By Garrett Sutton, Esq. & Gerri Detweiler
How do you bring investors into your business? Not the sympathetic Mom and Dad kind of investors — those who love you anyway — but rather the hard-nosed, serious investors who expect quite a lot.
As the author of the book Million Dollar Women, about women entrepreneurs who have created multimillion dollar companies, Julia Pimsleur shares three lessons with other entrepreneurs trying to raise money:
1. Take Risks.
“Women sometimes have a tendency to play it safe, but to raise money you need to embrace the risk involved and move forward despite the fear. No one can know for sure whether their business will be a success,” she says. “I may not have all the answers but I know not to be intimidated about that.” Men can benefit from that advice, too!
2. Know Your Numbers.
“You should have a firm grasp of the key parts of your company’s finances,” she insists. “It wasn’t the part I loved best but getting comfortable with talking about margins, COGs and EBIDTA has helped me tremendously.”
3. Treat Investors as Partners.
In her first two years in business, Julia sent her investors full 10-page reports each quarter. “Keep people interested and informed and they may become bigger investors,” she says.
What About Securities Laws?
The securities laws, as they are called, are known to sophisticated investors. They know that you have to discuss risk factors (problems the company may face in the future) and that you can’t make promises as to performance (otherwise you may be held to those promises).
Your friends and family may be just as likely to not understand the requirements of the securities laws. They will ask: “Why are you scaring potential investors away by overly drawing attention to all these risks? And why aren’t you writing about how well you are going to do for everyone?”
Because you can’t, you will tell them. The securities laws say not to, and you’ll get in trouble if you do.
The securities laws are very strict about disclosure. You’ve got to allow a potential investor to make an informed decision. So you’ve got to tell them everything—the good, the bad and the ugly.
You will tell them up front what the risks are of investing in the company. As well, you can’t get their hopes up by making wild promises about glorious returns. That may never happen, and you know it.
So you’ll tell them the truth; that you will do your best but can make no guarantees. In this light the securities laws make sense: A federal requirement to give people the information they need to make a reasoned decision.
Over time, however, the securities laws got so restrictive that they prevented the formation of capital. For an economy to grow and succeed, new companies need to be able to acquire new monies to pursue new opportunities. When the securities laws severely restrict the flow of information on such opportunities the result is that capital formation and job creation suffer.
To alleviate the problem, Congress passed the JOBS Act in the spring of 2012. The intent is to open up the securities laws to allow for greater investment in new and development
phase companies. (For more information on this read Chapter 15 on Crowdfunding from by book “Finance Your Own Business” and this Crowdfunding article updated with recent changes.)
With the advent and implementation of these new securities laws, many more companies will be financing with equity. That is, they will be bringing money into the company by selling stock (or shares) in the company.
You may find yourself in a position to invest in one of these companies. What lies ahead will help you as both a business owner raising money for your company and as well as an investor looking into opportunities with other companies.