Seven Important Rules for Prospecting for Capital Sources

In Angel / VC on November 23, 2011 at 9:43 am
The lifeblood of all companies is capital. Whether it is money from sales, bank loans, or equity from investors, a business cannot do anything without the money that it takes to build its products and establish distribution.Acquiring capital is often the most challenging aspect of a business. Very few companies are lucky enough to establish and maintain a steady source of capital that can fund its growth. Lack of capital is the primary cause of failure for companies – even very successful companies. There is a wasteland of companies that are victims of their own success – these are the companies that had big sales and opportunities, but they could not get the money in place to fulfill their orders. Just last month I met a nice small business that lost a $1 million order because they could not secure the capital required to fill the order in a timely fashion. Do you think the owners had a bad day when their existing banking relationship said “no”? Today there are a lot of these stories as banks are constrained on tight lending covenants and lending limits.The key to growing any business is ensuring it has enough capital to grow – and – to survive the times when profitability is elusive. It takes dedication to identify and maintain relationships that will ensure these sources of capital through good times and bad. To achieve this crucial objective, you need to prospect.

These Seven Rules will make it easier to identify and open new capital sources to fund your long-term success.

  1. Identify your WHY and let it be known. Your mission and vision may change overtime, but your purpose should not. A strong “Why” of your organization will tie the interests of capital sources to your organization through changes in personnel and revenue streams. When your capital sources know “Why” you exist, the “how” you do it and the “what” you do can change and you shouldn’t be penalized.
  2. Be curious. If you hear about new sources of capital or new players, make phone calls and find out what they are doing. Ask questions. New sources of capital have notoriously been the linchpin to many successful companies. Savvy business people will try to locked up these new capital sources to gain an edge on competitors. Private equity plays this game all the time to fund their deals and so should you.
  3. Be original. You need to be unique, especially if you are in a highly competitive market. You need to get in the door. Even if you are the CEO of a great company, some sources of capital may not be easy to warm up to. Tell them why you and your organization standout from the rest – your “Why” should reflect this.
  4. Load several arrows in your quiver. It will likely take several attempts and strategies to achieve your relationship-building objectives. Use the tricks that your sales people do (or should!). Use a CRM to track conversations. Use newsletters or company press releases to keep your company’s name in front of budding relationships. Send packages or gifts. Make phone calls when you have news to share or you have seen news about the contact or of interest to the contact. Bottom-line: systematically execute “touches”.
  5. Block Time. You need to dedicate time to this process. No excuses. It is easy to put this off. The first five don’t matter if you don’t dedicate time required to execute.
  6. Ask. When you have built your relationship and trust: Ask. Ask if they can get you access to more capital. Ask if they can get you better terms on capital. Ask them for a term sheet.
  7. Stay the Course. Prospecting for new relationships requires persistence and patience. When times are good, you are at greatest risk of falling into the trap of believing you will never need capital again. When times are bad, you are at greatest risk of being desperate since you had not procured enough relationships to provide you with choices.

Capital is available. Always. It is available to those that have procured trusted relationships. Despite advanced communication tools, the act of identifying and procuring these relationships takes old-fashioned networking and prospecting. Some of the identification can be expedited by surrounding yourself with advisors and influencers, but its up to you and your team to cement the relationships.

Patrick E. Donohue, CFA

Special “Thank You” to our friend Jeffry Brown (Twitter: @IdeaWhiz) for his mentor-ship and education on finding your “Why”!


Tactics to Avoid Telling an Investor “I Don’t Know”

In Angel / VC on November 16, 2011 at 5:09 pm

In the securities business, if a customer refutes a stock trade, they can come back to the stockbroker and claim they Don’tKnow “DK” and the broker has to eat the trade. DKs famously annihilate trust. Don’t DK a potential investor! DKs are penalty points in building trust!

When I was in a military academy, we were taught to answer: “I don’t know Sir, but I will find out for you!” Since you can’t know everything on the spot, here are some preparation tricks to avoid DKs.

– Maintain a list of industry resources. If you get asked a technical question, offer the document and any insights that you have on identifying the answer.

– Be confident. When you are looking in to the future, there is only so much certainty you can have. Be confident on your current plans and convey points that you are confident about today. Prepare yourself to answer forward-looking questions with a modifier like “Here’s what we know today….”

– Avoid taking meetings alone. Even if you have to conference someone in, it is best to have the safety net of another point of view when answering questions.

– Do not provide openings to the unknown in your presentation. And never let a slide be smarter than you! If something can be left unsaid during an initial meeting, let it be. Hit the high points at initial meetings, as these are essentially get-to-know-you sessions. Keep your slides simple. Technical slides are prime opportunities for you to drop several DKs.

– Listen closely to the question and don’t be afraid to ask the person to repeat the question or frame it in a different way. This sounds simple, but I have seen very intelligent and seasoned executives botch this. I have witnessed executives give answers to questions they THOUGHT they had heard. And 99% of the time, the answer to the real question would have been easier. Don’t drop a DK on a question that was not asked!

– Practice. My team works extensively with executives to prepare them for roadshows. When management teams truly understand the value of this exercise, I find the best learning moments are via the role of an antagonizer – that person that inevitably asks all of the tough (and sometimes offensive) questions. My career has been spent in many meetings with Wall St analysts and portfolio managers. The stereotypical Wall St investors do not care much about being polite – they like to throw curveballs and antagonize executives with tough questions. Why? Because the savvy investors have found that they like to see how executives conduct themselves under pressure. An executive’s reaction to antagonizing questions can be more indicative of success over the business opportunity at hand. So find someone you trust and get them to ask you all of the tough questions. Practice your answers. List all of the things that could “throw you off” and have a plan to get through all presentations without dropping a DK with a panicked and irritated look!

Patrick E. Donohue, CFA

Top Four Reasons Investors Write Checks

In Angel / VC on November 14, 2011 at 9:30 am

1. Trust
2. Affinity (Connections to people and/or industry)
3. Comfort (Understanding of the business opportunity)
4. Potential Return

Yes, potential return is on the bottom of the list! Most people naturally want to disagree with this. Your instincts tell you that investors’ top concern is potential return. This is false. Their top concern is preservation of capital – even with start-ups. Investors’ main concern is mitigating risk. This risk mitigation is accomplished with early stage companies through trust in the principals, knowledge of people around the company and/or industry and their overall comfort level with the business opportunity. Investors are willing to take total loss risk, but they need to make a determination about the likelihood of failure. This likelihood of failure is balanced with an estimation on what their investment should return if the company is successful – this is the investor’s required rate of return. When the potential risk of a 100% loss is more than remote, investors require a huge return opportunity i.e. “homeruns” to balance their risk-reward ratio.

Investors care most about trust. Writing checks is always about trust. You put money in your bank because you trust the bank will be open the next day and worst case, you trust the FDIC to repay your funds if the back goes under. Think about when and why you write checks – while not a conscious level, your most likely decision point in your process is a conclusion about trust.

So, when you are raising capital, how are you and your company building trust?

How well are you equipped to quickly build trust with potential investors that you have never even met before?

Patrick E. Donohue, CFA