The market has really bounced all over the place since the pandemic hit. We have all seen this happen during 9/11, then again when the 2008 recession hit. But there are investors who must invest in companies and if you have a strong revenue stream and positive cash flow, you will be attractive to investment-seekers.
One thing that is dramatically different with the pandemic compared
to the previous financial crises is the amount of money in the hands of the
Private Equity and Venture Capital firms. The total money raised in 2008 was
$392 billion as compared to $740 billion raised in 2019.
These firms have slowed down their new investments as they
work to analyze and save their current portfolio companies. The money that has
been raised must be invested in new portfolio companies in order for
these firms to stay in business. The pace will pick up after they have nursed
their current portfolio back to health and you need to be ready to pitch to
these investment-seeking firms.
Companies with strong revenue streams and positive cash flow
will be as attractive to these firms as ever. You don’t want to risk losing a
potential investor by sending the wrong message in your executive summary or
From my experience in private equity, where I reviewed
hundreds of submissions from companies seeking investors, I know that if your
revenue stream is not apparent in a few minutes – the answer will be No. And No
will be a full sentence.
If you are a founder or a C-suite executive of a fast-paced, growing entrepreneurial company, are you confident you have the Seven Essential Tools you need to pitch to investors? Let’s make sure – please join me for a free webinar on Thursday, June 11, 2020 at Noon. Click here to join.
As with any business relationship, finding the right fit with your investor is the first step in a long and successful association. This may sound like dating advice, as there are many similarities. For example, identifying potential investors through word-of-mouth or introductions from mutual friends has a better chance of success than selecting the first name your search engine delivers.
But don’t stop there, ask your acquaintance why they recommend this or that one. Understanding your goals is critical with whomever you choose to ask for money.
With potential candidates on your list, think of a few “speed dating” questions to narrow it down. You should know yourself well enough to already know which questions/answers are deal-breakers. What do I mean by that? Let’s say you want a silent investor who is hands-off. Ask how they work with their current clients – hands-on, hands-off or somewhere in the middle.
Other filtering questions might include: who are some of their other clients (besides your referring friend); are they local; in which industries do they specialize? Are they a solo investor or in a group? What type of client do they prefer – are you that client?
By doing your due diligence you have reduced the risk of having to break up with your new investor sooner than planned.
One of your goals in securing an investor should be that once they have reached their goal with your business, they stick around as your #trustedadvisor. You just may need them again when your successful business is ready to rise to the next level of success!
Building trust takes time and an investment from both parties. At the end of a successful pitch to gain an investor, the trust clock with that investor starts ticking. You both must deliver now on the promises made during the courtship; nothing builds trust quicker than doing what you said you would do. And when you follow through, the role of trusted advisor just naturally evolves.
At Mindy Barker & Associates we help entrepreneurial businesses prepare for meeting with investors to pitch their business and obtain funding. If you think you need an investor, but don’t know where to start, contact me at firstname.lastname@example.org to set up a no-obligation 30 minute discovery call to discuss how we can help.
My final word of advice: this process should begin the minute you start a business – not when you need the money. If you are trying to raise money at a time you are getting ready to lose money – you lose leverage.
Part 2 of the Equity series. In Part 1 of the Equity series I laid the groundwork for equity allocation by discussing the impulsive entrepreneur who gives away the business to friend and family just to have them involved in the new venture.
Part 2 focuses on equity allocation to key roles in your organization. Unless your entrepreneurial idea is to start a new kind of venture capital firm or become an attorney who specializes in IPOs, discussing employee stock option plan (ESOP) allocations and agreements with potential staff members may seem intimidating.
That’s why I am sharing some key considerations for you to be aware of when you are ready to start that conversation. My perspective is that of a former principal and chief financial officer of a private equity firm.
Equity allocation to Principal Management. The rule of thumb for the allocation of equity to senior management and advisors is 15 – 20%.
The allocation to individuals depends on several factors and even timing. For example, if the founder(s) know they need to hire a CEO/President after they get the entity to a certain level, they should reserve some equity for this position.
