Hi friends,
I know we all have this issue one way or the other. we all long to get investors to grow our dream business and here are ways that can help. please read this article by Ryan Caldbeck.
I have written a lot in this space about the myriad of considerations
entrepreneurs must grapple with when they raise outside capital: When
should I raise money? At what valuation? Should I sell control
or a minority stake? While all these questions are absolutely critical, there is a key consideration that precedes these questions: how do I find investors? While some people might advise you that all money is green and $5 million from investor A is the same as $5 million from investor B, this could not be further from the truth. As you will hear many private investors say, equity investing in a private company is similar in many ways to a marriage; you are together, through good and bad, for many years.
Below are five considerations every entrepreneur must think about when raising institutional capital.
2) What do you want in an investor? Sure, all
cars can get you from point A to point B, but the style, handling and
experience along the journey—as well as the likely maintenance required—
will be very different depending on the make and model you choose. The
same can be said of the entrepreneur’s journey from point A (investment)
to point B (exit). As an entrepreneur, you need to ask yourself if you
want an activist investor who will be on calls with you several times a
week and help you make “in the weeds” decisions on issues like pricing,
suppliers and new hires, or if you want passive capital that will write
you a check and only see you four times per year at board meetings.
Or, perhaps you want a firm that has deep experience in your sector, or a firm that has deep experience in a distant location where your company hopes to expand. There is no right answer to the type of investor question, but aligning yourself with an investor who shares your vision is a great foundation for a successful partnership. The first step in doing so, of course, is for you to decide yourself what you want and need. Make sure you conduct reference calls with several of the potential investor’s current and former portfolio companies to understand the firm’s style, and, more specifically, the style of the specific investor who will be leading the investment in your company.
3) How much money are you raising? If you are
raising $2 million, your potential investor-set will be very different
than if you are raising $10 million. Most firms need to put a defined
minimum amount of equity capital to work in each deal, so you don’t want
to find yourself raising $2 million but pitching to a firm who needs to
put $10 million to work in a platform deal. They’re probably only
meeting with you to learn about your company or they view your company
as an add-on for an existing portfolio company. Similarly, if a firm’s
average check size is $50 million and they are willing to write checks
for as little as $10 million—which happens to be what you are
raising—you need to understand the implications of this: the firm will
likely pay much less attention to its investment in you because you are a
much smaller portion of their fund, so if their investment in your
company does not succeed, it’s less impactful than if one of their $50
million investments falters.
Another scenario is you may plan to operate your company at a loss for the next few years to invest in sales and marketing, which would require equity to plug the loss. Some firms might tell you they are okay with this strategy, but make sure that they have done it before; otherwise this will cause uncomfortable conversations every time you need a new capital infusion.
To obtain a more realistic comp set, look at the ten companies in
your space whose growth trajectory you most admire—companies that are a
few years ahead of you in their lifecycle. Presumably a few of these
companies have raised money: find out the investors they raised money
from when the brands were your size. Google GOOG +1.65%
might be your best friend in this process. Look at the investment
bankers they used. You will usually be able to access some valuation
information through these channels—especially through a great mentor.
While you probably won’t raise capital from the same investors, you can
learn which investors lost out on the opportunity to invest, which ones
are still bullish on the space, and which investors have a similar
profile to those that did invest in your competitors. Then, you can seek
them out.
or a minority stake? While all these questions are absolutely critical, there is a key consideration that precedes these questions: how do I find investors? While some people might advise you that all money is green and $5 million from investor A is the same as $5 million from investor B, this could not be further from the truth. As you will hear many private investors say, equity investing in a private company is similar in many ways to a marriage; you are together, through good and bad, for many years.
This post is written with a focus on companies
looking for institutional capital (i.e. private equity, venture capital,
etc). Having said that, many of the points are still relevant for
those seeking individual investors – whether through an angel group or
an equity-crowdfunding site.
1) Who are your mentors?
Before you start meeting with potential investors, a great first step is
to find industry mentors, both on the operating and investing side, who
can serve as “honest brokers” for you throughout your fundraising
process. These mentors could be entrepreneurs in your industry who have
successfully raised capital in the past, investment professionals who
you respect but are not necessarily an option for you, investment
bankers, or others with the expertise and experience to guide you. These
folks, who most likely have been through fundraising processes, are a
great jumping-off point for understanding the relevant investor universe
and best fits for investment bankers in your space.
Or, perhaps you want a firm that has deep experience in your sector, or a firm that has deep experience in a distant location where your company hopes to expand. There is no right answer to the type of investor question, but aligning yourself with an investor who shares your vision is a great foundation for a successful partnership. The first step in doing so, of course, is for you to decide yourself what you want and need. Make sure you conduct reference calls with several of the potential investor’s current and former portfolio companies to understand the firm’s style, and, more specifically, the style of the specific investor who will be leading the investment in your company.
For smaller companies that are deciding on an
equity-crowdfunding site or other ways to receive investment from
individual investors, think through the backgrounds of the investors and
the platforms themselves. If you’re going to a crowdfunding site, have
they helped raise money for companies that look like yours? If its an
angel group, how many investments have they made in the past 12 months
that are similar to your company.
Another scenario is you may plan to operate your company at a loss for the next few years to invest in sales and marketing, which would require equity to plug the loss. Some firms might tell you they are okay with this strategy, but make sure that they have done it before; otherwise this will cause uncomfortable conversations every time you need a new capital infusion.
4) Understand the Comps.
No matter how unique your company is, there are comparable companies who
have raised capital in your space. Their products may be different, but
there are almost certainly companies that have served either the same
market, need-state or customer-set that you serve. In the consumer
industry in particular, comps can be hard to come by, and many
entrepreneurs only hear about the once-in-a-generation type of
valuations that companies like vitaminwater have received—valuations
that unrealistically raise an entrepreneur’s expectations (disclosure:
my prior firm, TSG Consumer Partners, invested in vitaminwater).
5) Get out and Pitch! By
this point, you should have a good list of investors who invest in
companies in your industry and life-stage with the same needs your
company presently has. In other words, you should know what companies
have a history of having invested in businesses similar to your own.
Once you have this list together, go out and start pitching a few of the
“tier three” investors on your list—the investors that you would take
money from if all else fails but are not at the top of your
consideration set. You will learn how investors think and what questions
they will home in on so you can refine your presentation for the
investors you may later target. If you decide to raise capital from
angels and not private equity firms, consider going out first to
successful industry gurus who can provide both capital and invaluable
credibility to your fundraising. If you are a skincare company who has
raised even $10,000 from Bare Escentuals founder Leslie Blodgett, that
will serve as a powerful signaling device to other investors; in
investing—more so than almost any other industry—success begets success.
Like a marriage, if your values, personalities
and needs are not aligned, it can spell disaster for the union. Because
of this, it is critical that you search diligently to find the right
investor(s) for your company. The capital can come through an equity crowd funding site,
an individual angel, a private equity firm or other sources. Hopefully,
however, you will have made your decision after having considered the
points in this article.
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