Keeping a Clear Fundraising Paper Trail

This article was written by David Worrell of Entrepreneur.com. He is the author of the e-book Finding Funding.

Even in today's fast-paced business world, raising money relies more on paper and ink than point-and-click. Whether you are looking for funds from a bank, a VC or just a rich uncle, it is crucial to communicate your ideas and plans on paper. And what a pile of paper! When done right, the fundraising process requires a dizzying array of forms, contracts, plans and projections.

And when it's not done right? Mistakes can lead to serious and long-lasting repercussions, as Cary Daniel learned several years ago. Daniel says he learned while working in a previous business how not to raise money. "In one angel deal, we raised $200,000, but later, additional funding was held up because we did not do the right documentation," says Daniel, 37. "It took the lawyers a month or two to fix what they [hadn't done right] a year [before]."

These days, Daniel doesn't cut corners. As CEO of Business District, Daniel assists more than 1,000 business brokers and entrepreneurs in buying, selling or financing businesses. Having the right applications and contracts available for his customers' financing needs is critical.

At the same time, Daniel is out on the fundraising trail himself. He and his partners put together more than $300,000 in start-up capital in 2005 and 2006, and he is now seeking more than $1 million to turn Business District into a one-stop shop for anyone looking to buy, sell or finance their business. Fundraising is an arduous task, he admits, but one that has clearly defined steps. And each step requires its own unique set of carefully crafted documents.

David Gilroy of GrowthFinance in Charlotte, N. C., agrees. As a finance consultant and a partner in a VC firm, Gilroy has worked both sides of the funding table. According to Gilroy, fundraising documentation falls into two categories: marketing and legal.

Plans, Presentations and Projections

Because most initial communication between the business owner and investors will happen in cyberspace, Gilroy starts by crafting a concise email that will introduce the concept in eight to 10 bullet points. "To just volley an executive summary over to an investor as an attachment is not a good plan," he says. "An intro in the body of the email hits them front and center in their inbox."

Whether it is delivered by email or not, investors expect to see an executive summary before anything else. That means a four- or five-page synopsis of the business plan. And as a follow-up, there's the business plan itself, of course.

The summary and plan form a broad overview of the business, Gilroy says, and should convey the potential of the business opportunity to the right investor. The document can be lengthy, usually 15 to 20 pages plus appendices with other marketing materials. This becomes the centerpiece for initial discussions between the investor and the entrepreneur.

Daniel says he chose to take an extra step and turn his business plan into a legal document called a private placement memo. "We may not have needed a full-blown PPM," he says, "but we wanted to assure future-round investors that the initial investors were accredited and informed."