Archive for the ‘Equity Financing’ Category

Things To Consider When Courting Equity Capital

Its been written many times over that selling shares in your business and taking on equity capital in return is many ways like marriage… long term potential commitment, relationship challenges, the difficulties in breaking up, and so on.

I’m not going to recycle this analogy.  Instead, I want to focus on the preamble and courtship that comes prior to the union and I want to look at it from both sides of the courtship.

From the point of view of the business owner seeking capital, the process can be many times drawn out and rather grueling.  Any interest that does surface can easily be mistaken as love at first sight due to the stressed out and/or desperate nature of the those seeking capital.

Like any courtship, there should be a dating process whereby several meetings take place over a period of time to see if there is a worthwhile relationship to develop or not.  Those seeking capital can develop tunnel vision over the physical (money) attributes and overlook other characteristics and flaws that should be evaluated as well.

Regardless of how tired or desperate your search for capital has become, a proper courtship should still be undertaken before jumping into bed with a potential investor.   Every investor has a history, a past, a lending portfolio and strategy that one would be well advised to learn about before cashing any checks.

From the investor side that provides equity capital for an interest in a business, the same need for courtship also applies.

Investors, for the most part, are more courtship oriented, especially those that have previous investments notched in their belt and have likely seen a lot of what can happen when there is a Las Vegas type wedding ceremony between the parties soon after meeting.

An investor is far better served by playing a bit hard to get and being prepared at the outset for an old fashioned courtship.  As mentioned previously, the business seeking capital is too often in a hurry and wants to get funding in place as soon as possible.  These capital seekers can provide well polished presentations and convincing arguments why they should be the ones chosen to receive equity capital.

The interesting thing about courtship is that many times the applicant for capital can’t provide any great level of substance after the flurry of the initial presentation and first few dates.  If an investor can find an opportunity with some real staying power over several meetings as well as being able to hold up to some background checks and story verifications, then there may be a serious relationship in the making.

While both sides can feel the pressure of outside competition competing for the others affections, in the end, goodness of fit is more of a courting process than an intense  weekend fling.

For those couples that take the time to put each other through their paces, the resulting opportunities will be far more rewarding if further pursued and far less regrettable if the process of courting equity capital reveals significant blemishes and warts lurking beneath the surface that otherwise would have been overlooked or gone unnoticed until after the wedding.

Technorati Tags: courting equity capital, equity capital, Equity Financing

What do investors value most when considering equity financing proposals?

Lets make a slight qualification to this post before going any further. Obviously, investors will focus their attention on opportunities that meet their criteria for industry, technology, profit potential, and so on. But after they pre-qualify the opportunity to be in the ball park so to speak, what is the most significant criteria there after that most equity investors and their advisors will apply against potential opportunities?

Answer… Strength of the management team.

And even to get more specific, the presence of some one or a team of some ones that has been involved with a similar opportunity in a similar industry with at least one other company at a similar stage in its life cycle, and successfully led these past organizations to not only meet the expectations after capital investment, but also were able to orchestrate a profitable exit strategy.

Most investors are looking to get in and get out in 5 years or less and at least double their money in the process to provide the minimum return expectation. So not only do they want someone at the controls that knows how to get things done right off the start, but also someone who knows how to cash out profitably in a reasonable amount of time.

So basically, investors are looking for a tangible financial score card that clearly shows what the key personnel have delivered in the past, and hopefully delivered more than once. Sure, holding high senior positions in profitable companies and having an impressive set of academic and professional credentials can help build the case for competent management, but if there isn’t proof of making things happen and delivering returns directly from their leadership efforts, then investors are likely to pass.

There are a number of reasons why this makes a lot of sense.

First, there are all kinds of senior managers out there that may be highly skilled at what they’re area of expertise is, but have no real experience of managing in a more raw and non linear start up or growth environment. And the business landscape is littered with all kinds of examples of high priced executives that flamed out on ventures funded with other peoples money.

Second, there is a definite learning curve to managing a fast moving venture with high expectations and lots of moving parts that have to come together quickly or fall apart. There are many executives that are capable of moving into an existing position and improve upon it or take it to the next level. But its not the same experience as building something from nothing.

And here’s something else to consider. Not only is the past management track record the most important equity financing criteria, but in many cases its at least 70% of an investors decision to proceed with the opportunity or not.

So before you spice up your presentation for the next group of equity investors you want to get an audience with, make sure that you’ve got someone you can bring along that has the type of track record to close the deal.

There Are Many Equity Financing Sources Out There.. Which One’s Best For Your Business?

First off, lets focus our discussion around equity financing objectives, not the exact form whether it be angel, or venture capital group, or institutional fund, or whatever.

Regardless of the form of equity financing source, what’s more important is the investor requirements or intents.

Too often small and medium sized business owners or entrepreneurs start seeking equity financing for a business venture because they either realize that they can’t borrow enough debt financing, or they need more equity in the business to leverage more debt financing.

So, effectively they’re backing into the need for equity financing in the first place, out of necessity.  And because most types of Business Financing capital hunts are unplanned, the business ownership group is usually in a rush due to some time pressure, perhaps even in an early stage panic mode.

As a result, the business owners are not perhaps as selective as they should be, or they don’t start the equity financing process with their objectives clearly outlined.

This is where all the different shapes and sizes of equity capital come in.

Like the business owner trying to Secure Capital, the investor is trying to place capital.  Each investor is going to have their own profile of industries they like, returns they expect, level of risk, business stages their interested in, and so on.

