Get Anything You Want – selling investors on your business

January 16, 2010

Zig Ziglar said “You can get anything you want, as long as you help enough other people get what they want.”

Of course he was talking about sales. Which makes it perfect for you. (In case you forgot you were in sales!)

Everything you do is a sale, and selling your business idea is no different. Forget about what you want from the transaction, and focus on what an investor wants. Your business plan needs to answer what is on their mind. Namely – Is this a high growth opportunity? How risky is it? Where are you now? What is the exit strategy? What has to happen to get there?

There is a writer’s trick which is worth keeping in mind. The trick is to look back and read what you have written, and ask “So What?” . If your copy doesn’t answer the “So What?” question, then it has failed.

Use this when you are writing your business plan, and put everything through a filter – how does this section or piece of information answer the questions in the investor’s head, or support my case that this is the right opportunity for them.

Figure our how you can help the VC get what they want, and have a much better chance of getting what you want.

Consider this… there are funds available to invest. Your job as a business owner is to make it clear that you are worth investing in.

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Understanding Private Equity and Venture Capital

January 15, 2010

Some Great Definitions

This is a useful overview of some main points, as provided by VentureCapitalSA

Can private equity help my business?
If you are aiming to start up, expand, turnaround, buy into or buy out a business, private equity funding could help you. Private equity investors are seeking unlisted businesses with potential for growth who are willing to trade a share in the company for investment. Private equity funding is provided to businesses in all sectors including food, technology, retail and manufacturing.

Do I need a private equity partner?
For private businesses, finding the money required to achieve significant growth can be the biggest factor prohibiting expansion. If you are willing to trade a share of your business to an experienced private equity investor, you stand to benefit from not only the injection of money but also the experience and skills of your new partner. Private equity investors aim to increase the profitability of their investment companies by providing a stable base for strategic decision making, not by taking day to day control. Think of it this way: you may have a smaller percentage ownership, however in a few years, that percentage should be worth more than the whole of your business was before. However, if you are not willing to release a share in your business, private equity investment is not suitable for you.

Expansion
The company is now established and requires capital for further growth and expansion. The company may or may not have made a profit at this stage. This may be a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan.

How does private equity work?
Private equity investors receive an agreed share of the company in return for the risk of investing. The investor is a business partner, sharing the risks and successes of the company. Funding through private equity is very different than receiving a bank loan. Repayments for bank loans must be made according to a contract, regardless of the success or failure of your business. Private equity investors hold a stake in your company and their return on their investment is dependent upon your business growth. Many private equity investors provide management expertise and experience, contacts and discipline. The investor has to be very careful about their investment because of the high risk in a company failing. They therefore have to check that the information provided is correct (due diligence) and they seek returns that are very high. In general, private equity investors are interested in companies which have the potential to significantly increase turnover within 2-5 years.

How does the investor realise their return?
The investor will want an eventual exit, there are a few ways they can exit the business and it is important to have an exit strategy agreed as early as possible. Ways for an investor to leave a company and realise the return on their investment include: 1. Sell the shares back to you for a profit 2. Sells shares to another investor 3. Sell when the whole company is bought by a larger company 4. Help list the company on the stock exchange

IPO (Initial Public Offering)
The sale or distribution of company shares to the public for the first time (i.e. listing on the Stock Exchange).

Management Buy-in (MBI)
These are funds provided to enable a manager or group of managers from outside the company to buy in to the company.

Management Buy-out (MBO)
These are funds provided to enable current operating management and investors to acquire an existing product or business from a public or private company.

Pre-listing (or pre-IPO)
Investment into a company where it plans to list on the Stock Exchange, usually within a period of a few months to two years.

Pre-seed / R&D
Refers to funds used to expand the concept and advance product development, usually during the research and development phase of the business.

Seed
Provided to companies which have not yet fully established commercial operations, and may also involve continued research and product development.

Start-up
The company is in the process of being set up or may have been in business for a short time. Such firms have not yet sold their product commercially and have no track record. Investee companies have completed the product development stage and require funds to initiate commercial manufacturing and sales.

What do investors look for in a company?
In order to gain private equity investment a company must be able to demonstrate: – A product or service with a unique selling point – A business plan showing growth prospects and the ambition of the company – An effective management team with relevant experience Efficient financial management – A planned strategy for offering a share in the company in return for investment

What is a Business Angel?
“Angel” investors tend to be wealthy individuals who may look to invest in a high-growth company that has synergy with their own business or competes in a market where they have succeeded. “Angel” investors generally invest in small businesses in deals considered too small for private equity firms. Typical “angel” investments are around $10,000 to $1 million. As “angel” investors generally invest in companies within their own expertise, the investor may seek a hands-on role in the management of the company or will look to act as the company’s mentor.

