(FORTUNE Magazine) – WANT TO RAISE $10 million for your new business? Listen to the saga of Douglas Pihl and Duane Carlson. They were among six co-founders of Lee Data, which manufactured peripherals for IBM computers, but left Lee to market a device that Pihl, a computer engineer, had invented. The product, a gigarouter, is a piece of high-performance hardware that links electronic workstations to give them the power of a supercomputer at a fraction of the cost. With four others, Pihl and Carlson started NetStar in 1990, and then devoted the next year and a half to coming up with a detailed business plan and scraping together $500,000 in seed money from friends, relatives, and former colleagues in and around Minneapolis.

It was discouraging to spend 18 months and raise only half a million dollars, so in 1992 the pair took the advice of a former Control Data executive they knew and approached R.J. Steichen & Co., a regional brokerage firm in Minneapolis. Within three months, Steichen collected a band of angels -- wealthy investors who wanted ground-floor equity in NetStar and put up $1.35 million. Two more rounds of angel dust, and two years later the entrepreneurs had over $10 million, even though NetStar's revenues to date total only $90,000. Says Carlson, who still sounds exhausted: ''My only regret is that we didn't go to the brokers sooner. We wasted a lot of time at the beginning. When you have a hot product and you know you'll need a given amount of capital to get your business rolling, the main thing is to get on with it.'' Financing a new venture has never been a day at the beach, but your chances of succeeding are best if you know where the money is and what potential backers are looking for. Above all, you must be prepared to persist, persist, persist. Herewith a short primer:

-- Where the money is. Few entrepreneurs expect to raise as much as $10 million. In fact, most companies get going with working capital of $10,000 or less. To help these outfits, the U.S. Small Business Administration has come up with a new program offering ''micro loans'' of up to $25,000. The paperwork for this type of borrowing is vastly simpler than the usual labyrinthine ordeal of requisitioning government money. For more information about micro loans, telephone the nearest SBA office or dial 800-8-ASK SBA. Another government-backed source of capital for qualified startups: quasi- public state development agencies, usually funded by the state in partnership with corporate movers and shakers. Some of these programs will lend you a minimum of $25,000 and provide support services, such as leasing you office space at favorable rates. For information about what you must do to qualify for a loan, call the economic development office in your state capital. The single largest source of cash for fledgling enterprises is angels -- not celestial beings, but earthbound investors who will buy into a promising new company at $15,000 to $100,000 a pop. How do you find them? As Pihl and Carlson did, ask around at brokerage houses and small regional investment banks in the town where you live. Many stockbrokers are eager to form an investor group from among their clients. Angels are more active now than they used to be because of a change in the 1993 federal income tax law that cuts by as much as 50% the capital gains levy on privately issued stock that an individual has held for five years or longer in qualified small businesses. To be considered as a tax shelter of this kind, your company must have less than $50 million in assets -- no problem for most entrepreneurs -- and be a manufacturer. You must also meet other criteria, so ask your tax adviser to give you a rundown on Internal Revenue Code section 1202, which describes the new capital gains rules. Bands of angels aren't the only moneybags. Big venture-capital funds, backed by institutional investors, including pension funds, had all but dropped out of the seed-capital game a few years ago. They may now be getting back in. According to Richard Meyer at Orion Technical Associates in Atlanta, 170 funds now specialize in startups -- nearly double the number in 1991. Don't overlook large corporations with an interest in fostering innovation, especially in the health care industry. Johnson & Johnson, SmithKline Beecham, and Genentech have quietly set up funds to sponsor ventures that might produce hot new technologies. Make a list of the giants in the industry you want to enter. Then call and ask if they have a development company, and whether it would be willing to take a look at your product, with an eye toward committing some dollars. Then there's Uncle Sam, the venture capitalist. The SBA has sunk about $41 billion into startups over the past decade. In April it launched a new Small Business Investment Company (SBIC) program that will offer more than $1 billion a year to infant enterprises through venture capital firms. SBICs, many owned by banks, have been around for 36 years and have funneled about $10 billion into startups, some of whose names you might recognize: Apple Computer, Federal Express, Intel. Any capital-hungry growth business may apply, except financial companies and certain real estate ventures. Each SBIC sets its own investment parameters, but no fund puts more than 20% of its capital into any one deal. Minimum investments generally start at $100,000. For more information about the new SBIC program, call the national association of SBICs in Alexandria, Virginia, at 703-683-1601. Unless you have a well-established business already churning out a solid stream of revenues and profits, forget about banks, at least for now. Most regulators are still so spooked by the credit debacle of the late Eighties and early Nineties that they have cracked down on any loans with even a whiff of risk. American Bankers Association chief economist James Chessen calls the current lending atmosphere ''horrible.'' For what it's worth, however, in a survey by the Consumer Bankers Association, 94% of retail banks said they hoped to devote more attention to small-business lending before this year is out.

