Go Green:
Show a Little Savvy and Go for the Same Money
By Mark W. Sheffert and Katherine Vessells
April 2000
A dollar is a dollar is a dollar, right? Not!
If easy money---the kind with no strings attached, no pesky investor breathing
down your neck, no one telling you how to run your baby---seems too good to be true,
it probably is. Entrepreneurs who take the time and possess the confidence to
understand the nature of truly "smart" money will have acquired the kind of capital
that can help a company achieve its objectives. Smart money is worth more than its
face value, because it also represents intellectual and business capital---the kind that
brings with it the knowledge and expertise you need to help grow your enterprise. Think of using this investment to salt your company with solid, diverse layers of
experience to help see you through subsequent rounds of financing. The right board
and investor representation will provide a fledging company---usually thin on its own
management---with valuable leverage to propel its growth.
After all, it’s a given that you’re about to trade a percentage of company
ownership for needed growth capital. Make it your priority to give up that percentage
to the right investors. And remember: your work is nowhere near done once you’ve
closed your first round of financing. When you can trade a piece of your action to
investors who add strategic value to the dollars they provide, and then commit yourself
to tapping their expertise, you’ll be better positioned for the next time you pass the hat.
Whether you are a small, private company obtaining first or second-round
financing from an "angel" (usually, wealthy former executives or business owners who
currently provide 95% of all private equity under $500,000) or you are in a position to
attract venture capital funding of $500,000 to $10 million (provided by a pool of capital
from several sources for investing in companies poised for growth) the principles of
acquiring smart money are the same. You must balance the two sides of the scale: on
the one hand, trading the least amount of equity for the most capital while enjoying
sufficient freedom to run your company; and on the other, attracting the kind of investor
who can provide some helpful "interference."
A flag should appear before your eyes the moment Daddy Warbucks (or a
consortium of Daddies) shows up at a dog-and-pony show with checkbook and pen in
hand, ready to start scribbling before you reach the final frame of your presentation.
You, as the user of capital, should be just as critical in judging the attributes of potential
investors as venture capitalists are in assessing your company’s products and prospects
for growth.
This type of reverse due diligence means asking potential investors for references,
and then following through by talking extensively to companies that have been the
beneficiaries of their capital and business assistance. Don’t be shy, and don’t worry
about insulting anyone; any angel or VC worth his or her salt would expect nothing less,
and you can save yourself many headaches later by asking probing questions on the
front end.
Company founders/owners should complete their own checklists when assessing
the merits of one investment dollar over another:
- What is the potential investor’s experience in your industry, and in your
particular niche?
- If the investment is to result in yielding a significant percentage of ownership
of the company, how available is the investor to serve as a contributing board
member?
- What is his or her reputation in the business community with regard to
integrity, experience, insight and a sense of strategic vision?
- How connected is the investor in the investment community at large?
- What are the potential investor’s key business strengths, whether in product
development, marketing, human resources or capital planning?
- What has attracted the investor to your company’s industry?
- What is the investor seeking to achieve with the capital he or she is willing to
invest in your company?
- What are the timing expectations with regard to an exit strategy? Is the money
short-term capital (i.e., bridge financing) or a patient endorsement of your
strategic plan, with a willingness to take the long view?
The entrepreneur hat can become, in some cases, a ten-gallon headache: by their
very nature, company founders don’t cotton to investors, or anyone else, telling them
what to do. You must resolve, however, to check your ego at the door once you’ve
gathered your smart money. Become the world’s greatest listener. Take notes.
Implement valuable suggestions, and remember that these angels and VC’s see hundreds
of deals per year, have probably served on dozens of boards, and just might know as
much or more about your business than you do. Balance youth with maturity when
choosing your investors: the brash, young kid who can run circles around the rest of us
when it comes to "dot-com" savvy, with the seasoned executive known for wise
judgment. Both types hold within them a wealth of knowledge that you can now access.
When you surround yourself with those who might have walked in your
moccasins with their own companies, you gain leverage to the greatest possible degree.
Wise entrepreneurs understand that most angels and VC’s have no desire to run the
companies in which they invest, only to help facilitate a win-win situation for everyone
involved. Believe it.
"Visibility" investment dollars represent another aspect of smart money. If an
early-stage company can point to first-round funding contributed by a respected angel or
a high-profile VC, that "name" money can help the next round of financing to sell itself.
It involves a bit of the "me too" conundrum, but later-stage investors like to think that
the angels and VC’s who walked before them knew what they were doing. When known
angels or VC’s have taken a hands-on approach in partnering with start-ups future
investors are reassured. The right kind of early investors can help you establish
relationships with industry leaders, potential customers and talented executives to
round out your management team---cutting your work in half.
Once you have secured your "smart money," concentrate on building the
business and allowing your important investors to help you through good times as well
as difficult periods. Be as shrewd a user of capital as an angel or VC is when choosing
an investment. Remain open-minded as you mine your investors’ various resources to
maximize the company’s success potential. Understand that talent, expertise and advice
can be leveraged, and you will have leveraged the capital invested in your company. Know that no one can grow an enterprise single-handedly; make humility your new,
greatest virtue, and you will have mastered the art of converting "green" to
"green +" dollars.
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