Sales executives typically will earn more through commission than most of the management team, therefore should have the lowest allocation of equity of the C-Suite.
Technology and Financial positions are critical in most companies, which means the majority of the allocation should go to these positions.
Equity to advisors is another factor when divvying up equity, and discussed in more detail in Part 3 of this series.
Finally, there is vesting equity ownership as an employee incentive to perform well and stick with it while the company evolves from start-up to success. My advice is to keep it simple – don’t have one-off vesting arrangements for each person – keep it straightforward, make all terms and conditions with all option arrangements pari passu (on equal footing) with everyone – this makes it easy.
Part 3 concludes the Equity series with other key considerations for entrepreneurs considering equity allocation for their startup.
Mindy Barker & Associates (email@example.com) works with entrepreneurial growth companies to help maneuver the many questions of funding, employee compensation and other decisions and is available to discuss your questions on equity.
Part 1 of the Equity series.
Virginity and equity have a lot in common: human beings do not spend enough time thinking through how to give away either of them, but once they do, the results have the potential to be rewarding or devastating.
This article focuses on giving away equity – virginity is a topic for another time, maybe even under a pseudonym!
As an entrepreneur, the day you think of an idea, you own 100% of the equity and intellectual property (IP). The power to give the equity to others in exchange for their time and money is one of the most important decisions you will make. The devastating consequences of misappropriating equity can ruin even the best of ideas.
Giving equity or IP away may start with a conversation over drinks with a friend. When you start to tell friends and family about your entrepreneurial venture, be prepared to hear their version of your great ideas, along with their advice.
The conversation goes something like:
Friend: “That is a great idea and I have been thinking about doing something like that for a long time. You are great at technical development and I can help you with sales and operations. I can quit my job and help you with this company.”
You: “Wow, I am so flattered you think so much of my idea that you would quit your job and help me!”
What you are thinking: “You are absolutely right, I hate to sell and it would be great to have someone help with that. After all, I do need a team to help me launch this idea.”
So your friend then says, “For only 10% in options and a salary of $100,000 a year, which is a lot less than what I make now, I will be part of your team.”
You are thinking, “You are a great sales person at ABC Large Company ABC selling to other huge companies – you will be great at helping me with getting my company off the ground.”
The two of you toast to the future with visions of a wonderful partnership dancing in your head – this is exactly what you need to launch the business.
Stop Right There!
You have just given away 10% of your equity with almost no forethought of the consequences.
Think of starting a business as a real-life personal development plan where you learn quickly how to deal with the ultimate emotional highs and the down deep lows. Most of the down deep lows result from lack of cash. Your friend sounded very generous when they offered to take a lower salary and accept $100,000 per year. However, when cash is tight and you are fighting to find the money to make payroll, it may not feel so generous. In order to pay them you make sacrifices. Paying their salary keeps you from paying yourself, which means your personal finances are in jeopardy, which causes you stress. This stress may turn to resentment toward your friend and cause tension, especially when the sales are not coming in at the rate you expect them to.
You can see where this is going, right?
According to Fortune magazine, 9 out of 10 startups will fail. The exuberant valuation and success realized by Jet.com. Amazon, Airbnb and Uber are clearly the exception, not the rule. If you have boot strapped this Company, not taken a salary for 5 years because you haven’t realized the success you once dreamed of, you are not going to want to pay your friend 10% of the $500,000 proceeds you may be offered for your company after Year 5.
Here is the advice I give to enthusiastic entrepreneurs who are eager to cut their friends and family in on a share of their big idea – think before you give it away.
The allocation of equity should be properly documented early on in a Stock Option Agreement that lays out the terms of vesting and other criteria that work for all. Even simple agreements should be undertaken by a business attorney who can prepare you for scenarios you currently could never imagine.
To help you start a conversation with your attorney about a stock option agreement, read Part 2 of my series on Equity, Considerations for Equity Allocation Agreements.”
Until then – remember that barroom conversation, and think before you give it away.
Mindy Barker & Associates (email:firstname.lastname@example.org) works with entrepreneurial growth companies to help maneuver the many questions of funding, employee compensation and other decisions and is available to discuss your questions on equity.
