subject: So How Do You Raise Money Today? [print this page] 1.The Next 12 Months Will Be Very Darwinian.Unlike the past few years, only the smart and the strong companies will do well in the next couple of years, as there is simply not enough fat in capital markets or the workforce to take the weak along for the ride. There will be more focus on protecting and building on what you have, rather than focusing on rapid growth. Entrepreneurs must be flexible and highly responsive to market changes and customer needs, and should be extra careful in the management and use of precious resources. The party is not over but the bouncer at the door just got a lot bigger and is being more selective about who gets in to the party (and who stays in!).
2.Growth Must Be Strategic and Creative.The capital markets for smaller and mid-sized companies will not be as accessible nor as affordable as they were pre 2008. Therefore, your plans to raise capital to grow your business going forward must be much more strategic and creative than ever before, with a greater focus on strategic investors partnering, licensing, alliances and even domestic and international franchising as strategies for expansion, as set forth in greater detail below.
3.Valuations Must Be Realistic.If you have been lucky enough to raise capital over the past few quarters, don't expect the sky-high valuations that entrepreneurial companies enjoyed over the past few years. Venture investors have returned to ground level and realize that many of their investments will not qualify for an initial public offering twelve months later! Therefore, be prepared to give up more ownership for smaller amounts of capital and possibly even more control if you need to raise equity capital. The capital markets are now focused on very specific opportunities, not large-scale sectors or trends. There is no forgiveness or room for mediocrity just because your company is in a "hot sector." You need to get more creative and aggressive in your search for capital and uncover new stones, such as strategic financing from customers, vendors or corporate venture capitalists, all three of these sources are expected to grow significantly going forward.
4.You Will Need to Hire the Strong-Willed and the Patient.It has always been difficult for emerging business owners to compete with their larger competitors to recruit and retain qualified personnel. The early-state business owners' most recent "secret weapon" to attract human capital has been the promise and potential upside of stock options. But the qualified workers of the past few quarters have been sufficiently burned by worthless options, failed IPOs and dilutive mergers so that these plans may no longer serve as an effective carrot. To combat this trend, take the extra time to look for potential employees who are not as focused on the "rapid rise to riches" and may be willing to trade a friendly and flexible atmosphere for the higher salaries offered by your larger competitors.
5.Make Technology Your Friend.As executives of growing companies, you will need to use the Internet and available communications technologies more strategically than ever before in order to survive in the highly competitive business environment that the next few years will bring. The entrepreneurship boom of the last 10 years means that more companies of all sizes will be competing for the same customers and available market share. It is critical that you take advantage of internet-based resources to gather competitive data, generate new leads, enjoy opportunities for cost-savings, and learn new information that will help you manage your business and level the playing field in competing against larger companies.
So what does it take to survive and manage growth in this volatile environment?
I believe that to continue to flourish, emerging growth companies need to put (and keep) in place for 2010 and beyond the following:
A strategy and commitment to protecting and leveraging the company's intellectual property;
An experienced and mature management team that knows how to actually make money, not just raise money;
A business model that will produce sustainable and durable revenue streams (e.g., targeted customers who can actually pay your bills);
A genuine understanding of the strengths, weaknesses (and likely next moves) of your competitors;
A corporate culture which is more focused on financial performance and financial tables than pool tables and chill-out rooms; and
A leadership vision which is more focused on keeping your eyes on the road rather than searching for the next exit strategy.
Virtually all capital formation strategies (or, put simply, ways of raising money) revolve around a balancing of four critical factors: Risk, Reward, Control and Capital. You and your source of funds will each have your own ideas as to how these factors should be weighted and balanced. Once a meeting of the minds takes place on these key elements, you'll be able to do the deal.
Private Equity investors want to take steps to mitigate their risk, which they can do with a strong management team, a well-written business plan and the leadership to execute the plan.
Reward.The rewards desired may vary depending on the type of investors. The entrepreneur's objective is to preserve the right to participate in a significant share of the growth in the value of the company as well as any subsequent proceeds from the sale or public offering of the business.
Control.It's often said that the art of private equity investing is "structuring the deal to have 20% of the equity with 80% of the control." But control is an elusive concept that's often overplayed by entrepreneurs. Depending on the investor's philosophy and its lawyers' creativity, there are many different tools available to savvy investors to exercise control and mitigate risk. Only the entrepreneur can dictate which levels and types of controls may be acceptable, but remember that the higher risk deals are likely to come with the higher degrees of control.
Capital.Negotiations with your investor will often focus on how much capital will be provided, when it will be provided, what types of securities will be purchased (preferred stock, convertible notes, debt with warrants, for example), at what valuation, what special rights will attach to the securities and what mandatory returns will be built into the securities.
by: Ziad K. Abdelnour
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