Should raising money in today’s economic climate be the equivalent of “pulling teeth?” NO! We know. We’ve been on both sides of the fence, as entrepreneurs raising money and as professional investors. We have used our experience and built the Capital MatchPointTM to address this daunting task and make it easy for the capital seeker and capital provider to come together with common goals. That’s just the first, all important step…to get you in front of the right investors who’ll look at your deal. Here are 10 more secrets as you plunge headlong down the path of raising capital, 10 valuable secrets you MUST consider…
SECRET #:1 Who are you dealing with?
Every capital provider, be they an angel, venture capitalist, private equity firm, or your favorite crazy, rich uncle, has their own set of investment guidelines they follow when making investments. You should learn as much as you can about the people you will be asking to become a part of your company. In today’s internet age everyone has a website. Visit the on-line home to potential investors to learn about them and their investment strategies. They will do the same to you. Typical rules include geographic focus, investment stage preference, lead/follow-on investor, minimum and maximum investment amount, industry focus and board seat requirements. Make sure that the strategy of the firms you are targeting match your funding needs. Use the Capital MatchPointTM to automate this exercise.
SECRET #2: Get personal
If you’re cold calling, stop the insanity! It just doesn’t work. You’ll hear the expression, “Deals thrown over the transom,” more than once. It means someone just tosses their business plan over the door hoping someone finds it, reads it, falls in love with it and funds it. We built the Capital MatchPointTM to eliminate this practice by selecting quality business opportunities and matching them with quality investors. Capital providers are looking for good investments and tend to prioritize personal introductions.
SECRET #3: Get to the point, will you?
You’ve secured your first meeting with the person with the money. Hooray! Now, get right to the point. Time is money and if you’ve gotten this far, don’t waste their time or yours. I’ve sat through countless meetings with a capital seeker looking for money; they usually have a great idea or concept, but can’t articulate it and loses me in minutia. Be crisp. Be clear on what you do, who buys your products, how you make money, and how you plan to grow. Keep presentations under 12 slides and executive summaries under 2 pages.
SECRET #4: Is your team the right team?
Does your founding team have the passion you do, or does cousin Eddie think he can help because he has knows someone who knows someone? If you don’t have people on board that have the unique combination of experience, passion and who are smarter than you, it’s going to be a tough grind. You don’t have to have a complete executive team, that’s what the new money is for. Be flexible and be willing to listen and give up some portion of the deal to the capital seekers…and don’t think they’re interested in giving you a simple loan and you’ll pay them back when it gets huge, that’s for rookies. One of my old mentors, the late, and very great Hy Fedderman used to say, “Money is honey, use the company’s paper as wampum for trade. Never be afraid to give up equity for cash.” It’s true.
SECRET #5: I’m different…I really am!
If you don’t know who your competition is and why you’re better than they are, at least after funding, then save the trip. Everyone has competitors. Those that say they have no competitors are not believable. Directly present yours and the measurable difference your product or service offers. Identify them, don’t be afraid of them, and make your deal better than theirs. After all they were there first and can be picked apart for weaknesses.
SECRET #6: The ROI
What is your value proposition to the customer? How does your business save time or money or both? What is the cost to the customer of not using your product or service? Show the investor how darn valuable your product or service is to the market you address.
SECRET #7: The real market size may not be as big as you think!
Who exactly are your customers and what is the real market you are serving? Don’t be expansive. Be realistic. What is the exact size of the addressable market of purchasers of your product or service? Don’t use “fuzzy math”. If you tell the capital provider “if we capture 1 zillionth of 1% of the market we’ll make zillions!” your credibility will be called into question. The people with the money have resources necessary to corroborate or refute your claims. After all they have the money for a reason.
SECRET #8: Know your numbers!
How will your company spend the money and how does this all come together to break even and make a profit? Explain the key business drivers such as number of customers, sales per customer, cost per customer etc. Show a bottom-up analysis of how many customers you need to hit your numbers. Be prepared to discuss what you would do with more money and how you could make it with less, which is usually what the capital provider wants to know.
SECRET #9: Tell me how I exit
These days, the public exit strategy is dead, and I mean DEAD! Don’t even go there. Assume the only way for your investors to realize a return (what this is really all about) is an acquisition of this wonderful business you are going to create. Provide tangible examples of recent and related acquisitions by at least three different categories of potential acquirers (suppliers, distributors, competitors). Be prepared to cite five companies in each category to show that there are plenty of viable of exit options. Oh, and don’t forget to tell the investor the time line to harvest his reward.
