Clarity can go a long way toward convincing an investor to buy a stake in your business.
If you believe your company is headed in the right direction and you have evidence that clearly backs up this notion for potential investors, you could be on your way to making a connection that will help you achieve your goals.
If you can’t provide that evidence in a quick, concise manner, you’ve got a problem.
“Investors want to know what the story is, what the need is and what their money is going to be used to do,” says Ed Lambert, senior vice president and senior market manager at Bridge Bank. “If you can’t explain what you do in two pages, you probably need to go back and do some more homework.”
The move to raise equity can be a challenge, especially if you’re an entrepreneur who has put your blood, sweat and tears into building your company from the ground up.
It only gets harder if you’re not completely on board with bringing on a business partner.
“This is your baby,” Lambert says. “Do you really want to give away part of your child? Better said, are you willing to share custody? And if so, with whom?”
Smart Business spoke with Lambert about the decision to raise equity and the best way to approach investors.
How do you know when it’s time to raise equity for your business?
Before you approach an investor for an equity injection which will result in you giving away part of your company, you should always look at debt as an option.
Talk to your banker and explore the various possibilities that are out there, both within the bank and through partnerships the bank has in the community.
It’s also important to have people on the financial side doing the blocking and tackling of looking at the numbers and understanding where your company is at.
You may come to a point where you realize that you’ve gone as far as you can on your own and you need to raise equity. If you’re up to your neck in demand and you can’t fulfill the orders you’ve got coming in without an equity injection, that’s a good place to be and the evidence speaks for itself.
If it’s not as clear cut, you need a banker or investor to be able to look at your numbers and say, ‘Yeah, I see where you are coming from. We need to look at raising equity.’
How important is the mindset of the CEO?
Bankers are analyzing the numbers, but they are also relying on instinct. Does their gut tell them that you are a person they can work with? Can they trust you? Will you keep your word and back up what you say? It’s absolutely key that there is a comfort level between you and your bank.
You don’t have that many at bats with the investment community.
If you send them something that is unfocused, they are going to seriously question what you’re trying to do. It’s the fundamental core of every relationship. You need to convey a level of confidence and determination, backed up by numbers that show you are someone that a bank and/or an investor should want to be in business with.
What’s the key to making a strong presentation?
There are typically three types of financial scenarios for your business when it comes to raising equity: best case, worst case and most likely. Each of them plays a role.
The best-case scenario is what you show investors. This is what you think your company is capable of doing with equity from this investor under the right conditions.
Most likely is what you’re going to use internally when you’re talking to your own people. Here are the goals you think you can achieve by raising equity.
The worst-case scenario is what you share with your bank.
Bankers are lenders, not investors, so they are always going to want to look at the most conservative scenario. The bank isn’t betting on you being the next Google. It’s betting on whether or not you are capable of paying them back. ●
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