I am often asked how to find the right investor to invest in an entrepreneurial business. The question often comes from an entrepreneur who is about to run out of money and wants me to introduce them to someone that is going to write them a check by the end of the week. For the investor/entrepreneur relationship to work effectively, a relationship of trust and understanding has to be cultivated during the pitch and due diligence process.
How prepared are you to ask investors for funding?
Would you ask a friend of yours on Monday to introduce you to a spouse you can marry on Saturday? I hope not! So why would you think an investor relationship would work that way? The message you are sending is essentially, “I’m a poor planner and waited until I was in trouble to take action.” Not a good way to start a relationship involving asking for money, is it?
Getting ready to find an investor begins long before you think you will need the money. Preparations include thinking through how to build a business that investors will want to invest in, that they can identify with. You have to maintain credible data on your financials and your potential client base so that each time you meet with an investor you can definitely and consistently communicate your position.
How confident are you that if the right investor comes along, you are prepared with accurate historical and projected financials? Can you show the investor you have thorough knowledge of the financials, cash flow, burn rate, use of proceeds and return on investment? You have to know your product inside and out as well as the financial numbers behind it. You will get drilled on it when you meet with investors and it will feel like the worst spelling bee you ever participated in if you are not prepared. Do you feel confident?
If the answer is, “Not confident…” make the investment in your business to prepare. Let’s schedule some time together to dive in to gain financial clarity and understanding. Let’s talk. Contact me at email@example.com to set up a no-obligation 30 minute discovery call to see how we might work together to prepare you to meet with potential investors.
What kind of question is that … of course you would not purchase a piece of equipment that does not work! Yet you may be doing exactly that if your hiring practices have not grown and evolved to support the growth of your company.
As the founder or CEO of an entrepreneurial growth, or family owned company, an honest evaluation of your hiring practices might highlight if you are investing in employees who do not “work.” In this context, “work” means they are not suited for the current stage of your company, prompting the question, “How did I not see this happening inside my own company?”
Entrepreneurial growth founders and CEOs tend to hire friends and family at the early stages of startup, relying on people who they trust, and with whom they have an existing relationship. This type of employee tends to be fiercely loyal to the founder, willing to put in the hours to help get the startup moving in the right direction. My observation has been the founder has enough day-to-day interaction with all employees to fill in the gaps and correct shortfalls that result from hiring based on relationships versus skills and qualifications.
As your company has evolved, perhaps these types of employees are no longer team players; or possibly your superstar employees have become discouraged as the company has grown and changed, so they are leaving and taking valuable company intelligence with them.
Companies that survive three years in business and realize success in their revenue goals also find that the needs of the organization have changed. Hiring practices require more structure and objective measures, which means additional up front planning when considering a new hire. Here are my recommendations for putting in place that structure and objectivity:
Complete job descriptions for existing and new positions. Since this process has Fair Labor Standards Act (and other regulatory) implications, refer to a source such as the Society for Human Resources Management (SHRM: http://bit.ly/1pJUinA), for guidance.
Use the job description to create a job posting, describing the new position and the criteria for candidates to apply.
Make certain you have an organization chart that clearly illustrates everyone’s relationship within the company.
Properly communicate to existing employees you are hiring a key team member and explain the reason for the hire and eligibility requirements for applying for the new position.
Prepare a template of key metrics the employee must have for the position before you identify the first candidate. Metrics such as job skills, education level, and experience should be included.
Reproduce the template for each candidate you interview. Use it to evaluate all candidates during the hiring process to help you stay focused on the essential needs of the organization – rather than letting your emotions get away from you and hiring someone you really like but is not suited for the position.
During the actual interview, the founder/CEO and select team members, trusted advisors or others, should be involved in interviewing candidates using the interview template for that position. Final applicants should be vetted with a background check, confirmation of all certifications, degrees and employment verification, prior to making a formal, written offer to the selected candidate.
If you have suddenly realized that it’s time to implement more formal structure and hire key executive positions for your growing business, contact Mindy Barker & Associates to find out how we can assist with the process. From developing the criteria for key executive positions, to working with firms to source qualified candidates, we will not only lead you through the process, but also leave you with a documented procedure to follow as your company continues to grow.