-- How much to ask for. Obviously this depends on the kind of company you are starting. Federal Express needed enough to lease and operate terminals at airports around the country and a fleet of planes and trucks. But there are some rules of thumb. You want to raise at least 12 months' operating capital, because anything less will have you out a few months later rattling your tin cup, when you should be concentrating on building your business. Don't ask for more than 24 months' funding. It might be nice to have the extra cash, but you'll be selling equity for it, and this is equity that will probably be worth more later. Get used to the idea now that you are going to be giving away large pieces of your enterprise to your investors, whether they be angels or big-time venture capitalists. How much depends on how many rounds of financing you need. Initial investors who put up the seed money usually take the biggest chunk, sometimes more than half. The more rounds, the less equity left for the founder. But most investors are smart enough to leave the management team, including the founder, with a stake of about 20% so they will be motivated to work hard. You may have started your business in the first place to be your own boss, but you'll wind up working under the gimlet eye of the folks who financed you.

-- What backers are looking for. Two words: fast growth. Venture capital firms typically expect a 20% to 30% average annual return on their investments. The trade journal Venture Economics reports that U.S. firms now manage about $30 billion, but most of that is invested in established small companies with years of results to show. All big funds now labor under quarterly pressures from investors, and some that once considered any promising-looking business now specialize by industry or focus only on companies in a particular, usually close-to-going-public stage of growth. VentureOne, a San Francisco research firm, reports that the average venture fund now oversees about $70 million in capital. To put all its monies to work, that firm has to deploy $2 million to $3 million in each of 20 to 30 companies. VentureOne President David Gleba observes that many entrepreneurs make the mistake of coming to a big fund for a small amount of capital. Says he: ''Companies asking ((a large fund)) for only $300,000 clearly have misconceptions about how funds operate, and they rarely get a yes.'' Choosing the right firms to target in the first place can save you a heap of wasted effort and frustration. Go to any good-size public library and ask for Pratt's Guide to Venture Capital Sources. It tells which firms specialize in which industries, whether they finance pure first-round startups or will consider only later stages of development, and what parts of the country they prefer to invest in. The National Venture Capital Association in Rosslyn, Virginia, also puts out a handy directory of its membership with much of the same data. A warning: Don't believe anyone who claims that he's got an ''in'' with a venture capitalist. Jon Bayless is a partner in Sevin Rosen, the Dallas firm that first backed Compaq. Says he: ''There are some outlandish ripoffs out there. We've seen naive entrepreneurs who hired intermediaries to help them raise money and ended up giving away 5% of their company as a 'finder's fee.' '' Bayless and most other prospective backers prefer to hear from you directly. Your best bet: a thorough sales pitch you can deliver by phone in five minutes or less, followed by a letter describing your plans in more detail. Because they need to maintain a certain deal flow -- that is, new opportunities coming in the door -- venture capitalists have an incentive to get back to you.

