Model Behavior

Abstract number sorcery won't cut it anymore. Investors want to know exactly how you're going to make money.

It was just two short years ago that a profound wake-up call hit the capital markets. The numbers game of raising money had been reluctantly redefined during the 60 months that spanned from the first quarter of 1994 to the peak of the Nasdaq in first quarter of 2000. Fundamental valuations had given way to customer-driven metrics such as industry share, volume and first-to-market presence. Many on Wall Street hailed the arrival of the new "new math." Peter Henig, writing in Red Herring, said, "As long as there's dynamic growth, there are dynamic stock prices." And the recommendation that came down from Charles Crane of investment research firm Key Asset Management was, "If you believe in these new statistics, then you have to buy these stocks."

But today, huge opportunity and market share are no longer enough to secure a funding deal for your growing firm. Raising money has taken a turn back to the basics. And as company earnings have come back in line with the mainstream, the real numbers game for your deal is now focused on the most elementary component in your enterprise: your business model.

"Our initial test of any investment has to do with the validity and strength of the business model and how the management team's core experience can be used in the execution of that model," says Jeff Carmody, a bridge loan specialist with Santa Barbara, California-based Agility Capital.

"The period in time where money was raised from a flow chart drawn on a cocktail napkin has, mercifully, passed," notes Jason Spievak, vice president of business development for Callwave, a Santa Barbara, California, next-generation software-based switching technology firm. "To be taken seriously by investors today, an entrepreneur needs to have both the long-term strategic vision as well as the practical focus on operations. A real business model that can drive sustainable revenues is a must because while there's more capital than ever piled up in private equity funds, very little of it is available to the dreamer or the get-rich-quick entrepreneur."

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David Newton is a professor of entrepreneurial finance and head of the entrepreneurship program, which he founded in 1990, at Westmont College in Santa Barbara, California. The author of four books on both entrepreneurship and finance investments, David was formerly a contributing editor on growth capital for Industry Week Growing Companies magazine and has contributed to such publications as Entrepreneur, Your Money, Success, Red Herring, Business Week, Inc. and Solutions. He's also consulted to nearly 100 emerging, fast-growth entrepreneurial ventures since 1984.

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This article was originally published in the March 2002 print edition of Entrepreneur with the headline: Model Behavior.

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