Terrie's Job Tips -- Starting Your Own Company - Part Six: Raising Money

Probably the biggest consideration for most people in wanting to set up a company is the issue of having the money to pay for it. As I teach in my entrepreneur classes, starting a company with any number of employees will always cost more than you think. In fact, my rule of thumb is to set aside about JPY5m for each person employed, quite apart from the cost of any office move, furniture, tools of the trade, company registration, licenses, etc.

The reason for this number is that it approximates the 9-12 months of "ramp up" time it takes for new employees to start actively contributing to the business, and for most services companies at least, manpower comprises about 80% of the costs of running a business.

Most small companies need about 3-5 people to operate in a manner which will convince larger companies to give them work, or for consumers to buy their products. The typical make-up for a minimum 3-person business is one salesperson, one support person, and someone to look after the bookkeeping and company legal requirements. Then if you have a CEO who takes on a more strategic role, there is likely to be a helper. Beyond that, as you grow, you have marketing, technology, and more sales people to hire. Using my formula above, then, for a 5-person company, you need a capital of about JPY25m plus set up costs. Let's say the total winds up being around JPY30m.

This is a lot of money, and is beyond most people to find. So how do we go about getting this cash? Back 5 years ago, the simple answer would have been Venture Capitalists (VCs), however - things have changed greatly since the dotcom bust, and VCs very seldom invest in start-ups. Instead, they now act more like Private Equity people, and come in as investors once the company is clearly earning revenues and is perhaps 12-18 months away from becoming profitable. High growth and a strong product or market advantage is essential to attract their money.

Early stage investors these days are the Angel investors. These are typically high net-worth individuals with a spare JPY10m-JPY20m to place in a risky company start-up. They do this on a semi-professional basis, and expect you to provide them with a return within 5-10 years (meaning, you would either IPO or sell your company). Unfortunately these individuals are few and far between, and almost none that I know of are in the habit of making investments into foreign-owned companies.

However, there is another type of individual that looks and acts like an Angel, just they don't know that they're filling this role. They would be friends who are working in well-paid jobs with large multinationals. In my experience, most early-stage capital for foreign-owned start-ups in Japan comes from these types of people. Typically they can afford JPY3m-JPY5m, which means you'll need 4-5 such friends to back you in order to raise JPY20m to add to your own contribution.

I have had many people ask me if it is such a good idea to raise cash from friends. What if the business doesn't go well? My answer to that is if you are not sure that you will be successful, perhaps you shouldn't be starting the business in the first place. If you're too timid to envision success to your friends, it is highly likely that you will have trouble selling customers on your services and products as well.

In any case, if the idea of money from friends is too difficult, then your only option is your own cash, accumulated the hard way - through lots of overtime in your current job, or starting your business as a one-person operation and growing organically. Doing this can add years to your business cycle, and please don't have a family while doing it. Spouses hate irregular income, and being undercapitalized is a guaranteed source of frustration and disappointment.

Lastly, the very first place your new company's capital should be coming from is you and/or your family. Any outside investor, even an amateur one, wants to see that you believe in your own vision and that you're putting your money where your mouth is. I think if you're planning to raise JPY30m for example, you should be putting down at least 30% of this cash from your own funds. You could then offer to put in another 25% as "sweat equity" - meaning that you'll take a lower salary on mutually agreed terms, and on the part you don't get you pay income tax. This extra tax-paid income is provided as a loan (actually unpaid salary) to the company and is converted once a year into stock.

In Japan at least, this is how many founders get to keep a decent percentage of their business, even though they're not putting in as much cash as other investors.