What is a private equity firm?
Private equity firms are fund managers who invest capital on behalf of institutional clients such as superannuation funds and insurance companies. They are exposed to the risk of the company failing and as a result, look to invest in companies which have the ability to grow very successfully and give higher than average returns to compensate for the risk. When private equity firms invest in a business they become part owners and generally require a seat on the company’s board of directors. They usually do not take day to day control.

What is private equity?
Private equity is finance provided in exchange for an equity stake in a company. Private equity is provided on a medium to long term basis and provides a capital base for future growth. Investors can provide strategic operational and financial advice based on experience with other companies in similar situations.

What is the difference between Private Equity Firms and Angel Investors?
Private equity firms are professional investors who dedicate all of their time to investing and building innovative companies. The angel investor is an individual who invests in companies for their own interest. Typically angel investors invest less than $1 million in any particular company, whereas private equity firms usually invest more than $1million per company. Angel investors are usually successful business people who have spare cash that they see achieving comparatively little in their bank accounts. The value of angel investors is that they often back and finance small businesses. Angel investors expect a return on their money of at least 30% and want equity as a security for risk. Angel investors generally invest in companies within their own expertise; the investor may seek a hands-on role in the management of the company or will look to act as the company’s mentor.

What is venture capital?
The term Venture Capital refers particularly to the private equity investments made at the very early stage of a business in order for the business to grow and develop. The terms Private Equity and Venture Capital are often used interchangeably.

What rate of return do Private Equity Firms expect?
Private equity firms tend to favour high growth companies that are likely to provide them with a high rate of return. The rate of return sought will vary with the risk: seed and start-up deals are considered very high risk and the minimum rates of return sought over the life of the investment will generally be around 30-40 percent per annum and above. As the perceived risk diminishes with the early expansion stage, expansion stage and management buyout and buy in deals, the minimum annualised rates of return may reduce to the 20-30 percent range. Investors generally look to exit the investment after three to seven years. The private equity firm only realises a return on their investment if the company goes public (IPO) or is merged or purchased by another company. In some cases the investment will be sold to another private equity firm.

Where do Private Equity Firms get their funds?
Most private equity firms raise their funds from institutional investors such as pension funds, insurance companies, endowments, foundations and high net worth individuals.

Who provides private equity?
Private equity is provided by private equity firms and by business angels

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Venture Capital & Private Equity Outlook 2010 (Video: 56 min)

January 15, 2010

See what industry heavyweights see on the horizon for 2010.

If you are seeking capital, this kind of insight from investors will help you see how you need to present yourself to be attractive to investors, and win over VCs.

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Overview on Venture Capital (Video: 58 min)

January 15, 2010

This is a presentation by Granite Ventures who have over $1b in capital invested. The presentation, while it has an American focus, is very informative as an overview on VC from the entrepreuner’s perspective including options on financing, launching a startup, and the process of raising capital.

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Systems needed to grow – background for any company seeking venture capital

January 15, 2010

“If you don’t have a system, you have a job not a business. You need to upgrade the engine (the systems) before you accelerate the vehicle (sales).” – Tony Gittari

Tony was the GM of Harvey Norman’s computer division, and worked with Gerry Harvey to increase the computer division’s turnover from a healthy $12 to a staggering $565 million. He is now a consultant and coach specialising in retail businesses.

Listen here to Tony’s take on why businesses need systems
(Audio mp3: click to play, or right click to download).

Systems are important to all growing businesses, and in particular those seeking capital – investors want to know that the business is scalable, and that growth can continue beyond the reach of the current individual owners.

For more about Tony, visit http://www.achieversgroup.com.au/

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Financial Modelling – Tips To Getting It Right

January 11, 2010

A sound financial model and projection is one of the core ingredients of a business plan.

Here are some thoughts on how to do it right.

1. Keep it real. Don’t overstate sales projections. It is a common enough mistake to make because human nature says we want to put the best case forward. The solution is to have various scenarios, assign some probabilities, and tell an investor honestly what needs to happen to reach these targets.

