Five by Five: Considerations for Raising Capital

In the 1986 movie Aliens, the tough female Marine spacecraft pilot delivers this evocative line to her platoon commander as the shuttle descends to the planet's surface: “...I read you five by five...we're in the pipe...”.

Five by five. Loud and clear.

My hometown of Santa Monica and the surrounding region have surged onto the national landscape in the past 12 months as a hotbed of startup activity. This is terrific news for the community.

And as might be expected, there is no shortage of advice, varying from blog postings to a seemingly limitless selection of events. For entrepreneurs, the volume and widely varying quality of available information can be overwhelming, not to mention difficult to sort out.

One oft-overlooked area for a startup's consideration is the strategic decisions that underlie the capital-raising process. These decisions can be critical to the ultimate success of the effort and the company and avoiding mistakes can save you a lot of work.

Here are five areas deserving careful thought as a new company considers the process of seeking outside capital.

1) Find experienced advice: Before deciding anything, seek out those who have proven records of accomplishment over a meaningful period of time. There's plenty of advice. Just make sure you evaluate who's giving it as well as the information itself.

2) Weigh the capital alternatives: There are several capital categories to evaluate, including friends and family, the new burst of incubator/ accelerator options, angels, venture capital and strategic capital, to name the major ones. Each has distinct characteristics.

3) Analyze carefully how much you need: Build a model for your company that includes consideration of how many people, what you can accomplish and when, conservative revenue projections and other essential numbers from the bottom up. And then double that amount.

4) Build a capitalization model: Construct an analysis showing how much you need over what period to reach self-sufficiency and then add an analysis showing to investors in your company. It helps to show investors you've thought about how they'll make money.

5) Be realistic about valuation: Assuming your goal is a self-sustaining enterprise that eventually provides liquidity, understand how to value your company at the outset to facilitate growth.

Obviously there are dozens of other issues and decisions on people, strategy, product and related topics. But it's the rare startup that succeeds on a high level with no external funding. Even Bill Gates took in outside investors.

So think clearly, filter out the noise, and listen for clear, unattenuated signals, and you can save yourself time and boost the chances of your company's success.

Jon Funk is the founder of Ocean Road Partners and has been directing startup investments in LA for over 25 years. He has backed some of southern California¹s most successful companies, including Sandpiper Networks, Rent.com and Shopzilla. He currently teaches a class on raising capital, writes about local venture capital and other topics and selectively considers angel investments. This and prior articles at blog.oceanroadpartners.com, and more about Ocean Road Partners at oceanroadpartners.com.

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