Are You Ready to Raise Capital? - What are Investors Seeking?

What are Investors Seeking?

Investors are seeking risk-adjusted returns on their own funds or those they manage for others.  They understand this well and expect entrepreneurs to appreciate their perspective.  The relative attractiveness and attendant valuations they assign to prospective investments may vary widely from the views of the entrepreneurs.  However, it is their capital that is required to your opportunity.  This is a perspective entrepreneurs should keep in mind.

The basics that investors are seeking and upon which they are evaluating opportunities include:

·     Potential for Growth and Expansion
Investors are seeking opportunities that have the potential for significant growth and expansion.  They are not seeking to build a nice, comfortable small business.  Entrepreneurs need to realize the often the management team and talents required to launch a new company may be different than those required to transition the company to more rapid expansion and a more mature set of corporate disciplines.  Founding entrepreneurs should carefully consider this matter when presenting the long term plans for growth of the company to prospective investors who well understand this reality.

·     Capable, Proven Management Team
Sophisticated investors are like handicappers, they understand and value highly experience and past performance.  They prefer a good opportunity and a great, proven management team to a great opportunity and a good management team.  Poor management has destroyed the value of many good companies.  We cannot overemphasize the importance to investors of the right management team.  It is also important that the experience of the management team is relevant to the industry in which the company intends to compete.  If the founding entrepreneurs do not have this proven experience, we highly recommend expanding the founding team to include this experience.

·     Preparation and Thoughtful Planning
Has the business opportunity and the intended market and competition been thoroughly researched.  It is highly likely that potential investors most attracted to an opportunity will be those with some experience in the relevant business or intended market.  They may know as much or more about the target markets or industry as the founders.  They will instantly spot a poorly researched opportunity or week planning.

·     Board of Directors or Advisors
Investors will find companies with a strong Board of Directors or Advisory Board more attractive.  Members should bring strategic value to the company in the form of industry knowledge, leverage with suppliers, strong relationships in the company’s target markets, and the ability to help the company achieve its intended growth.  Early stage companies in particular benefit from an Advisory Board with the ability to provide warm introductions to prospective customers, and strong relationships and credibility in the company’s the target markets. In addition, the Advisory Board should be able to assist the entrepreneur in evaluation of strategic and tactical alternatives and provide a great sounding board to assist in key business decisions.  We generally recommend the formation of an Advisory Board early in the launch of a company but suggest deferring the formation of a Board of Directors until the company is ready to conduct an outside capital raise.  Advisors carry no corporate liability and it is easier to attract a strong Advisory Board.  Once a Board of Directors is formed it is necessary for the company to provide full General Liability coverage as well as Officers and Directors Liability Insurance coverage.  Directors carry significant liability as a consequence of their service and both the Board and management should take corporate governance responsibilities very seriously.

·     Forthright Integrity and an Honest Assessment of the Opportunity and Its Risks
Experienced investors seek entrepreneurs who are open to honest and forthright critique of their business plans.  They want to be certain that entrepreneurs they back are open to ‘two-way communication with their investors.  Most investors will wish to back not only sound and attractive business propositions, but also those in industries in which they have an understanding.  Often the investors in a young company can contribute much more than simply their capital toward the growth and success of the company.  We always urge our clients to seek out investors who bring strategic value to the business as well as capital.  We strongly urge entrepreneurs to include in their business plan and present to investors a carefully thought through and honest risk assessment.  Be honest, tell potential investors of the challenges and hurdles the business will face.  The investors may well be the very people who can help with those challenges.  Many investors have a broad set of relationships that can be very important in assisting entrepreneurs in solving problems and resolving issues as they are encountered.  When identifying risks be sure to describe the risk, the likelihood it will be encountered, what the potential impact may be on the business, and how it will be avoided, mitigated, or cured if encountered.

·     The “Been There, Done That” Factor
Investors are more attracted to propositions surrounded by experienced and successful management teams.  This is particularly true when considering previous entrepreneurial success.  Launching and growing a young company requires a much different set of core competencies and energy than being successful within a large corporate infrastructure.  Nothing is a better predictor of future success, than prior performance.  Those opportunities most attractive to experienced investors are ones presented by entrepreneurs with whom they have had prior success.  Experienced entrepreneurs are more likely to anticipate problems and take corrective action early to avoid dire consequences.  Investors love people who have the Know What, Know How, and most importantly the Know Who relationships get things done expeditiously and to make the opportunity successful.

Conclusion

A successful capital raise requires effectively dealing up front with valuation and control issues.  We have seen so many entrepreneurs fail to raise the capital sought due to unrealistic valuations and stubborn refusal to retain absolute total control.  We have heard time and again – “Why should I have to give up that much of my company to someone whose only contribution is their money.”  This is a key genetic marker to identify entrepreneurs who will fail to accomplish not only a successful raise, but also likely trying to launch a company doomed to fail.  As angel investors ourselves, we never back entrepreneurs who fail to understand the value contributed by their investors.

We urge entrepreneurs to think like investors when dealing with issues of valuation and control.  It is indeed the wise entrepreneur who carefully researches similar opportunities successfully funded by investors to understand both valuation and control.  We often suggest an approach that reserves a significant percentage of the equity the founders might otherwise claim and tie it to performance.  Investors are happy to have entrepreneurs earn a significant portion of their equity stake.  This reinforces the perception of shared risk and reward.  Likewise this same approach can be used to deal with control.  As milestones are achieved the founders earn a greater stake in the enterprise and increase their control.  This approach is fair to both the entrepreneur and the investors and often viewed favorably by potential investors.

Concerns about valuation and control can be dealt with through the use of warrants and options tied to performance objectives.  We always urge entrepreneurs to consider the potential increase in the value of their ownership, than the percentage of their ownership, when pondering the issues of valuation and control.  If you fail to raise the capital today, can you still launch the business?  How much faster would the business grow with the availability of the capital sought?  Will the opportunity window remain open long enough to achieve success if the current capital raise fails?

It always comes down to the decision of would you rather have 100% of a failed company, 80% or a company worth $2 million, 20% of a company worth $8 million, or 10% of a company worth $800 million?  Easy decision.

We also advise entrepreneurs not to use the approach of starting out negotiations and their offer to potential investors with more favorable terms to the entrepreneur than they think will be required to raise the capital and then settling for less favorable terms during negotiations.  This is unlikely to be successful with potential investors.  The entrepreneur will likely get only one shot at a potential investor and if the investor is not attracted to the offer the negotiations will never take place.

Finally, you are ready, you have made the pitch to an investor, he has expressed interest, but have some concerns about some of the terms.  Don’t fail to land the catch.  The terms may not be ideal, but you need to remember, particularly in today’s economic and investment climate, you not get another chance.  If you have to alter any of the terms of the offer, remember in any one raise, all investors must get the same basic financial terms.

So, are you ready to raise the capital you need to launch your business?  Has this article been helpful and allowed you to think through some of the issues?

There is just one last piece of advice we will emphasize.  Entrepreneurs should never attempt even a friends and family raise without the advice and assistance of an experienced professional advisory team.  This professional team will include at a minimum your business advisors, an experienced securities attorney, and a trusted accountant to potentially assist with and review your financial projections.

Now, prepare thoroughly and then go get the money you need to launch your dream.  If we can help you as we have so many others prepare for and conduct a capital raise, please get in touch with us through the Harbour Bridge Ventures website at www.HBVinc.com.  We wish you success.