The Thinking Blog

Strategy. What Is Yours?
November 5, 2010

Expanding a business, starting a business, sales and marketing and raising capital have one thing in common. They all require a sound strategy before any of them should be attempted. Today’s entry focuses on the bare minimums required to raise investment capital from the private investor and most of this applies to institutional investing as well.

We meet with, on average, five to seven companies a week to discuss their company’s needs and inevitably it comes down to the fact they need some level of capital infusion. So, we listen to their story and most of them are very interesting and some are even down right exciting. They even go so far as to explain who they have met with in terms of raising their capital and sometimes those connections are quite impressive. However, they come away empty handed. Now, I could give you a list of the top 10 reasons why that is, but I want to focus on the reason that causes these companies great trouble in getting the investor to write a check. They are not properly prepared.

If you are reading this and your company is seeking capital. Ask yourself, “what is my strategy for raising this capital?” Is your strategy to wing it and hope for the best? Or is your strategy to be as prepared and legally covered as possible? So start by asking yourself (and be honest), “Am I really ready to have an investor write a check?” What is the checklist of things you’ll need? I’ll cover the bare minimums. Some of the things on this list seem so obvious, yet we see companies on a monthly basis fail by at least one of the items on this list but more often numerous items are missing.

1. Is the Company actually formed. Yes, this seems obvious, but you’d be surprised at how many entrepreneurs don’t want to spend the money to incorporate as they want to have the investor write a check first. Are you serious? I’ve even had attorneys advise their clients of this. Sad but true. These attorneys need to find another line of work because they are hurting, not helping their client. Not only do you need your company to be formed, but please have a bank account opened under the business name as well. I’ve seen so many companies wait until they get a check and then scramble to get a bank account open so they can deposit the check. Good grief, who needs that kind of stress?

2. Does the company have a complete business plan? Ahh yes, the business plan. For every article written that states you need one, I can find you an article that says you don’t need one. Our experience over 23 years and over $300 million invested is, you must have one. We have not seen a company that needed more than $50,000 receive funding when it did not have a business plan. So get over it. Get one or waste your time in meetings trying to get funding and for gosh sakes do not use a biz planning software for your plan unless you are starting a mom and pop hair salon. Take the time and do the business plan right. Businesses are not templates and the plan is not either.

3. Does the company have a PPM? Many companies and entrepreneurs don’t know what a PPM is. A PPM is a Private Placement Memorandum and it is the document that offers the sales of securities which are sold without an initial public offering, usually to a small number of chosen private investors. If you are raising capital for your company from more than one person, you need one to protect yourself and your shareholders. Our advice, do a PPM even when you think you are only going to have one investor. You need as much legal protection as possible. Most states require one in order to comply with state securities laws. When investors are approached to invest and there is no investment documentation (PPM) they know their money would be put at great risk because the management team doesn’t even know they need a PPM in the first place.

4. Is there a complete management team? If the company has a business plan, then the management section should be complete along with a credible working advisory board. We have seen too many business plans where the management section lists the CEO and one or two other people. That simply is not good enough, at least not in today’s investing environment. Be as complete as you can with the key positions. You don’t need to list who the secretary is but the key positions such as: CEO; CFO; CTO; V.P., Marketing; V.P. of Sales; Head of Manufacturing, etc. should be included. The advisory board is important as well. Investors don’t expect you to carry excess overhead in terms of salaries for people that can help open doors. Advisory Boards are an important piece of the management team puzzle and if you choose great Advisors, they can be worth their weight in gold.

5. Be able to substantiate your claims. We see companies all the time that claim something exactly like one or more of the following: “we have customers waiting for the product”…”we only need $1.2 million because we already have a firm commitment for the other $1.2 million”…”we just need the last $100K and then the other investor will put in $650K.” Believe me, we’ve heard it all. So one of the first things we do is check the claim. We look at the documented proof and then we actually call to verify that the paperwork is still valid. If you’re not willing to let the investor speak to the originating party of what you are claiming then the perception is you are trying to scam people. Yes, scam is a strong word, but that is the impression you are giving if you are not willing to let the investor verify your claim. If you cannot let the investor verify your claim, then don’t even mention it in the first place.

There is an entire chapter dedicated to the process of raising capital in our book, “The Scorpion Factor in Business” but this is a good solid start of things you need to think about having ready prior to meeting with ANY investor.

Our advice as to what your strategy should be is, don’t go to the investor unless you are truly ready. You’re going to really only get one shot at this. I don’t care that you’ve known Joe for 20 years and Joe is really, really wealthy. Joe would expect you to have your stuff together before approaching him. Do you really want to go to one of your wealthiest, closest potential investors without having your ducks in a row? I mean if you were advising someone else who was about to go to their closest, wealthiest investor, would you really tell them, “Ah, don’t worry about it, go ahead and pitch your deal, you can always bang out your due diligence package by Friday…after you meet with him.” Raising capital is tough business, even when you do have all of your ducks in a row.

Here is to your success.