7 Truths About Private Money That Will Help You Raise Capital
I often get asked, "How do I raise private money to fund my business or investment?" To do it effectively, you need to accept these 7 truths.
7 Truths About Raising Capital
1. There’s plenty to go around.
The amount of capital out there is basically infinite, with a great deal of it (especially initial funds) right here in San Antonio. Don't think so? It's probably because you're in the wrong network. Keep reading, and we'll teach you to cultivate and expand your network to fix that. Because the truth is: there’s money available to you, and it's closer than you think. Your job is to help it find you, and The Startup Club's job is to show you how.
2. Money follows the deal.
Ever watched Shark Tank? People with money have anxiety about whether they are making the best use of their money. These people are always on the hunt for new opportunities to make a good return without too much risk. I often hear, “I have this great real estate deal [or business idea], but I can’t find the money for it.” My response is almost always, “Take it to your lender or investor group or a local real estate association.” Because if the deal is actually good... the money will seek you out. If you show this deal to lenders, and get turned away? Well, that tells you the deal isn’t quite as good as you think it is, and you know what they’re looking for in the future.
3. People invest in people.
Have you ever walked away from deal because you felt uneasy about the person who presented it? I know I have. In my experience, no deal is good enough to make me work with someone I don’t trust. And I guarantee the same goes for any investor looking for a place invest his money. Nothing is more important than your integrity. Your reputation is everything. I’ve seen entrepreneurs take money out of their own wallet to pay their investors back. Do what you say you're going to do, and always be honest about it, even if it hurts.
4. Your private money partner wants you to make money, too.
As a private lender myself, I can tell you that we never want you to lose money on a deal. Investors want a win-win for you and them, for the simple reason that it’s in our best interest for you to become a long-term partner. We also want to tout our successful investments, "look at that awesome company I funded" sounds good right? A good private lender/investor knows that he or she is getting a good deal by making a reasonable return on their money, and they love it when you make a healthy profit on top of that. So don’t be suspicious if they’re positive, and consider their advice. Remember that they were probably once in your position too.
5. It’s OK to turn down Someone's money if it’s not a good fit.
Read over the first four points again. I want you to see the value that you’re providing to an investor or private lender and be OK with walking away from money when the person’s not a good fit. These deals should always be win-win. Like I’ve said before, the money is out there, and a good deal will attract the best of it, so don't settle for money just for money's sake. Know that you're bringing on a partner, and make sure that is a person you can and want to work with.
6. don't assume anything. every person you meet may have money or can connect you to someone else who does.
It's natural to size a person up and make assumptions based on limited information. But the average millionaire looks nothing like you think. In fact, it's impossible to know whether someone has money or not. So suspend judgment and make it clear to anyone and everyone you talk to that you’re looking for ways to fund a business, find a partner, or help investors make solid returns in a safe, secure way.
7. There are a million different ways to structure a private money deal. Get creative.
The first thing I’d recommend when it comes to thinking about structure is to research, research, research. Check out the book Raising Private Capital by Matt Faircloth, its for real estate investors, but can easily be applied to business. Ask your fellow Startup Club members, or join the Club and talk to me or Derek. Soak up as much as you can before you go to an attorney for assistance to draw up paperwork, because you should have a good idea of how you want to structure an agreement prior.
More Thoughts on How to Attract Private Money for Your Deals
Maybe before we get into how you ask for money for your deals, you should probably look at why.
Why would they invest with you?
- Do you have a great business idea?
- A great track record of success?
- Are you knowledgeable and experienced?
- Do you have a great team or business model that you can explain?
What is it about your business model and the way that you execute that would give an investor confidence to want to do business with you? What about it makes it more advantageous than other business models?
Do they like and trust you?
Let's rehash number 2 from above. People like to do business with people they like and trust. That sounds simple enough, so why would people like and trust you? Is it your good reputation? How do you become trustworthy? I think it’s simple.
Do as you say.
When it comes to building trust, it really comes down to this simple rule: Do what you say you’re going to do. Demonstrating personal integrity isn’t just a good way to live. It’s good business and shows you follow through and are dependable. And when you’re in a position where you can’t fully deliver (because let’s face it—unexpected things can happen), investors still appreciate communication and knowing that you’ve done all that you can do and your plan to correct it.
Take care of your investors.
In addition to having a good business idea, a good plan, a good team, and keeping to a schedule, are you protecting your investors first? This means properly securing them with the right paperwork and recordings and basically protecting their money as if it were your own. Expressing this at the outset is key. Plus, with the mindset that this is “your money” just as much as it is theirs, protecting it becomes just a part of who you are as an investor and how you do business.
Know who you’re planning to ask.
Once you have a good answer to why someone would invest with you, you’ll need to figure out who are you planning to ask, or better yet, who your ideal investor is. The knowledge or experience level of the type of investor you ask to invest in your real estate deal is critical. Some people may not understand private investing or think it’s too risky.
From my experience, Real Estate investors (especially those with self-directed retirement accounts) are a great source of capital. Because they understand investing and are used to working with individuals.
If you’re asking traditional investors who are accustomed to vehicles like stocks and bonds or who are unfamiliar with your industry, they may not appreciate the full value of an investment in a small business, or understand collateral. They are used to working with a broker or investing app that allows them to see their stock value in real time. If you keep things simple enough with all the benefits and advantages, you may have a chance. But I don’t believe in trying to sell anyone because if I have to sell, its because they probably don’t want to invest in the first place. I just want to find a potential investor where if I say enough about the investment and what it has to offer while outlaying the risks involved, they understand and are interested.
Tip: A great way to “ask for money without the asking” is to start out with this question: “Who do you know that may be looking for a good solid return?” But, of course, that’s after asking them first if you can be of help to them in any way.
The point is that asking them if they know someone is usually better than asking them outright. And if they do know someone that is interested and eventually invests, they’re more likely to do it as well.
Picking Your Investors
For my company, it’s not just about interviewing an investor to see if they’re a right fit for us; it’s about if we’re a right fit for them. Our conversations with investors are about their goals, needs, and strategies. None of us can be everything to everybody, and we’d much rather develop more long-term strategic partnerships with an investor based on mutual respect and comfort than have them simply give us capital. It’s not time wasted on our end either; it’s time invested, and at the end of the day, it feels much better than asking “Would you be interested in giving us money?”
So, let me ask you, what do you feel are the biggest challenges when it comes to asking for money? What was it like when you got your first investor? What works for you now as you find new investors?