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Beware the False Investor - Raising Capital for the Entreprenurial or Growth Business

Beware the False Investor - Raising Capital for the Entreprenurial or Growth Business

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Published by Rich Pirrotta
Overview of the process an organization should take to raise external funds
Overview of the process an organization should take to raise external funds

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Published by: Rich Pirrotta on Sep 15, 2012
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1663 Maple Creek Court, Rochester, MI 48306
phone 248.705.1229
Beware the False Investor - Raising Capital for the Entrepreneurial or Growth BusinessRich S. Pirrotta
Many small or start-up businesses at some stage contemplate whether or not to seek externalfunds to accelerate their growth. While some organizations can work with more traditionalmeans, such as asset-
based financing from a lender using the company’s or owners’ assets as
many businesses either don’t have that choice or don’t like the terms and amount
available. As an aside, i
t’s common for a bank to ask for the owners’ personal guarantee (PG),
and from my perspective,
that’s a dealbreaker.
A good rule of thumb on the PG request is topolitely say no. Find another lender who
doesn’t need
a PG, or choose another funding source.When an organization seeks external funding outside of the lending community, they are
entering the realm of the capital raise. Whether it’s friends, family, angels,
venture capitalists(
), alliance partners, or private equity (PE) firms, an effective capital raise to the investorcommunity involves communicating 1) a compelling business opportunity, 2) appropriatefinancial returns for the risk involved, and 3) a credible, experienced management team.The level of sophistication required for each of these audiences varies, but there is always arhythm involved. By your actions on this journey, you signal that you are either experiencedwith the process, or a novice to be taken advantage of 
make no mistake, when it comes to acapital raise, rarely is altruism involved. Funding your organization is an intense, no-holdsbarred process, and the stakes are very high. You can breathe a sigh of relief when the fundshit the
bank account, but then you’ll have the new journey of working with investors
andinvestor relations. Once you take in external
funds, it’s a milestone for more than just the
dollars involved.The dark side to this process is that you will ultimately come across the False Investor
thosemasquerading as individuals or firms that may appear to be interested in providing funds, but inreality, are in the dance to learn more about your organization for their own purposes.In my experience as an entrepreneur, advisor, CXO,
and board member, I’ve helped
a numberof organizations raise over $35 million in capital from every conceivable source, and wanted toshare a few thoughts on the difference between an approach that can deliver results, andothers that will just leave one frustrated. This article addresses the key players in the process,how to identify someone as a False Investor,
and the information you’ll need to prepare as you
enter the dance.
By the way, there’s no dearth of advice on this subject, and I don’t profess to be a deep expert
among any of the potential audiences.
I haven’t worked for a PE
or VC firm
, and I’m not an
investment banker. But I believe my experience in working broadly across the potential fundingaudiences provides a unique and successful perspective.
1663 Maple Creek Court, Rochester, MI 48306
phone 248.705.1229
Who Are You Listening To?
In the process of raising capital, there are professionals, advisors, and interested parties. Your
first task is to understand the role of the person or firm you’re talking with, and then to receive
that advice with the proper context.Professionals in this space are the firms or individuals that provide capital to companies as theirprimary mission. This includes VCs, PE firms, investment banks, and others who provide fundsand/or financial advisory services to companies seeking capital. As you might expect, they arealso the most sophisticated in approach because they have lots of practice! These firms seehundreds of opportunities and proposals a year, so getting their attention is a long shot unless1) you have demonstrated success taking a previous company through a successful exit with anice multiple for investors, or 2) you have a strong relationship with a decision maker. Not an
acquaintance, not a friend of a friend, but someone that’s on your speed dial.
 Despite the fact that the odds are long, would it surprise you to know that you are actually thecustomer for these firms? And that their ultimate payout is based on finding the value inoutstanding companies like yours before everybody else does?Given how the dance unfolds, it may never occur to you that you are buying their services, andwill be compensating them with a nice hefty multiple if you bring a successful exit to yourcompany. Most lose that focus in the distraction of the capital raise. If your firm and
companies like yours don’t exist, there’s no market for
the Professionals
just keep that inmind as you work with them.A second group in this category
is the Advisors, and in this group, we’ll include angel investors,
alliance partners, and other groups of high net worth individuals who make funds available.Under SEC rules, companies seeking funds are required to work with Accredited Investors,which encompasses several categories, but for an individual investor, means that they canrepresent they have a net worth in excess of $ 1 million.In this group, you will see the most variation in approach, sophistication, and actual desire toinvest. Unlike the Professionals, this is not the primary mission for most of the Advisors, and
they don’t have to invest the funds they’ve accumulated. They have run companies, ser
ved inother professional capacities (doctors, lawyers, accountants, etc.), and have generated incomethey would like to put to use in a diversified manner. Whether or not your company fits the
profile is anyone’s guess –
but the right Advisors can serve as a rich source of advice and accesswell beyond just providing funds.The final, interested parties, group includes your friends and family, or anyone else who has agenuine interest in providing funds for your organization. Friends and family may invest simplybecause you are a known entity and they support your passion! Your role is to share with themthey might lose their entire investment, and that this is probably one of the riskiest investmentsthey could make. You know this group the best, so if your brother giving you $50K might
permanently ruin your relationship if things go south, then it’s best to leave those funds alone.
In this group, relationship should be your primary guide.
1663 Maple Creek Court, Rochester, MI 48306
phone 248.705.1229
In April, 2012, another source of capital, crowdfunding, became available. I have no experiencewith crowdfunding, so others can provide better advice. But separate of the regulatory rulesand disclosure of IP, I think it would be hard to communicate well with all of the investors thatnow have a vested interest in your firm. It may be better to wait until crowdfunding passes itsearly phases.For all of the groups you may be listening to, there are two key concepts. The first is the FalseInvestor, and the second is competition.
Beware the False Investor
What is a False Investor? My definition is someone who is more interested in learning aboutyour business because it is leading edge, innovative, or cool, than they are in investing funds.You will unfortunately run into too many of these False Investors as you seek to raise capital.To filter them out, ask the question
“Tell me a little bit about the types of companies you’veinvested in during the last twelve months?” If you get lots of excuses –
the economy was bad,
we didn’t see anything we really liked, we saw a few but couldn’t agree on terms
then knowthat you are not engaged with someone who is keen on investing. They are very interested inlearning about your business
the neat technology, the passion, the vision for growth -
because that’
s what they need to feel in the know or leading edge when they talk with theirfriends at the golf club, the investing group, or the office. But they are in the dance to receiveinformation from you, not invest in you. Hence the term False Investor.To be
fair, I don’t think most False Investors are intentional in their actions.
Someone who isseeking funds to grow their organization wants to talk with them, and so they oblige. But theymay not understand that the dialog is really about access to funding
. If they don’t have a
genuine interest and ability to bring funds to the table, their best guidance is to point to a firmor individual that can do so. Too many small organizations spend significant time chasing theFalse Investor at a distraction to
their core business. Don’t stay stuck in that part of the dance.
Despite the mismatch between your needs and their desires, I’ve never found it appropriate to
antagonize the False Investor. Be polite, hear them out, and stay in touch. But focus yourtime on those who are actually making investments, not talking about them.The second concept for all the groups is competition. Do not, under any circumstances, go
after only one source for your funding. A maxim I learned a long time ago is that “One
is no investor”, and it holds true, even if it is a bitter truth. In your sales efforts, do you go
after only one potential customer? Never. In a similar manner, you must generate and be indialog with several potential investors in your investor pipeline. You may only take funds from
one in the end, but until that day, don’t fall prey to on
ly seeking one source.

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