The Rx for Raising Investment Capital
By Alan W. Urech
As a private capital investor I have come to the conclusion that there are nine areas that companies should focus their attention on, while raising capital to grow their business. Being clear, crisp and compelling by explaining the business in the following areas will help you beat the odds on securing investment capital. Anyone can develop a company, but Investors want to see that you have developed your company into a thriving and sustaining business. Remember there is plenty of competition for “your” capital and the companies that demonstrate the best chance for significant growth will win the investment.
What are the nine areas Investors look for?
1. Strong management with meaningful equity stakes. I want heavyweight professionals in top management. I also check to make sure that the Company’s management team is aligned for growth by having all members playing in the position where they are best capable of achieving success. This is extremely important to the future growth of the business. Management sets the focus and business strategy and they must have the core skills and have the background to do this. It must be established upfront who is in charge of what areas. A successful CEO is painstakingly paying attention on the company’s growth in all areas, not just having “cool” products. The company needs to focus on execution, execution and execution, not the business strategy to grow.
Most investors want you to have some personal capital or tangible commitment in the game. They want to make sure that you are committed, but not too aggressive. If the CEO, for example, is worth $1 million in liquid assets, and has placed $6,000 into the company, my initial thoughts are “hobby.” If the CEO has placed $250,000 in the organization, that is serious money and should be respected. This money is commitment. If the CEO has placed $800,000, my thoughts are that he/she is too much of a risk taker because non-controllable events take place (9/11, Katrina, Rita, London, Madrid, etc.) and I wonder about this overly aggressive behavior.
2. Companies with a superior competitive position in a defensible market niche. Investors need to thoroughly know you, your market and where you focus your business. This includes the ins and outs of your market, the “skinny” on futures and which companies are doing what and when they will do it. There is a comfort level in knowing all this business information, and once Investors get comfortable with it, they are more likely to invest.
3. Companies generating predictable operating cash flow with low technology and market risk. Investors need to comprehend that the capital raised will be used for business expansion, not to pay back debt or develop new products. They need to understand that the company can expand on its own going down its current path, but at a much slower rate without this capital. This means the investor would not waste their investment in the business and have a more meaningful return from Company in the future.
4. Attractive exit alternatives within a 3 to 7 year period. Seem aggressive? Not really. Investors are seeking believable, predictable exit strategies to get their investment back within a defined period of time. One business strategy to grow your business from a thorn in a competitor’s side, to a spear in their back, then sell out to them. Explain to the Investor how your business strategy will succeed at that growth. Certainly a spear hurts much more than a thorn and they will want to take you out so they can expand. A purchase by a company that determines that your company is profitable and a necessary expansion of their own business strategic direction produces a great exit strategy.
5. Alignment of interests with management and other significant investors. One thing that I note is that companies often present to Investors that do not understand the “pain” that your product, service eliminates. Like going into a job interview, the interviewer wants to understand that if they hire you, they will be in a better off. Make sure that the pain is explained in easily understood terms.
6. Growth focused business model with ability to attract additional capital. Depending on where the company is in the investment cycle, the investor needs to know that you are not currently or in the future will be “desperate.” That you are on a path that after this round, you will be a much better position to attract cheaper capital…and the first-in investor will not diluted out by the second round investments.
7. Repayment of debt is not dependent upon future growth. Very important thought. This thought is that you must prove to an investor that your business can sustain itself and slowly grow. To get a significant boost, you need investment to hire heavyweight managers and workers who can significantly scale the operations, sales and marketing areas and make your investment worth more.
8. Financial structure which provides for reasonable margin for error. About 90% of the time, a company’s management tells me that their numbers are very “conservative.” The psychology, I suppose, is that our investor minds will immediately inflate them to my wildest dreams to be ten times what was actually given to me. Wrong. My mind sticks on those numbers compared to a many different areas that come into play including the management’s ability to grow the business, the market opportunity, the go-forward business strategy, the competition, the current customers, the sales and marketing strategy, etc. Remember that the seller wants you to buy the future. The buyer wants you to buy the past.
9. Diversified, stable customer / payor base. This brings me to my last major area and summarizes the main way that you can attract capital: Get more customers and keep them. Your money will be cheaper because there is less risk involved. There are 5 operating stages for Entrepreneurial Start-up Companies: From an idea through a developed product through a few paying customers through scaling up operations and finally creating enterprise value. Having more customers to an investor means money for the company because the profit from each of those sales. I like these thought patterns.
These are the nine areas that I think are necessary to secure capital investment.
I hope this brief article helps you to understand how to boost your chance of securing additional investment for your business when competing against other business for those elusive investment dollars.