Countless Americans seem to have an insatiable desire for immediate gratification. This drive for gratification has led to an increase in “on-demand” start-ups, such as Uber, one that is frequently in the news these days. These start-ups address needs such as transportation, food, entertainment and beauty treatments. The short-term euphoria derived from the instant gratification meets a perceived (or even real) need, resulting in billions of dollars being available to fund these companies. Investors have bet the companies will build enough revenue and momentum to go public. With an opportunity to exit through an Initial Public Offering (IPO), they can get a great return on the investment. The IPO market has allowed some unprofitable, high-growth companies to pass through the gates and create hope for others – including Amazon and FitBit.
Prathan Chorruangsak / Shutterstock.com
History often repeats itself – there were many “on-demand” start-ups during the dot.com boom in the 1990s that were unsuccessful, including Webvan, known as poster child of the dot-com “excess” bubble, according to techcrunch.com. My belief is that the initial euphoria of immediate gratification is then seized by the control freak in us who wants to choose our product. For example, when the apple from the grocery delivery shows up with a bruise or we cannot communicate with the office manicurist, the urgency for immediate gratification dies and we drive to the grocery store to pick our own perfect apple or to the spa to get the manicurist of our choosing.
The success of Uber has given the on-demand space an extra surge of enthusiasm and creativity. Many riders frequently use Uber because they appreciate the experience and the price. On the one hand, this is a great business outcome; the fact remains, the company eventually has to make money. Uber continues to struggle with growing regulatory issues that will eat into revenue, create higher operating costs and, ultimately result in higher rates. I recently landed in the New Orleans airport and requested an Uber car at the airport. An immediate and distinctive pop up on my phone alerted me that all Uber rides were $75 from the New Orleans airport due to city ordinances. This is compared to a $15 cab ride to my client’s office. I cancelled my Uber request and went to the cabstand.
The message to entrepreneurs and business owners is that we can learn from history, and basic business fundamentals are clear – you have to make money selling the product. Investors expect a return on investment, and at some point will be unwilling to continue to fund a losing proposition. Keep your books and records current to ensure all your products are making money or, by default, you could be making the decision to fund a loss leader.
Sunday began the week with the Holiday of Love – St. Valentine’s Day. How do love and emotions influence our decisions about business and investing?
Many people have used the services or read about a Unicorn or a Unicorn “wanna be” without even knowing it. Fortune.com defines a Unicorn as a once mythical, now reality, start-up business valued at more than $1 billion and includes Uber ($62.5 billion), Airbnb ($25.5 billion) and Snapchat ($12 billion)*.
Jacksonville-based Fanatics is a local Unicorn valued in excess of $3 billion that is putting Jacksonville on the start-up map according to a First Coast News report (http://fcnews.tv/1om5Exd)
Speed to market for a unique new idea is critical for start-ups. The exuberance of growing a company fast can generate more endorphins than the Boston marathon, while the adrenaline rush can lead an enthusiastic business owner to burn through huge amounts of cash in an attempt to gain market share. This cash burn must show traction – is the cash you are investing to gain market share paying off? Are the dogs eating the dog food or, in other words, are you acquiring as much of your target market as you project or need to justify continuing to increase the value of the Company and command the incredible valuations such as in the previous examples?
The basic principles of running a business, i.e. the eventual need to generate enough revenue to create a profit remain a core value of building a business. For example, if the cost of production plus acquiring market share is more than what you are selling the item for, that’s a no-win situation down the road. Using metrics and projections, founders and owners must continue to evaluate building enterprise value in order to provide a return on the investment to shareholders.
My experience serving as the Principal of a Private Equity Firm and as a CFO of small and large entities provides a depth of experience that can help with the analysis your business needs to understand if you are on the right track for building enterprise value. Please contact me to discuss your unique situation.
* http://fortune.com/unicorns/. Note these are estimates of the companies’ enterprise value based on the latest rounds of private financings. These companies are private and it is difficult to find the exact valuation.