Tag: IPO

How Will You Convince A Prospective Investor To Fund Your Business

As I have written before, investors are risk managers and are very careful and selective in what companies they make investments. Now that you have a list of investors that you are contacting for your company, you need to prepare to answer their tough questions. Investors will want to know why they should invest in your company. It can be very difficult to convince them if you dont have everything ready. Furthermore, you need to have to answer the three major questions that are mentioned below correctly. This is not easy to do and I highly recommend hiring legal counsel and accountants to get all the legalities and numbers correct before you begin to meet with your investor.

How much capital do you need and where will it go? This is the question that when answered right is the million dollar question. Investors want to see how the money they invest will be spent. You must convince the investor that your management can manage the money that is invested correctly and efficiently to generate the revenue and profits that the investor is looking to get from his investments in your company. The point is clear. He wants to see numbers. This is why I highly recommend you hire an accountant who can manage the money properly. You also need to have a plan laid out with milestones that are set which the investor has to agree with and you need to give an approximate time when each of these milestones that are to be met.

Once an investor finds that all the answers to the three questions are correct, he will give you your investment in a series of tranches. Each tranche will be given on some set conditions, which are all set to meet each of the agreed upon milestones. This is why you need to be good with your numbers, and your accountant should be competent in budgeting the money. With every tranche, you need to have a percentage for employee and staff salaries (which also includes the salaries of all the management), product development, real estate, etc. If your numbers are not right or realistic, you will not get funded.

What is the forecasted valuation of your company? This is a question where realistic numbers and projections really count. A companys valuation is basically the projected value that a company can gain in the future as it functions in its relevant market. Though investors love to see high figures, its not wise to hype up your figures and have a higher than realistic numbers. Investors can see right through that. For example, your relevant market may be a multibillion dollar market, your company will not be worth billions of dollars, at least not for a while, unless your product or service meets a demand that has not been met. This case, however, is rare. You could make a few million dollars, but your company will not have the same value as the entire market, thats impossible. So how can you get the right answers for this question?

When you are preparing your companys valuation data, you need to have projections that are as accurate as possible and you need to be prepared for how to answer the investor when he asks if your profits drop below ten percent. This is very important, because investors have their market analysts who constantly analyze markets and are always on top of the latest market news and forecast the future based on current market trends. You need to do the same and you should have people who can analyze the markets just as effectively as the investor does. You need to be able to see eye to eye with the investor. Being well prepared for this question can give you the biggest chance of winning that funding.

How do you plan to exit? What do you mean by exit? Well, investors like to invest in a company for a certain period of time, say between five to seven years and then they want to exit and collect their profits. This is why you need to prepare an exit strategy. There are all kinds of exit strategies available, but even though they are needed, you should think more about building a valuable company than having an exit strategy. Investors can see the difference between an entrepreneur who wants to found a company simply for the sake of building a modest company and then selling it and an entrepreneur who wants to have a serious company and wants to be with this company for the long haul. This type of entrepreneur is more valuable to the investor, because a company that generates value and equity will provide greater profit for the investor and make the investor more interested in funding this entrepreneur. Furthermore, a company that generates value over time can also require less liquidation because the profits can be so big that there will be enough pie for everyone, both the investor and the entrepreneur. After all, an entrepreneur starts a company to have something for himself first. Investors are there to help the entrepreneur and to gain a profit from their investment from the entrepreneurs company. Investors have the same thing in common with entrepreneurs, that they both want to make money, the difference is that investors after a particular time period, will want to exit the company through some of the following strategies.

IPO or also known as an initial public offering is when a company prepares to go out to be publicly traded in the stock market. This can be a rather tricky exit strategy because there is a certain kind of capital involved in executing this strategy. When a company prepares for an IPO, it will need to get a special financing known as mezzanine financing.

Management Buyout is another common exit strategy that companies can liquidate. This exit strategy is when the management of two companies work together with the ultimate goal of the management of one company first gaining control of the other company by working with the management of that company and eventually buying that company out.

Leveraged Buyout is an exit strategy where the company is also bought out by another company, but in this case, the buyout is leveraged by the buying company from company debts and other financial deficits.

Whatever the exit strategy you want to go for, you need to keep in mind that your company should first and foremost generate value. That should be your first objective, and how the market goes and how your company manages in the market should determine your outcome.

Rounds Of Business Funding From Seed Financing To The Ipo

Fund-raising has never been an easy task. However, many entrepreneurs rely on the possibility of attracting venture or angel financing at the very early stage to get the projects off the ground. But is that a realistic assumption to be put into a business plan? What is the likelihood of conducting the first two or three years of coding (for tech start-ups) or R&D (for any other innovative projects) at the investors cost? Let’s outline typical stages in a successful company’s financing. We’ll start with the first and finish with the last. Although there are rare exceptions to this sequence, in most cases it looks like this.

1. Seed Round.

This is the starting point of any business: you only have your idea and the first rough profitability estimations. Every entrepreneur at this stage recognizes the Idea as his/her top value asset. And this is natural as the Idea will be providing the guiding light and most of the motivation before actual sales take place. Every book of Entrepreneurship advises you to think big at this stage. Even if all you do is opening a bakery at the corner, you should be aiming at changing this world for good. But it usually takes a year or two of hard work and bitter frustration before there is something at your disposal that can be sold. And chances are that the world will disapprove your Big Idea and youll have to start it all over.

So what kind of investment are you possibly able to attract at this stage? The answer is the “3Fs”, otherwise known as Family, Friends, and Fools. You should be prepared to invest your own capital (including the money you make with your day job) and search for business partners among the people you know. If you are lucky, you will make great team that contributes all the knowledge, skills, resources and (yes!) capital to turn the Idea into actual business.
The seed round is important not only because this is how you raise your initial capital. You also validate your idea and make serious correction to the business plan. You start understanding the needs of your target customers and learn how your future project or service will change their lives for better.

1a. Crowd Financing.

This is a relatively new and by all means trending way to succeed at the seed stage. There are multiple web-based services that aim at connecting entrepreneurs and investors. Most of them charge either membership fees or success fees, but there are websites that you can use for free. I will review most popular and/or most interesting business matching sites in one of the upcoming articles.

2. Angel Round.

The launch and the first sales are the critical landmark to prove your business concept. When there are people out there willing to pay for your product or service, you know you are on the right way. Now you have a tangible proof of what has been the Idea. Your team matures and is getting ready to face new business challenge and open new market horizons So you need additional funding (more often than not its volume exceeds initial capital) and start introducing your business to might-be angel investors in a solid and confident way as you present not some projected but real sales numbers.

3. Venture Capital Round.

When your business is growing, possible revenues are running long before the market average and the potential for an IPO or acquisition is more than decent, VCs step in. Dont think about venture firms as ambivalent money sacks they are searching for potential market break-through businesses actively as investing at, lets say, 10X, 20X, 50X IRR is their business specialization. Usually you start negotiating in a few years before an actual IPO or acquisition might take place. As the cooperation proceeds, VCs assist and consult you in preparing your company for this important step. Often this preparation includes replacing management with C-level officers who are known to and respected by your industry and/or Wall Street.

4. The IPO or Acquisition.

This is the big pay-off at the end of years of hard work. It means liquid stock are selling at, hopefully, high P/E multiple or your business is acquired by a large strategic player from Fortune 1000 list. Of course this is not the only possible exit scenario as you might choose not to exit the game. Your business might become your lifetime passion and you might be one of those brilliant start up entrepreneurs who are also the best CEO of their companies.

Business development and financing is an interconnected process. And in order to succeed you should follow the inner logic of the process and apply the funding strategies which are adequate to your current position.