I had an interesting chat today with a young entrepreneur who is trying to take his company to the next level of growth. It is a small marketing and communications company with a number of individuals that have grouped together under one banner. In order to grow they feel that they need an injection of capital.
I am certainly no expert in this area, but whenever I have conversations like this it becomes apparent that after 11 years in business I certainly know more than a lot of people starting out. I relayed some of my experiences when starting Eagle, and talked about some situations that I had encountered along the way … all of which were cause for this person to think.
Here are some of the areas which seem to be a common “hurdle” or “news” to many people in that start-up phase:
1. Commitment. When asking people to invest in your venture one of the things investors inevitably will look for, is the level of commitment of the principals. Ideally investors want to see the principals so deep into this venture that failure is not an option! When we started Eagle we cashed in our RRSPs and remortgaged the house in order to have the capital needed. There is a lot of motivation in knowing that failure means starting over! I have had this conversation with many would-be entrepreneurs and it has caused several to reconsider. I don’t suggest that this is always the case, but I do believe it is the norm!
2. Talk Finance-speak! Most people starting companies are pretty good at their world, which in this case was marketing & communications, in Eagle’s case it was staffing. The person with the money wants to talk in terms of balance sheets and cash flow, projections and assets etc. It is critical that the entrepreneur can present their case in these terms. An eloquent sales presentation that talks about differentiators and messages, market share and technical superiority is probably also needed … but money guys like to talk about money. They want to know what you want and what you are offering as a return. The very first time I went to see a Venture Capitalist, when looking for financing to start Eagle, he asked me how much I was looking for … I didn’t know! Seems basic, but I’ll bet I’m not the only one who ever made that bone-head move!
3. Equity. Equity is a long term prospect, and investment money is needed up front. Sometimes there is an ability to give an investor an excellent return on their investment without having to give up too much, if any equity. My belief is that you should be sparing with the equity because as a company grows there will be plenty of opportunity to use equity as a lever to get in new blood, or merge operations with other companies etc. Of course if equity is needed to get the cash then do it!
4. The business plan. It really should be concise, but it should also encompass all of the key points of the business. I carried a little notebook with me for months and every time a new thought came I would jot it down … I still do! A business case can really demonstrate the depth of knowledge an entrepreneur has, which is comforting to investors.
5. Shareholder agreements. When the shareholders are also employees it is absolutely critical to ensure there is a clear division between their responsibilities as employees and their rights as owners. It would be very unfortunate for business discussions to be complicated by people playing the ownership card. I believe both roles need to be completely separate. I also believe that if an employee who is also an owner needs to leave the company by choice or otherwise then they should no longer be an owner. Shareholder agreements are a great topic of conversation but you need to get them right up front to avoid issues years later.
6. Leadership. The entrepreneur needs to instill confidence in any investors. In addition to all of the above they need to exude confidence and be very clear in their authority in the company. If an investor senses weakness in the leader then its not likely going to be a “horse” they will back.
I really enjoy chatting with new entrepreneurs but never have enough time for it! Starting a company is exciting, it is fulfilling, it is fraught with issues but the sense of achievement is a great feeling. Obviously it is not for the faint of heart but every now and then i meet someone who has what it takes, I think I met one today!