Posted 02/07/2019 in Capital Raising

Why Business Plans Fail at Raising Capital As a Standalone Vehicle


Why Business Plans Fail at Raising Capital As a Standalone Vehicle

The path most private companies follow when attempting to raise capital from investors typically involves developing a business plan or executive summary and then promoting that document to investors.  This is also the primary reason why the vast majority of those companies fail at raising capital for their business or project.

Business plans have significant limitations regarding accommodating investment from individual investors:

Problem #1 – Regulations:

There are regulations that apply to a private company raising capital from investors.  Unless you can claim that the investor is a founder in the business or project – and was inherently involved in the development of the business – that investor will be deemed an “outside” investor. Raising capital from that individual, even if they are a friend or family member, will require the use of a proper securities offering.  We have seen numerous instances of companies that raised capital improperly to only have it cause significant problems later including fines and forced rescission of the investors capital.  A Regulation D offering ensures you are raising capital in compliance with State and Federal rules.

Problem #2Lack of structure: 

Raising capital from investors involves far more complexities than simply providing them a summation of your business plans. Are the investors purchasing equity or debt securities?  If equity – are the shares or units preferred or common?  Are they convertible?  Do they have voting right?  Do they have a liquidation right or other security attached to the securities?  You will fail at raising capital unless you provide concise and proper structure to investors. Sophisticated investors will expect and demand this from you as it is your responsibility to provide investor these critical transaction particulars. Even soliciting an indication of interest from an investor will require that you provide them specific transaction structure and data.  Without this information they are incapable of vetting the investment opportunity and expressing interest.

Problem #3:  Inability to Accept Investment

In order to accommodate the investment from an interested individual the Company will need to execute a proper private placement offering to sell the investor the equity or debt securities that will result from execution of the investment transaction.  It is far more effective to have this capability in place when you initially solicit the investor – rather than soliciting the investor and then putting the investor on hold while an offering is formulated (at which time they will have to revisit and re-evaluate the transaction again).  If an investor is interested in your company’s investment opportunity – you should have the capability to move forward and capitalize on that interest and execute processing their investment in a timely manner.  This is not possible outside of a properly prepared offering.

Problem #4:  Disclosure is Responsibility of the Company

It is the company’s responsibility to provide the investor with everything needed to properly evaluate the company’s operations, the investment transaction, terms of the investment, and the risks involved.  A business plan or executive summary does not provide for these requirements.  Thus, initial interaction with an investor outside of a structured offering does not accommodate the disclosure needed for proper vetting of the investment.  In turn, investors are typically unable to provide an indication of commitment to the investment opportunity.

Problem #5:  First Impressions Count

You never get a second chance to make a quality first impression with an investor.  Providing an investor with a professionally prepared, accurate private placement offering tells the investor the following about your company:

  1. You are serious about raising capital properly
  2. You intend to comply with all rules and regulations in handling their investment into your company
  3. You are sophisticated and savvy to the requirements of soliciting investors and accepting their investment
  4. Using a private placement offering from the outset of interaction provides investors the positive perception that you will manage the company’s planned operations in the same manner as you are managing soliciting their investment into the company – with professionalism and in accordance with applicable regulations.
  5. You want to provide full disclosure to the investors about the company and risks so they may make an accurate decision regarding participation in the investment

Is it worthwhile to prepare a proper private placement offering and related prospectus materials prior to soliciting investors?  The answer to that question is simple:  how serious are you regarding raising capital for your company properly and effectively?

Business plans serve an important function for certain businesses – but they should not be utilized as a means to solicit investment or accommodate investment from investors. A Regulation D private placement provides the needed structure to properly interact with investors, solicit interest, and accept investment.

This article originally appeared on Regulation D Resources.

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