Smart Money for Smart Businesses

Businesses looking for capital will find investors are more active and willing as they have more money to put to work than had been the case in the past few years.  While deals are getting done, it is a more deliberative process than the vigorous late 1990s market was.

I've met with many fund managers, venture capitalists, institutional and private lenders this month and although each might specialize in a particular domain all share common traits for companies they will invest in.  Though money is abundantly available, it clearly is an investor's market.  It's not uncommon for institutions to evaluate several hundred opportunities each year; even the most aggressive investors will close only a small percentage of the qualified companies they evaluate (10% seems to be the consensus).  Investors are quick to point out that they are impressed by the quality of deals they are seeing and freely recognize they are passing on quite a few good companies in what amounts to funding of the fittest in this highly competitive environment   Among the more compelling and universally expressed investor insights, businesses seeking capital have a greater chance for success if they:

1.  Feature an Excellent Management Team:  Investors are no longer simply looking for impressive resumes, they want to see track records from management teams that have produced results and have worked together over the long haul.  Many give preference to management teams that have stayed together after facing adversity in the business both as a way to prove stability and to demonstrate the team can successfully overcome challenges. 

2. Differentiation and Vision Matter:  Solving marketplace problems might be enough to keep a company in business but it's unlikely enough to attract investors.   Solving problems is a lagging indicator while investors are more interested in leading indicators.   With an emphasis on unique, businesses must be able to communicate their unique strengths to any investor committee and then reinforce these superior advantages by outlining management's view of the future and how their company is poised to capitalize. It's all about growth.

3.  Emphasize Business Development History and Strategies:  Present accurate and comprehensive sales funnel information, including historical sales cycle times and close ratios.  Comparative sales funnel data is also invaluable, especially if the company can show reduced sales cycle times and higher close ratios.  Management teams that are able to communicate why and how they have improved sales cycles and close ratios stand a better chance than those not well-versed in these essential details.  Deal-flow is an important consideration, investors are keen to know about sales not closed and the reasons why.  In some cases, companies gained rapid investor committee approval by blending their vision with deep analysis on business they had lost and how an infusion of capital would be allocated to apply valuable market intelligence gained to expand product offerings and service lines.

4. Style and Substance:  Everyone seems to have slick presentations and wonderful PowerPoints which undoubtedly diminishes the impact.  Businesses piquing real investor interest are able to emotionally and intellectually grab their attention by highlighting strategy and then supporting it with meaningful and measurable plans.   There's a strong correlation between enthusiasm for an investment and enthusiasm for the product/service, the latter achieved by having (prospective) investors become intimately familiar with the business.  If they can't relate to a business it's unlikely an investor will put up risk capital to fund an entity.

5.   Validate Before Proceeding:  Even the best management teams will have blind spots and before seeking capital,companies are wise to hire credentialed professionals to assess their business, critique and refine strategies and business plans so that they are best positioned to earn investor trust by having fully considered all threats and opportunities, having excellent answers for the toughest questions, the most significant of all "Why should we invest in you?"

Of course great ideas will always matter, but sincerity seems to be more important in this environment.  Investors are anxious to work with real people in real companies with real upside and have available capital for those who prove they qualify.

This blog, by the way, will be migrating to my all new website/blog!
Go to: http://www.bermanmeansbusiness.com/ 

The Fundamentals of Start-Up Business Success - Part 2

Instead of looking to politicians in DC, business leaders must control their destiny. Part 1 in this series identified matters executives can take into their own hands. Part 2 features NFIB's troubling survey.

In Part 3, I will highlight strategic and tactical initiatives small, start-up and emerging businesses should take to ensure profitable growth.

The Fundamentals of Start-Up Business Success - Part 1

Start-up and early stage businesses will determine whether or not the US economy makes any progress in 2013.  Though there is a great deal of advice offered to help entrepreneurs succeed, most of it is redundant and ineffective; just look at the historical record of new venture failure if you have any doubts about this.

In this multi-part series, I will identify the key ingredients for building a successful start-up/early-stage enterprise that have been proven to work in all industries.

1.  It's a For-Profit Business, Not an Offspring:  Understandably, entrepreneurs get emotionally wrapped up in their business.  Though the deep attachment has its benefits, like any other strength when left unchecked it becomes a weakness.  Leading a business requires consistently excellent judgment; emotion is the enemy of sound decision-making.

2.  Maintain Proper Roles and Responsibilities:  Arguably the most expansive and challenging aspect for successfully growing a business.  In many instances executive management rewards early hires through promotions to bigger roles.  For example, a loyal hardworking bookkeeper is rarely equipped to become a CFO.  More urgently, entrepreneurs should set very specific ground rules for investors who become board members.  Venture capitalists, private equity professionals and the like are far more experienced in business analytics than they usually are in business operations.  I have seen more businesses harmed by amateurs with money pretending to be experts at strategy or organizational design than any other single factor.

3.  Successful Disruption Comes From Outsiders:  Hiring senior management from within the industry a start-up business intends to compete in defies logic.  Industry veterans are rarely ever able to conceive anything other than an industry's status-quo.  Captive to convention, "that's not how this industry works" is both the industry veteran's favorite saying and the entrepreneur's motivation.  Early stage companies must offer superior alternative value to the way things have been and are.  This simply can't be achieved by those who know only those rules.

4.  The Curiosity Imperative:  Regret only the meetings you didn't have and the people you didn't meet.  For early stage executives, working on the business is more important than working in the business yet too often leaders claim to be too busy to do anything but work in the business, consumed by tasks.  Your bright ideas will be validated and even further illuminated by those you meet.

5.  Resources are Precious:  One of the great big lies is "we need fancy office space to impress prospects and customers." Emerging companies spending too much for swanky offices do so for their own ego, not because the customer expects it.  For every $1 fully loaded expense you had better be able to generate at least $7 in revenue.  If you can't then expect each $1 spent will destroy your company's value by at least $10.  And above all remember this: your most precious asset is time because you can never get that minute back you lost.  Therefore, if you do not run the business through and by meaningful plans you're wasting too much of your time.

Despite the popular advice, there are neither short-cuts nor fairy tales for building a successful business from scratch.  If you are a start-up/early-stage business executive, I urge you to evaluate your company on each of these 5 basic fundamentals and if you don't like what you come up with you should be encouraged!  The first step to fixing a problem is recognizing it.  

In Part 2, I'll cover positive ways to steer the business forward.