-- Have a strong business plan. In no more than 30 pages you should include a complete description of management, followed by a down-to-the-last-de tail marketing strategy. Financial projections, at least two years out but no more than five, go in the back. Write the plan yourself, using your own knowledge and that of your management team or any outside advisers you've been able to recruit. Hiring a consultant to do it for you is a mistake, because the plan won't show investors much about how you are thinking, which is what they really want to know. This is a working document, so don't put it in any kind of permanent binding. Once you start meeting with likely investors, one thing is certain: It will get shuffled around, added to, revised, and revised again. Venture capitalists say that entrepreneurs make three mistakes when they sit down to talk turkey with a potential backer. First, they underestimate the importance of having a management team with proven experience in marketing, manufacturing, and finance -- all of them, not just one or two of the three. Second, they underestimate the competition in their industry. Finally, they have not thought out the nuts and bolts of building a business around their idea. Don't staff your management team with friends or relatives who lack expertise. ''Venture capitalists are really buying into the management of your company,'' says Dave Radin, author of Building a Successful Software Company. ''If the light isn't on at the top, it's dim all the way down.'' If you're a brilliant inventor with no sales ability or a great marketer with no financial acumen, search among former colleagues and business acquaintances for people who have the skills you lack, and ask them to come onboard. Venture capitalists have built their own networks of consultants and specialists and can steer you to people who will make up for your weak spots. Indeed, since they will own a piece of your company, your investors may insist on getting you some expert advice where you need it most. Become very knowledgeable about products that may compete with yours and be prepared to explain precisely why yours is better. Read trade journals, go to . trade shows, stalk your competitors' wares in retail aisles. Then be realistic about how you expect to fit in to the marketplace. Ideally, you want to find a niche where no one else has yet trod. Says Walter Wilkinson, head of Kitty Hawk Capital in Charlotte, North Carolina: ''If you're a tiny startup in, say, computer parts, and you go up against Motorola, they will eat your lunch. Find an area of the business where you are unique. Then tell us what is unique about you.'' Ideas, unfortunately, are not companies. Stephen Reidy of Euclid Partners in New York City offers the example of the would-be health care magnate who came to him with a proposal for a kit enabling people to test their cholesterol levels at home. It looked like a nifty notion, with so many folks worried about their arteries but loath to run off to a doctor for frequent testing. The trouble was, the product required the user to draw blood with a syringe. Says Reidy: ''Consumers will simply not use this technology unless they have to in order to survive -- like diabetics who must inject themselves with insulin.'' The company never got off the ground. While you're being ruthlessly realistic, advises Brian Goncher of Coopers & Lybrand's entrepreneurial advisory unit in San Jose, make sure your business plan fully discusses the risks you see facing your company. ''Telling an investor that there are no major risks is naive, and it's a big turnoff,'' he says. And if you have any skeletons gathering dust in your closet -- such as a previous startup that crashed in flames after a year or two in business -- by all means say so. Rumbles Jon Bayless: ''If we find out about it later, from someone else, problems will ensue.'' The opposite is also true: Don't be bashful about why your previous experience uniquely qualifies you to be successful now. One reason NetStar's Pihl and Carlson could raise $10 million for a company with a product that barely existed is that they were known as the founders of Lee Data, which had been one of those shooting-star initial public offerings that made a lot of their investors rich.

-- Don't give up. ''Entrepreneurs usually have very little idea at the outset of how much time and effort it takes to raise money for a new company,'' says Gary Stoltz of the Pathfinder Venture Capital funds in Minneapolis. ''In Northern California there are so many seed funds, you can do a deal over lunch. Almost everywhere else, if you get a first nibble after four months of full-time work at it, you're ahead of most people.'' Duane Carlson has a theory that angels and venture folk will often give you the brushoff just to see how you react. If you go away meekly and don't come back, they figure you haven't the dogged perseverance required to start a company and were therefore a bad risk from the get-go. But suppose you keep at it: You change your business plan, you get expertise where you lacked it, you improve your product. Then you keep calling, and calling, and calling, until potential investors are forced to hear your spiel all over again. Now you are showing some promise. Says Carlson: ''The process is similar to 'cold calling' in sales. You have to be ready to take a lot of rejection.'' In other words, Mother was right: If at first you don't succeed . . .

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: VENTUREONE, COOPERS & LYBRAND 1993 SURVEY CAPTION: WHERE THE VENTURE CAPITAL GOES