fund startup ventures during the friends/family round of financing, especially in high-growth businesses where issues of valuation may prove particularly difficult.

Operating businesses may also use convertible debt financing (sometimes called “bridge financings”) to satisfy working capital needs between rounds of capital stock offerings. In this context, they are often viewed as providing a “bridge of capital” between rounds of equity financings and subsequent (often preferred) equity financings. In a typical convertible debt financing, the borrower issues convertible promissory notes to investors for a limited term. These convertible promissory notes often mature within one to two years from the date of issuance of the note. Parties commonly negotiate alternative structures relating to the note’s maturity, for example, providing for acceleration of the note’s maturity upon consummation of an equity financing.

Upon maturity or some other negotiated event, the note holder may have the option of calling the convertible promissory notes (with accrued but unpaid interest) or converting the convertible promissory notes into capital stock of the borrower based on a pre-determined formula. To compensate the investors for the investment risk they are assuming, convertible promissory notes are often secured against all of the assets of the borrower.

According to Louis R. Dienes and Ekong I. Udoekwere, convertible debt financings offer several advantages—and a few disadvantages—when measured against typical equity financings, including the following:
Cost-Effective and Efficient. Equity financings, particularly preferred equity financings, require the negotiation and documentation of a legally complex financial relationship between the business and its prospective investors, often including stock purchase agreements, amendments to charter documents setting forth preferred stock rights, shareholder agreements, voting agreements, registration rights agreements, and other documents unique to early stage equity financings. This translates into higher legal costs for businesses. On the other hand, convertible debt financings may eliminate much of the legal complexity and unwieldiness of equity financings, as well as the time required to negotiate and document such transactions.

The cost-effective nature of convertible debt financings often appeals to both early-stage businesses with limited capital resources and better established businesses looking to contain costs and access capital sooner. Further, because convertible debt financings are relatively common financing structures, they will not create impediments to future preferred.    –more

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Venture Capital – Funding in the Recession

By Thomas Ajava

As you might imagine, the recession and implosion of the credit markets has had just a tad of an effect on the venture capital and angel investor markets this year. For those considering start-up businesses or expansion, the forecast is decidedly mixed.

I don’t have to tell you that the implosion of 2008 and 2009 resulted in the near strangulation of many niches of the financial markets. Oddly, venture capital investing was not one of those markets that was rocked to its core. Don’t get me wrong. Things were bad, but the downturn in venture capital investing was in the teens as a percentage instead of a much larger number as with most markets. Angel investing, sadly, was crushed for the most part with rates dropping by 30 percent or more.

Well, enough about the past. What about the future? After all, we’ve all read and heard we are now in a recovery from the Great Recession. To say it is a tepid recovery might be a mild understatement. The simple fact is the financial world is still at a stand still. For example, more banks have failed in 2009 than all of 2007 and 2008 combined. That doesn’t make for a solid platform from which to launch 2010. So, what can we expect?

2010 is going to be a brutal year for start-ups. Venture capitalists are risk adverse at the moment, which means few will be interested in taking on the risk of a brand new business. Unless you have a proven record turning start-ups into big winners, don’t hold your breath on VC funding. The same goes for angel investing. The year is going to be about family and friend investing or simply waiting until things turn in the venture capital markets.

What about existing businesses looking to take that next step? VC companies and angels are going to be much more receptive towards inquiries from companies that have a history. That doesn’t mean they will be handing over money right and left, but it means you have a chance. As usual, it comes down to whether your idea seems plausible to them at a time when things are very tough.

The venture capital markets are not dead. Not even close. That being said, there are a lot of fish competing for the food in that market. Things will eventually loosen up, but it may be some time before that happens.

Thomas Ajava writes about venture capital funding for VentureCapitalInvestmentFirms.com where you can find venture capital investment firms for your start-up or existing business.

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