by Stephen Day
Recently, we met with a very smart scientist who had developed an exciting new technology. It was apparent that he had much experience in manufacturing but little in finance or startups. Did we like the technology? Yep. But more importantly, we really liked him. He needed several million to further develop his tech. So why did he not get investment?
Because he just did not understand what investors need to make a decision.
The CEO did tell us that he needed another cash infusion to get the company funded. We were obviously interested. We asked for a business plan, but we never did receive one. He did not have a Private Placement Memorandum (PPM) and furthermore, did not know what a PPM was.
After two hours of hearing about the technology, we were anxious to hear about the company and its structure. It was the standard LLC that so many attorneys advise. No problem. Most companies start that way and then move into a C Corporation as they grow.
I asked about the company legal counsel. The attorney was his old friend, but evidently not someone who had much startup experience. There was no consideration on how the company would raise needed capital. A good startup attorney would have taken this into consideration.
We kept awaiting the pitch to invest. It never came. We left and felt great about the founder, but not so much about his ability to handle the capitalization. He did need the investment but did not show us a reason why anyone would wish to invest.
DAYCAP receives a dozens of request from startups for funding. At least 50% of them have no idea on how to structure their company to receive investment. At another recent meeting with a founder, I asked him what ownership we would receive if we invested and how we would expect when and how we would receive our money back. He had NEVER even considered any of this.
This is VERY COMMON.
Here are just a few insights:
1. All CEOs must constantly raise capital. Just because you have raised enough to get by for a while, does not mean you should assume you have enough capital for the future growth. Raising capital should be a skill set you must learn.
2. Find a mentor who has done startups. My experience is that a Fortune 1000 seasoned executive, while impressive, is not very helpful if he or she has never done a startup.
3. Hire a startup lawyer. A general practice attorney who handles divorces, DUIs, and everything else is just not going to have the knowledge you need.
4. Know how much capital you really need. If you are funding a startup, you will likely not get help from a traditional bank. So you may think you can only qualify for equity financing …i.e. selling shares or convertible preferred debentures. But some capital needs (building, machine tools, office copiers, computers, etc.) could possibly be leased or financed through a non-traditional bank.
5. If you are a CEO or founder, understand that the investors are allowing you to use THEIR money to build your business. NEVER forget that the investment is THEIR money. State how the new investment funds will be used. No matter how innovative your technology may be, nor how cool your office set up is, the investor wants to know that you can keep their money safe and make it grow.
6. Keep your business plan (BP) current. Of course, a BP is fluid and should always be updated to meet the changing conditions of your industry.
7. Make sure you have several options for a liquidity event or exit. Be able to discuss these options at any time.
8. Create a Board of Directors of experienced business executives. If you are a science-based company, develop a Board of Advisors with subject matter expertise. You do not need to pay them with cash. Offer equity. Make sure that each director and ALL your senior officers understand the business plan and can speak to potential investors.
9. If you are seeking more than a few “family and friends” for investment, make sure you develop a Private Placement Memorandum (PPM) to raise funds. Keep several copies in your briefcase, along with a subscription agreement.
10. Develop and learn to tell a story about your company. That will become your pitch. Learn it by heart. Then practice, practice, practice. You will soon become an experienced and effective fundraiser for your company. You may not think this is necessary, but if you are evangelistic in describing your company, you are also demonstrating a special trait that will attract your investors…your own enthusiasm. Investors are not investing just in a business. They are investing and putting their trust in the leader……YOU!
You can contact Stephen Day at: firstname.lastname@example.org