SECRET #10: Valuations...Reality sets in!
Valuations for start ups and early stage deals are virtually worthless, so don’t get too excited. If there is virtually no operating history and financial data is spotty, be realistic. DO NOT use the words “it’s based on conservative numbers”. Early stage valuations are subjective, so get over it. Your first round of investors will probably own 30%-50% of the business.
One must be realistic when approaching the capital markets because if you aren't, the capital providers are! After all they're looking for the best deal they can deploy capital to and will do it with the least amount of money forging themselves the best deal for themselves. Be tough, be clear and there are more than one source out there!
Tuesday, June 23, 2009
Wednesday, April 22, 2009
Middle Market Deals...a Convergence of Capital!
Middle market companies are attracting disparate investors these days, and the Capital MatchPoint was right on target when I wrote we're seeing an influx of these types of capital providers on the site. Traditional roles are being reversed. What's happening here?
The convergence of private equity firms and venture capitalists is a very new phenomenon. Traditionally, private equity firms have funded larger deals and, with credit harder to locate, these firms are looking for smaller propositions, while venture firms are seeking out more mature deals, as they are now perceived to be less risky although more capital is likely to be needed. This makes good sense to diversify and lean away from having front end loaded investments with a murkier time to exit.
Meanwhile, private equity firms that were making money investing in leveraged, traditional and established companies are now having to look for returns from deals that need more upfront capital invested in high growth companies. While this happens, both the private equity and venture firms are now becoming competitors. The upshot? The amounts paid for M&A!
The view? Both private equity firms and venture companies need to work with each other as well as compete against each other. Both have capital to spend, the capital markets are tight and the potential beneficiary looks like the middle market segment particularly in the pharma, telecom and high tech areas.
The Capital MatchPoint saw this trend developing as more and more investors have subscribed to the site that fit these investment criteria almost perfectly. Capital needs meet capital providers! http://www.nuquestinc.com/
The convergence of private equity firms and venture capitalists is a very new phenomenon. Traditionally, private equity firms have funded larger deals and, with credit harder to locate, these firms are looking for smaller propositions, while venture firms are seeking out more mature deals, as they are now perceived to be less risky although more capital is likely to be needed. This makes good sense to diversify and lean away from having front end loaded investments with a murkier time to exit.
Meanwhile, private equity firms that were making money investing in leveraged, traditional and established companies are now having to look for returns from deals that need more upfront capital invested in high growth companies. While this happens, both the private equity and venture firms are now becoming competitors. The upshot? The amounts paid for M&A!
The view? Both private equity firms and venture companies need to work with each other as well as compete against each other. Both have capital to spend, the capital markets are tight and the potential beneficiary looks like the middle market segment particularly in the pharma, telecom and high tech areas.
The Capital MatchPoint saw this trend developing as more and more investors have subscribed to the site that fit these investment criteria almost perfectly. Capital needs meet capital providers! http://www.nuquestinc.com/
Wednesday, April 8, 2009
Innovation and the Entrepreneur
The financial crisis and the economic downturn…subjects beat to death by every pundit that has access to a computer which pretty much includes everyone. Got “crisis burnout” yet? We all have!
Let’s counter this with some positive understanding of how innovation will, and is, playing a key role in the new fortunes of the individual and the economy at large. Personally, I think the recent effects of the downturn is a rich breeding ground for the effects of true innovative measures undertaken by the best and brightest of us all. One thing these present conditions warrant is the fact it forces innovators to not waste nearly as much money identifying and pressing the monetary action button for projects. What? If you give people a lot of money, it gives them the privilege of pursuing the wrong strategy for a very long time. Prosperity tends to insulate innovators from market realities and allow them to pursue their vision, right or wrong and statistically speaking, usually wrong as 93% of all innovations that started out and became successful, started out in the wrong direction in the first place!
What effect does this have? Breakthrough innovations come when resources are limited and the tension is the greatest. This is typically when people are open to re-thinking the way they do business. The corollary to this is when companies abandon their plans and retrench, focusing on their niche to make it more relevant than embarking on new plans.
