| Ask anyone who has ever raised millions of dollars in | | | | the worthless projects and hone in on those that offer |
| funding and they will tell you that it is an expensive | | | | the greatest return with the least amount of risk. |
| proposition. Whether it is an Initial Public Offering, a | | | | Oftentimes their costs make up the bulk of a funding |
| Private Placement or a simple commercial loan, it costs | | | | sources’ due diligence expenses. |
| businesses thousands of dollars before they see their | | | | “If that’s the case, then why don’t they pay |
| first dollar in funding. To the uninitiated this seems | | | | for it? Why should I have to cover the cost of all this? |
| downright backwards. After all, they say, “My | | | | After all, I’m coming to them with an opportunity to |
| business needs money. Why should I have to pay any | | | | make millions!” some might snap back. The |
| fees to get it?” While on the surface this seems to | | | | unpleasant truth is that, as far as they’re |
| make perfect sense, a closer look at what goes on | | | | concerned, you need them more than they need you. |
| during a capital raise reveals some shocking facts. | | | | While this perspective may not sit well with some, the |
| There’s no better place to start our exploration of | | | | fact of the matter is that, right now, funding sources |
| this subject than by taking a closer look at a sector | | | | are literally being flooded with investment opportunities. |
| whose very existence depends on its ability to raise | | | | Every single day, they’re sifting through hundreds if |
| hundreds of millions of dollars every single year: | | | | not thousands of projects. This means that they can |
| charities. According to the Giving USA Foundation’s | | | | comfortably pass on the expenses involved with the |
| Giving USA report, last year charities raised an | | | | evaluation of your project onto you. If you don’t like |
| astounding $307.7 Billion in donations. While some might | | | | it it’s no big deal. They have hundreds of others |
| think that 100% of their donations actually go to the | | | | who understand that this is just another cost of doing |
| causes they have donated to, there are others who | | | | business and are more than willing to pay for the |
| know better. | | | | opportunity to get their project in front of them. |
| The reality is that charities spend hundreds of | | | | In their eyes, the onus is on the prospect to |
| thousands if not millions of dollars each year in their | | | | demonstrate that they have a viable and lucrative |
| efforts to raise money. While great charities are able | | | | opportunity, not the investors’. That’s why |
| to keep these expenses between 5% and 10%, it’s | | | | you’ll always have to pay for them to perform their |
| not unheard of for others to spend as much as 90% | | | | due diligence on your project before you get funded. |
| of the donations they take in. That’s right, 90%!! So | | | | There’s just no way around it. Truth be told, funding |
| much for helping those in need, right? | | | | sources actually prefer it this way. You see, by making |
| While the costs for your capital raise will be nowhere | | | | prospects cover their due diligence costs it helps them |
| near that rate, you need to be prepared to cover | | | | dissuade the disingenuous from presenting them with |
| certain unavoidable expenses. Walk into any reputable | | | | projects that have no real merit or are outright |
| commercial financing institution and you’ll soon learn | | | | fraudulent. You’d be surprised how many individuals |
| that getting them to invest in your project is going to | | | | try to get funding by misrepresenting themselves, their |
| cost you. It’s not unusual for prospects to have to | | | | financials or their project. |
| spend anywhere between $15,000 - $120,000 in due | | | | Given all of the time, energy and expenses involved in |
| diligence and other third party fees. The greater the | | | | trying to get a project funded, it’s extremely |
| scope of a project and the more money is being | | | | frustrating and painful when a prospect spends so |
| sought, the more complicated, lengthy and expensive | | | | much only to have a funding source come back and |
| this due diligence process is. | | | | say “No”. Having a project you think is fantastic |
| “That’s insane! Why do they do that?” you | | | | just isn’t good enough. If it doesn’t cater to |
| ask? It’s simple really. You see, part of an | | | | investors’ appetites they won’t fund it. Period. |
| institutional investor’s process to determine whether | | | | That’s why it’s smart to have your project |
| or not it makes sense to take a chance on a project is | | | | evaluated by an advisory firm with a strong grasp of |
| to utilize reports prepared by independent, third party | | | | what investors’ predilections are before you put it |
| firms. From appraisals to engineering reports to | | | | in the hands of a funding source’s unforgiving |
| feasibility and environmental studies, there are an array | | | | underwriters. They are adept at accentuating the |
| of reports, among other things, that an investor will | | | | strengths and shoring up the weaknesses of a project. |
| need to study before they commit to investing in a | | | | This saves business owners tens of thousands of |
| project. Suffice it to say, the firms preparing these | | | | dollars in wasted due diligence fees because |
| reports do not work on a contingency basis. They | | | | they’re able to find problems and fix them before |
| need to be paid upfront. | | | | the underwriters discover them and are forced to kill |
| On top of this, financing institutions incur substantial | | | | the deal. |
| expenses related to the work performed by their | | | | Now that we’ve cleared this up, its critical that you |
| underwriting staff. Within many financing entities there | | | | not underestimate the costs you will incur in your |
| are a host of highly trained professionals whose sole | | | | search for funding. This will be the topic of our next |
| responsibility it is to rigorously vet a project and give it | | | | post. |
| the final thumbs up or thumbs down. They also need | | | | We’re pretty sure we’ve struck a nerve with |
| to be paid upfront for their services. | | | | some of you. It’s an issue which really frustrates a |
| Make no mistake, they are there to protect their | | | | lot of people so we’ll be very interested in hearing |
| company’s interests. In the wake of the collapse of | | | | you sound-off on this controversial topic. Let the |
| so many financing institutions in recent past, they’ve | | | | debate begin! |
| been placed under enormous pressure to weed out | | | | |