2. State assumptions clearly in the projection, so the investor knows what it is based on (fact, opinion or fiction).

3. Make it easy to adjust and show the consequences – what if sales are lower, what if churn is higher, what if our costs decrease, what if our main customer leaves? Investors are a (justifiably) cynical bunch, so you need to be able to lay out a best case and a worst case scenario.

4. Show the impact of growth on cash flow. As sales increase, what is the increased need for further capital. This will show an investor not only how much they’ll need to put in, but when.

5. Acknowledge knowledge gaps. If you don’t know something, that is OK. Explain the gap in the knowledge and either how you’ll get the knowledge, or its likely impact if you don’t. If you claim to know everything, it’ll be clear you are not being honest.

6. Focus on readability – it’s easy to get wrapped up in the complexity of your own spreadsheet and end up with a wall of numbers which is incomprehensible. KISS (Keep It Simple Stupid). Use clear labels, colour code, space, and remove less material variations (put them elsewhere). Separate inputs and variables from calculations – so the user can see what they can adjust.

7. Get in a pro. You may be surprised by what you can achieve in Excel. For a small investment (a few hundred to a few thousand dollars) you can may build something which becomes a key factor in winning over an investor. Remember the quality of the brief to the programmer may have a major impact to the success… don’t assume they know anything about your industry. Explain everything.

8. GIGO (Garbage In Garbage Out). Get good input figures.

Scotia Macleod provides financial modelling services as part of its corporate advisory role.

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Bootstrapping v Show Me The Money

January 11, 2010

Bootstrapping is the process of growing by reinvesting profits back into the business. A business may start with something from the owners, but often not much. In 2003 61 % of the Inc 500 companies had started with $50,000 or less – this normally comes from personal saving rather than outside investors. (This is not to say they all continued this way… ). Costs are kept low, budgets highly monitored, and profits are used to grow. This has advantages and disadvantages. The advantage is that it appeals to many people’s ideas of a good strong work ethic, it keeps companies debt free, and often forces people to find creative ways to get results (ie focusing on selling, rather than investing tens of thousands in a web site). It proves a model will work, rather than just relying on dollars to make it work. The disadvantage is that growth is limited to the amount of profits. A business may just survive, when it had the potential to thrive.

Seth Godin wrote a great book about it. Click here to download it.

Bootstrapping is a mentality. The problem is, it might be a mentality that stops someone from creating a fortune. By getting by on incremental change, and not leveraging an opportunity, the danger is that the business stays small.

Investors will want to see a balance of the good aspects of bootstrapping (keeping costs low, getting by with what you need instead of buying $1000 chairs and a new Porsche) and the slight disposition to risk that shows a business owner can create something bigger.

Often a good fundable business is one which has proven itself through organic growth – building on existing customers and sales activities, and proven that the products and systems work – but that needs capital in order to leverage these assets. A dream investment opportunity is one which is proven, yet constrained by lack of capital.

Some businesses just don’t work with limited resources, so would not be possible to run as a bootstrapped operation. Examples include anything with high fixed costs, longer sales cycles, high R & D, and when the only strategy is to enter a market quickly (some innovative products need to start strong in order to gain first entrant advantage).

As a business owner seeking capital, part of your “packaging” to an investor needs to be a clear demonstration of those things which you have achieved on your own, so that you are seen as capable and resourceful. Companies that seek to raise capital with just an idea, and no results yet, are unlikely to win funding… even if the “results” are not profitable. A company that shows it can win customers, but is losing money (due to its size for example) may still be an attractive investment.

A brilliant example of bootstrapping is Ovid Technologies started by Mark Nelson in the late 80s. He ran the business from an apartment, and as he grew, he rented more apartments in the building… running cables in and out of windows. It grew to 150 employees and in 1994 listed, raising $10m. In 1999 he sold for $200m. This is a great story because it shows both the creativity and persistence that was required to grow the company, together with the final payoff that this gave the owner in being able raise funds, then cash out.

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What’s Driving The Growth?

January 11, 2010

There’s apparently only about seven movie themes, and every movie is a mash up of these, with a few variations thrown in. There’s the underdog coming out on top (any Rocky movie), impending doom and the lessons it teaches us about ourselves (Titanic or any disaster movie), love lost, revenge, love won… In fact, there is a point at which if a movie doesn’t fit one of these classic themes, it will either 1. Flop incredibly, 2. Be a major success and create a new genre. (Hint: there’s more flops than genre creation going on).

It’s not unlike cooking… there’s only so many ingredients. What matters is how you put them together.