Disruptive innovation relative to specific market niches is taking place by companies and individuals with an even greater frequency in these market conditions. Why? Our view is that people who have been with true innovators have been forced into a downsized role or been gutted from their companies in ever increasing droves. Can they make a better widget? Market it? We see it frequently and have more and more prescient companies and their newly minted founders looking for the money to provide these innovations to the market place. Observing the numbers seeking capital for these great, and sometimes not so great, but interesting nonetheless, business propositions, puts us in the direct firing line of seeing America starting its metamorphosis from a big box company mentality, (don’t forget to get your gold watch at the end!), to one of true spirit and entrepreneurial savvy that made this country great. Bring on the innovators!
Let’s counter this with some positive understanding of how innovation will, and is, playing a key role in the new fortunes of the individual and the economy at large. Personally, I think the recent effects of the downturn is a rich breeding ground for the effects of true innovative measures undertaken by the best and brightest of us all. One thing these present conditions warrant is the fact it forces innovators to not waste nearly as much money identifying and pressing the monetary action button for projects. What? If you give people a lot of money, it gives them the privilege of pursuing the wrong strategy for a very long time. Prosperity tends to insulate innovators from market realities and allow them to pursue their vision, right or wrong and statistically speaking, usually wrong as 93% of all innovations that started out and became successful, started out in the wrong direction in the first place!
What effect does this have? Breakthrough innovations come when resources are limited and the tension is the greatest. This is typically when people are open to re-thinking the way they do business. The corollary to this is when companies abandon their plans and retrench, focusing on their niche to make it more relevant than embarking on new plans.
Disruptive innovation relative to specific market niches is taking place by companies and individuals with an even greater frequency in these market conditions. Why? Our view is that people who have been with true innovators have been forced into a downsized role or been gutted from their companies in ever increasing droves. Can they make a better widget? Market it? We see it frequently and have more and more prescient companies and their newly minted founders looking for the money to provide these innovations to the market place. Observing the numbers seeking capital for these great, and sometimes not so great, but interesting nonetheless, business propositions, puts us in the direct firing line of seeing America starting its metamorphosis from a big box company mentality, (don’t forget to get your gold watch at the end!), to one of true spirit and entrepreneurial savvy that made this country great. Bring on the innovators!
Monday, March 23, 2009
The Banks are Lending, the Banks are Lending...NOT!!
As the market digests the federal governments "How to fix the economy in as few easy steps as possible and not cream the taxpayer," plan, it's more than instructive to address some of the fallacies surrounding this monumental and historic event.
What to make of the underpinnings? First, let's take a look at some of the popular mis-conceptions about what ails the American economy:
1. "The banks aren't loaning any money to any one." Somewhat true, although the American consumer and corporations took on so much debt that its like balancing a watermelon on a toothpick...it's gonna collapse under the weight of it. They are lending, just not as much as they have in the past.2. "The banks aren't lending because of all the toxic assets that are really not toxic, just priced incorrectly." Banks are fearful of many things, but the biggest one? Losses that cripple their liquidity. Banks simply aren't going to make loans to entites that can't pay them back, thus creating the potential for future bumps in their equity.3. "Toxic assets can't be accounted for because the market doesn't understand what they're really worth." Let's examine this one...these assets are bad because they are worth less than the banks say they are. $5 trillion dollars say that's about right in the form of residential real estate losses alone. Hey, why should the banks shoulder that economic burden? If they share it all, they will be wiped out so let's just pawn the losses off on the taxpayer! Novel idea that looks like it's going to work, although we have NO say on the matter.4. "When these bad assets are off the banks balance sheets, they'll surely start lending again." Oh, they'll be lending again, (see #1), but the housing market and economy will still be hampered, so they'll wait to see the economy wait to hit the very bottom. They have time to wait, the capital seeker doesn't, unfortunately.5. And finally, "When the banks start lending, the economy will recover." And why would someone think that? The American consumer will still have crippling debt, the housing market just doesn't spring to life again and the poor soon to be retired type? Back to the workforce again! Let's face it, consumers have no more place for debt even if the banks are ready to bus them in to their branch to sign them up yet again.
So, in the end result, the overwhelming debt won't evaporate overnight, it will just be passed from the banks to the taxpayer until the government admits it was shortsighted, (sure), and the taxpayer will continue the long hard fight to not only pay their way, but their Big Brothers way too.
