Courting Equity Capital

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.

Cut To The Chase When Securing Capital For Your Business

Be Direct And Specific When Trying To Secure Business Financing

Before you speak to a debt financier or equity investor about securing capital, you should have gone through the process of pre-qualifying them to some extent to make sure they are relevant to your business financing requirements.

When you go to speak to a source of business capital, its their turn to qualify you and the sooner you allow this to take place, the faster you’ll get their serious attention.

Too often, business owners and managers start off their initial discussion with lenders or investors with a long winded explanation of their business opportunity or business potential, trying to impress the capital provider with what they view is the best approach to securing capital.

Instead of creating a good first impression, they are more likely to put the capital provider to sleep as the provider impatiently waits for the business owner to disclose the pertinent initial information they require to perform their initial assessment of the business financing opportunity.

Seeking business capital is a marketing exercise and like any marketing approach, the goal is to provide the target audience with the information they are interested, not the information you feel they should be interested in.

So here’s the best way to get off on the right foot with a debt or equity financier.   This approach may also get you a fast No as your audience will be able to qualify you faster, but at least you won’t be wasting your time pitching a lost cause.

Start off by stating exactly how much capital you’re looking for, why its required, and how exactly it will be applied in your business.  While this may seem obvious, its rarely the beginning point of business owner presenting to a lender or investor.  The primary reason being that human nature seems to think that if a compelling enough business case can be created right off the bat, then the amount of funds requested and the application will be secondary in nature.

In reality, by not being able to immediately describe in financial terms what capital you seek and why, you’re more likely to leave the impression that you don’t have a buttoned down plan of action that has been summarized in financial detail, regardless of the raw potential of the proposed investment.

When you lead with a detailed summary of your financial requirements, you’re not only allowing the capital provider to see if you fit into their current criteria, but you’re demonstrating to them that you have gotten a well thought out plan of action that can be accurately described in terms of numbers.

This is a great way to get serious attention from a debt or equity provider who are inundated with dreamers and entrepreneurs either weak at or uninterested in the underlining financials and corresponding stewardship that goes hand in hand with gaining access to someone elses money.

Once you’ve established what you want and why, the lender or investor will be able to make their initial assessment and either give you a fast no that you would have gotten anyway, or start moving forward in their seats with a higher level of interest.

We will address the next phase of the your initial discussion in tomorrow’s post.

Equity Financing Comes In All Shapes And Sizes

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.