TIPS FOR RAISING PRIVATE EQUITY CAPITAL
SOME BASIC RULES
- Rule 1: Sophisticated investors do not invest in "on-the-job training".
- Rule 2: No matter how good your venture looks to you - it will not have a high probability of being funded unless it meets the investment criteria of the person to whom it is being presented.
- Rule 3: For early-stage financing requirements, look close to home.
- someone you know (family, friend or business acquaintance)
- a family member, friend or business acquaintance of someone you know
- a customer or supplier
- an acquaintance of a customer or supplier
- Rule 4: The less knowledge the potential investor has of you, the industry or the product/service the lower the probability of securing funding from the investor.
- Rule 5: The Rule of Relative Risk - You should have a greater relative risk exposure than the investor.
- Rule 6: No company sustains growth on one round of financing. Start now to secure the additional financing your company will need to grow.
- Tip 1: Understand the private investor's investment criteria.
- Most private investors will evaluate an investment opportunity based on some combination of the following criteria:
- the people involved (including experience relative to the investment opportunity)
- the stage of the venture (including sales and profitability levels)
- the industry and the markets served (customer characteristics and geographic location)
- the amount of the investment
- the liquidity of the investment (including the timing and nature of the exit strategy)
- the potential risk/return profile
- You need to get a feel for the relative importance a potential investor places on each of these criteria or other criteria. You can then customize and structure your presentation to maximize its appeal.
- Tip 2: Prepare an investor-quality business plan.
- The business plan must convince the potential investor that you have thoroughly researched, evaluated and documented the business opportunity. It should demonstrate your knowledge of the market, its dynamics and your understanding of what it will take to be successful. The plan should develop the basis for realistic models to support your sales projections, and include detailed operating and capital budgets, as well as, personnel, facility and financing requirements based on projected levels of activity.
- Tip 3: Convince the potential investor that you have what it takes.
- You need to demonstrate to the potential investor that you are capable of a sustained effort. The road will be a long and bumpy one. The investor must be confident you can handle trying times. You should have a track record that indicates you are familiar with the opportunities and pitfalls and capable of dealing with both.
- Tip 4: Position yourself to be funding-friendly.
- Seeking financing of any sort should be looked upon as an ongoing process. You should conduct your business affairs now, as if you had received the financing you think you will need in the future. This means having the types of financial reporting and controls in place that your potential investor would expect.
- Tip 5: Make the best first impression.
- Seeking private equity capital can be a time-consuming, frustrating and even demoralizing experience. There is little use in undertaking the effort unless you are prepared to commit yourself to presenting the most attractive opportunity possible.
- You should try to attract prestigious, influential and knowledgeable people to become associated with your venture. To the extent possible, within your budget constraints, you should build a team that possesses as many of the talents as is necessary to make the business successful.
- Tip 6: Be prepared.
- You should demonstrate an ability to accept constructive comments and criticism. The investor will be assuming a significant risk and needs to know that additional input will be taken into consideration. Always be prepared to do as much due diligence on a prospective investor as you would expect the investor to do on you. Beware the investor who makes too many commitments before conducting some preliminary due diligence.
- Tip 7: Be flexible in negotiating the deal.
- You must not overlook the significance of covenants, rights and restrictions the investor will consider necessary to protect the investment. It is important to understand the investor's motivation so that you can satisfy the investor's needs without impeding your ability to manage the company through good and bad times.
- Your objectives in obtaining financing of any sort should involve balancing the potential impact of the cost, risk, flexibility and control considerations on the success of your business.
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