What to make of the underpinnings? First, let's take a look at some of the popular mis-conceptions about what ails the American economy:
1. "The banks aren't loaning any money to any one." Somewhat true, although the American consumer and corporations took on so much debt that its like balancing a watermelon on a toothpick...it's gonna collapse under the weight of it. They are lending, just not as much as they have in the past.2. "The banks aren't lending because of all the toxic assets that are really not toxic, just priced incorrectly." Banks are fearful of many things, but the biggest one? Losses that cripple their liquidity. Banks simply aren't going to make loans to entites that can't pay them back, thus creating the potential for future bumps in their equity.3. "Toxic assets can't be accounted for because the market doesn't understand what they're really worth." Let's examine this one...these assets are bad because they are worth less than the banks say they are. $5 trillion dollars say that's about right in the form of residential real estate losses alone. Hey, why should the banks shoulder that economic burden? If they share it all, they will be wiped out so let's just pawn the losses off on the taxpayer! Novel idea that looks like it's going to work, although we have NO say on the matter.4. "When these bad assets are off the banks balance sheets, they'll surely start lending again." Oh, they'll be lending again, (see #1), but the housing market and economy will still be hampered, so they'll wait to see the economy wait to hit the very bottom. They have time to wait, the capital seeker doesn't, unfortunately.5. And finally, "When the banks start lending, the economy will recover." And why would someone think that? The American consumer will still have crippling debt, the housing market just doesn't spring to life again and the poor soon to be retired type? Back to the workforce again! Let's face it, consumers have no more place for debt even if the banks are ready to bus them in to their branch to sign them up yet again.
So, in the end result, the overwhelming debt won't evaporate overnight, it will just be passed from the banks to the taxpayer until the government admits it was shortsighted, (sure), and the taxpayer will continue the long hard fight to not only pay their way, but their Big Brothers way too.
Saturday, March 14, 2009
Stability Starting to Rear It's Head?
Close to a bottom? We certainly hope so, but not without a few more curves thrown our way. Let's see what has happened this week: the stock market had its best week since November, retailers have reduced inventories so when any signs of a pickup in demand will force them to restock, oil prices are up and core indicators are starting to show signs of life.
Need more proof? The Consumer Price Index appears to be stabilizing, if you call a less than expected drop to be encouraging. Why not? Retailers are practically paying you to take the merchadise and good bargains can only last for so long. Simple economics on this one: producers got stuck with too much inventory after consumers cut back dramatically last year. Now they have to cut back further to cleasr their shelves of stockpiled goods. So, the best way to reduce inventories is to sell more.
How about the behemoth industries? Fertilizer production has improved as the spring season approaches and inventory clears. Industrial metals are showing signs of better days ahead: prices for industrial copper are up 18% for the year, indicative of the metals use in construction and electronics, scrap prices are rising as companies drain their excess inventories and shipping freight rates are nudging up from hibernation. Demand for moving goods around the world is rising.
So what does this mean? Try a little dose of confidence that is sorely needed today. The enthusiasm about things improving can do a lot of the heavy lifting from the almighty consumer, who, in the end, is the biggest linchpin to getting the American economy back on track.
Need more proof? The Consumer Price Index appears to be stabilizing, if you call a less than expected drop to be encouraging. Why not? Retailers are practically paying you to take the merchadise and good bargains can only last for so long. Simple economics on this one: producers got stuck with too much inventory after consumers cut back dramatically last year. Now they have to cut back further to cleasr their shelves of stockpiled goods. So, the best way to reduce inventories is to sell more.
How about the behemoth industries? Fertilizer production has improved as the spring season approaches and inventory clears. Industrial metals are showing signs of better days ahead: prices for industrial copper are up 18% for the year, indicative of the metals use in construction and electronics, scrap prices are rising as companies drain their excess inventories and shipping freight rates are nudging up from hibernation. Demand for moving goods around the world is rising.
So what does this mean? Try a little dose of confidence that is sorely needed today. The enthusiasm about things improving can do a lot of the heavy lifting from the almighty consumer, who, in the end, is the biggest linchpin to getting the American economy back on track.
Middle Market Deals and What I'm Seeing
We're starting to see a trend in the investor's appetite for new deal flow, specifically, sound middle to late market companies. A good percentage of the investors listed on the Capital MatchPoint are seeking middle market firms and the demand thus far is outstripping the inventory of these types of companies. That's not to say they're not out there, but an huge request for them indicates these firms are not seeking investments and seem to be laying low and weathering out the storm by sitting on cash.
However, if indeed this is the majority of cases, hoarding cash is nearly as bad as spending it profligately. Cash returns are woeful and many firms may be sitting on cash reserves that demand less than a passing interest from investment houses, hence the dearth of middle market companies seeking it.
