Fatal Flaws

The Dirty Dozen

Investment banker Shuey keeps a tally of 13 unwritten no-no's that more or less represent his "wart list." (Actually, there are 12; the 13th states that the presence of any of the preceding 12 will cause immediate deal implosion.) Some of Shuey's rules relate strictly to IPOs--the penultimate goal for most, but not all, companies, since many entrepreneurs would be happy to simply raise a $100,000 dollop of equity. Therefore, the following discussion eliminates some of Shuey's rules and, where practical, homogenizes them so they apply to raising money in general.

These, then, are the warts that could make the financing sources you're wooing think twice:

1. You have no money. "Companies that cannot afford the dry hole expenses of the deal," says Shuey, "will likely never raise any capital." By dry hole expenses, Shuey refers to the legal, accounting, promotion and travel costs that are part and parcel of every fund-raising effort. For an IPO, these expenses might be $250,000. For a small private placement of perhaps $100,000, they might be $7,500. If you don't have the walking-around money to get the deal done, you're destined to sit on the porch and simply watch the action.

2. You've already shot yourself in the foot by attempting to sell a half-finished transaction. This is not to say the old adage about falling off the horse and getting right back on again doesn't hold merit. But in the arena of capital formation, broken deals can make strange and sometimes unworkable bedfellows, says Shuey. For instance, if you have tried to raise money and gotten halfway done, it's highly unlikely that an investment banker, venture capitalist or other intermediary will ride over the hill like the cavalry and finish the deal. "It's somebody else's busted deal," says Shuey. "Nobody wants to fix it for you because they would simply rather find another that isn't broken." If you want to raise money, he says, you'll have to scrap previous efforts and start again fresh.

3. You've overshopped the deal. No matter where you live, when it comes to early-stage financing, it's a small town. Heck, it's even a small country. "Everybody talks to the same attorneys and accountants," says Shuey, "so it's only a matter of time before you find out the [entrepreneur] who was in your office in the morning was in a competitor's office that afternoon."

Not that entrepreneurs shouldn't shop for the best deal; on the contrary. It's just that, to use Shuey's analogy, "the last available girl at the ball may not want to dance with you after she finds out everyone else you asked said no." Shuey's advice: Whenever practical, use a targeted rather than a scattershot approach, and pick off your funding sources one by one.

4. You think your idea is worth more than it really is. Shuey recalls one entrepreneur who was developing a new retailing concept and thought it was worth $100 million. Shuey talked to a lot of institutional investors, and they came up with a value of $60 million. Unsatisfied, the entrepreneur hired another investment banker--who got him a valuation of just $40 million. The entrepreneur walked again . . . and then went bankrupt. "The lesson," says Shuey, "is when a professional investor offers you real money for an unproven concept, you take it. If you hold out for the highest possible value, you become an unfundable deal."

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This article was originally published in the November 1996 print edition of Entrepreneur with the headline: Fatal Flaws.

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