One of the implications of this is that originality is overrated. You are far better taking a slightly worn business idea and apply it to a new product, then try and come up with something truly unique.

Business is the same. There are a limited number of paths to follow to grow.

Here is a list of “drivers” that can change a business or an industry. Where does your idea fit?

Reconstruction of the value chain and distribution model: This usually happens when a step is dropped from a distribution channel . Examples: a store (Bunnings) becomes an importer and avoids middlemen creating unbeatable value (extreme case – some brands are manufacturers and retailers ie Ikea): Technology makes manufacturers or services more accessible such as publishing (self publishing is easy, and avoids having to be “chosen” by a publisher, as well as putting a higher percentage of profista nd control in the hands of the writer): Virtually anything sold on the internet: Remote delivery of services (guru.com). A decade ago, just getting bigger –and creating a superstore was a paradigm shift – now it takes more to be unique. How does your business jump over a previously imperfect delivery system?

Changes in sales strategy or payment terms: Some companies exist because they have taken an idea from one industry, given it a slight twist, and applied it to a new industry. Rentsmart and its competitors are an example of this. Going back 40 years, everyone paid cash for purchases. Credit enabled access to machinery for production or recreation (cars and boats for example…) that would have been otherwise out of reach. The simplicity of the financial products drives the sales process. Taking this concept and applying it to what was normally a smaller business purchase anyway (desktop computers at $1000-3000) and converting this to a weekly $10-30 ongoing payment makes the products so much easier to buy.. therefore making money for the financiers as well as the product suppliers.

Creating economies of scale: Many industries are populated with small inefficient firms. An example would be the printing industry where the investment in machinery is significant compared to the size of the business. Competitive advantage can be created by combining many inefficient companies. Fixed costs as a proportion of sales go down, and this way be sufficient to create a new advantage of lower costs – continuing with the print example, there are several large companies in Australia which have acquired dozens of smaller firms, and as a result of the combined strengths of these plus new practices (such as running three separate shifts per day on the same machinery) can drive down costs of production.

Changes in technology: Improvements and inventions cause change… wireless technologies, biotech, mobile phones. You have a new thing. This is a clear reason for creating a new business. This category refers to revolutionary change.

Evolutionary change: Moore’s Law states that in some areas (speed of computer chips for example) speed will double every eighteen months. Where this law applies, there will always be room for new players and new applications. Costs are driven down as well as potential lifted. How can an existing range of products use these benefits?

Imperfect information: A business can be driven by finding deals and maximising their value. Examples include licensing, mining and exploration, art, private equity, antiques. In other words, what makes insider trading illegal can be a good thing in other industries. Your business might be built on one such deal and then the company is there to exploit it (buying rights to a technology because you believe it will become a new standard) or it might be an ongoing source of knowledge (such as a property developer whose advantage comes from researching and buying land that is expected to be rezoned, and thus take advantage in changes in value).

Accessing undervalued assets and resources: This might be in the form of turning around another company and breathing life into it. A customer base may be neglected. New management, new strategy, new ideas and new marketing might make this type of turnaround a viable proposition.

Changes in regulation: This can create or wipe out industries overnight. Consider the implications of changes in security to the airline industry, and the supporting services which then became necessary. Consider the boost to the home insulation industry when the government decided to subsidise installation worth up to $1600 per household. Hundreds of companies were created overnight to take advantage of this free money. Consider also the vulnerability of these companies to further changes… when the subsidy was dropped to $1200 per household half of these companies closed. Similar artificial (but profitable) niches exist in dozens of areas – including energy (solar hot water). Deregulation can also provide a pathway for companies to enter an industry, as has happened in airlines, telecoms and TV. It is believed that financial services changes will also create and destroy various companies in the years to come – changes are afoot (end 2009) that will change the way funds deal wih and renumerate fund managers which will have a major impact in financial services. This will mean both creation of new services and companies, and perhaps the demise of others.

As a business owner, one of the ways you need to sell yourself to an investor is as an agent of change. To do this credibly, you need to put forward a case about what you are doing it, why, and what the driver for the change is. If your business is merely hoping to grab a share of an existing market, and not really make a difference, it is unlikely to really excite an investor. This is not to say that the business won’t work, just that it may not be revolutionary enough to get funded.

Investors are generally looking for something which is a catalyst, and to be there when the change is clear, but has not yet occurred, and sometimes to be part of the energy which creates this change. Every investor (individual or firm) is different and will have varying criteria, but most will want a massive upside potential.

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