There may come a day very soon when these cash reserves may entice management to seek out weaker rivals and make impetuous decisions. If public, wouldn't it be prudent to re-purchase their stock while their valuations are as lo or lower than they've been in recent memory? If not, the cash balances would continue to grow while the economy continues to contract.
So, do they need an outside influx of capital? Maybe not. Is the competitive landscape for firms seeking this type of capital becoming more acute? We say yes, judging by the investor corps on our site. This may certainly be a small microcosm of the situation at large, but there is something behind the demand for these firms and the lack of discovering the really good ones.
However, if indeed this is the majority of cases, hoarding cash is nearly as bad as spending it profligately. Cash returns are woeful and many firms may be sitting on cash reserves that demand less than a passing interest from investment houses, hence the dearth of middle market companies seeking it.
There may come a day very soon when these cash reserves may entice management to seek out weaker rivals and make impetuous decisions. If public, wouldn't it be prudent to re-purchase their stock while their valuations are as lo or lower than they've been in recent memory? If not, the cash balances would continue to grow while the economy continues to contract.
So, do they need an outside influx of capital? Maybe not. Is the competitive landscape for firms seeking this type of capital becoming more acute? We say yes, judging by the investor corps on our site. This may certainly be a small microcosm of the situation at large, but there is something behind the demand for these firms and the lack of discovering the really good ones.
Tuesday, February 17, 2009
Recency Bias - Short Term Market Memory?
These are indeed tough times. How many of you hear the common refrain, "I'm just sitting on the sidelines right now." Or, "I'm not taking any risk at this time." So I have a suggestion: Why don't we all sit on the sidelines and take absolutely NO risk and watch the country die a slow death while we watch events unfold? What a novel approach to living under an overpass in a refrigerator box!!
Personally, I'm offended by these types. They don't do anything when times are good, or if they do, they inevitably buy at the top like Mr. and Mrs. middle America does and then grouse about how the "big wigs" took all of the profits off the table! Woe is us!
If you can't see this is the absolute worst approach known, consider an economic phenomenon caller "Recency Bias," the tendency to place too much weight on recent performance instead of the longer track record. Think of a card player who doubles the bet at a blackjack table because they have just won the last couple of hands. The odds haven't changed, but the perception has.
Many learned types, economists, investment professionals and the like are caught up in the latest trends in the marketplace that there is little room left for past relevant events that have manifested themselves over and over again. "Forgetting" the instances of past recessions, crashes and economic maladies, it doesn't take a combination of events that precipitates the current global gnashing of teeth, just a short memory.
We could conclude that our most recency bias would be one of understanding the situation is worse off than it actually is. Housing prices are still off their peaks, but have still increased by 20% since 2000, adjusted for inflation. We reamin wealthier than ever before as a collective unit, per capita disposable income is 18% higher than a decade ago.
If the good times are never as good as they seem, neither, perhaps are the bad one so bad. What to do? Continue with your dream, fight the urge to crawl under the covers and face the music! Look for opportunity from chaos, think scalability and a heavy dose of courage! Is this not the American way?
Personally, I'm offended by these types. They don't do anything when times are good, or if they do, they inevitably buy at the top like Mr. and Mrs. middle America does and then grouse about how the "big wigs" took all of the profits off the table! Woe is us!
If you can't see this is the absolute worst approach known, consider an economic phenomenon caller "Recency Bias," the tendency to place too much weight on recent performance instead of the longer track record. Think of a card player who doubles the bet at a blackjack table because they have just won the last couple of hands. The odds haven't changed, but the perception has.
Many learned types, economists, investment professionals and the like are caught up in the latest trends in the marketplace that there is little room left for past relevant events that have manifested themselves over and over again. "Forgetting" the instances of past recessions, crashes and economic maladies, it doesn't take a combination of events that precipitates the current global gnashing of teeth, just a short memory.
We could conclude that our most recency bias would be one of understanding the situation is worse off than it actually is. Housing prices are still off their peaks, but have still increased by 20% since 2000, adjusted for inflation. We reamin wealthier than ever before as a collective unit, per capita disposable income is 18% higher than a decade ago.
If the good times are never as good as they seem, neither, perhaps are the bad one so bad. What to do? Continue with your dream, fight the urge to crawl under the covers and face the music! Look for opportunity from chaos, think scalability and a heavy dose of courage! Is this not the American way?
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