My question to the business owners looking for money is are they presenting an investment opportunity for investors they want or don’t want?

If you’re in a rush, which most entrepreneurs are, many will answer that they don’t care about the profile or reputation of the investor, they just want the money.

While this mind set and approach can create the desired results, its unlikely that the results will be optimal for the initial business owners that were trying to get equity funding, but its much more likely that things worked out just fine for the investor, especially if they are a well seasoned equity capital provider.

Let me explain.

The more of a rush you’re in and the less thought through your strategy and implementation plan are, the more likely you’re going to attract very opportunistic investors that understand their superior bargaining position and will take full advantage.  If they inject money, they will likely command a large ownership stake, likely a large controlling interest, board control, and every other kind of control their lawyers can think up.

But again, there are all sorts of variations around this theme.  The key point is, unless you know what you want and are in a good bargaining position to get it, you’re likely to see very one sided investor offers that may very well give you the money you’re looking for, but ask for close to your soul in return.

When a business ownership group or individual is seeking equity financing, they need to consider two questions before starting their courtship with potential investors.

Question 1:  How much of the company (and in what ownership form and conditions) am I prepared to offer for the capital I seek?

Question 2: Am I looking to sell off an interest in the business for the long term or for the short term only?

Question 1 has a lot to do with your bargaining power which will relate to what business stage you’re at (pure start up, pre-commercial, early stage, growth, etc.), what types of assets you own and their ability to appreciate in value and generate cash flow, your management team and their related experience to what you’re trying to do, how much capital you’ve put into the business, the related time line for making use of the capital to be invested and the payback period, and so on.

Question 2 is critical to your ability to build out your business over time according to your vision and strategy.  For example, a business ownership group or individual may be prepared to relinquish a large portion ownership, perhaps even a controlling interest, if the original group or owner has the ability to buy back the interest at some predetermined time in the future for some predetermined price or price calculating formula.

Without this sort of objective, the equity capital you raise can very well get into the be careful what you wise for category.  For example, its not at all uncommon for very opportunistic investors to aggressively buy into a company with great potential with the underlying goal of getting rid of all the original owners and managers within a few years in order to take complete control of the venture.

There are also investor financing groups who are only looking for short term investing opportunities which in many cases are no more than 5 years in length.  They typically will require a certain amount of minimal return with some upside potential based on the performance of the business.

The key here is to clearly understand what you have to negotiate with and what you’re prepared to live with before seeking equity financing.

That way you’re more likely to get something that can work for both sides and if you have to compromise, at least you’re doing it with you eyes wide open.

Technorati Tags: Business Financing, equity capital, Equity Financing, equity funding, investor financing

When seeking any type of Business Financing for any sized business, small or large, there are four and only four uses or applications of capital.  I’m going to go over each of them and why this is important to know and understand.

First of all, why is this at all important?  Identifying the exact use of capital creates greater relevance in the capital procurement process.

Ok, I’ll speak english.  Locating suitable capital funds, either debt financing (business loans), equity financing(investor capital), or a combination of the two, will depend to some degree on how the funds will be applied in your business.

Lenders and investors can be very specific in deals they will seriously consider funding and one of their key criteria will be how the funds will be applied.

Certain applications of funds will completely remove certain lenders and investors from the mix.  By understanding this at the outset, you can create greater relevance in your search to Secure Capital by screening out the sources of money that will automatically not be interested in your deal.

This doesn’t mean the deal is good or bad, its just not going to be relevant to certain sources of business financing.  So you can save yourself a lot of time and aggravation focusing on relevant sources.  There are of course other criteria that helps determine relevance, but for today let’s stick with use of funds.

So what are the 4 uses of debt financing and/or equity financing?

- Start Up.  The start up of a new business venture.

- Acquisition.  The acquisition of an existing going concern business.

- Expansion.  The Expansion of the assets of an existing business for the purposes of growth.

- Debt Consolidation/Reorganization. The repackaging of existing and potentially new debt into a modified or new debt instrument or instruments.  This predominately relates to businesses in some distress or downturn that need to either inject more capital into the business to cover losses or move short term debt to a longer term debt instrument to improve the balance sheet and security position of lenders.

Within each of these uses, there are even more specific sub uses such as:

- working capital to finance day to day operations
- short term capital to purchase and add value to inventory
- short term capital to finance accounts receivable
- longer term capital to acquire other tangible assets like equipment, buildings, and land.
- capital to acquire  intangible assets

If you are seeking business financing for a start up venture, there are many sources of capital that don’t fund start ups.  Identify them, and don’t waste your time asking them for money.

If you’re looking to acquire an existing business, don’t seek funds from someone providing trade credit related to working capital type assets only.

As I alluded to earlier, there are other twists to this as well as certain lenders and/ or investors will consider expansion funding, but have other criteria to determine if the deal is relevant to them (amount of funding, industry, debt to equity ratio of the balance sheet, debt service coverage, assets to be acquired, security ratio, etc.)

Each lender will have their own criteria set for each application of funds they will seriously consider.  I say seriously consider because most lenders state at the outset they will look at virtually any deal to maximize their marketing efforts, but in reality, they all have a pretty narrow focus.

That’s why its important to understand how to accurately describe the business financing you seek and then qualify the universe of funding sources so that you’re only spending time with a relevant list.

But more in depth lender qualifying is a topic for another day.  Stay tuned.

Technorati Tags: Business Financing, capital, debt, equity, finance, loan, loans