The Tables Turn
It can take years of hard work and good fortune to find an investor who will help take your business to the next level. But what if you didn't have to wait? What if you didn't have to seek out investors and instead, they came to you?
That is not a fantasy--it actually happens every day. Private equity groups and VCs are always on the lookout for great companies that have the potential to become great investments. In fact, most investors don't sit around waiting for entrepreneurs to call and ask for money. Instead, they actively hunt for companies that are already well-positioned for strong growth.
Bruce Evans, managing partner at Summit Partners in Boston, says there are certain fundamentals that help companies attract investors. Summit Partners' 80 or so investment professionals manage nearly $9 billion and have invested in more than 280 companies since 1984. Summit makes both VC-style investments and later-stage private equity investments. In either case, Evans says, good fundamentals can make him pick up the phone and dial your number.
That is exactly what happened to Adam Bold, 42, founder and CEO of The Mutual Fund Store Inc. in Overland Park, Kansas. "I wasn't looking for any money," says Bold. In fact, when Summit Partners gave him a call in early 2006, he had only recently bought out a prior VC investor and was enjoying the benefits of owning the company himself.
The Mutual Fund Store provides 401(k) advice and services for individuals and companies, with locations in 50 cities. The company is not only profitable, but it also generates strong cash flow. Bold had it pretty good and could have stayed the course alone. So why did he take on another financial partner? It was about the opportunity for growth, he says, both personal and professional. "My company had gotten larger than any [company] I'd ever run before," he says. "I wanted to grow this thing and make it as big as I could. Instead of [using] trial and error, I'm getting [the investor's] experience."
Investors and entrepreneurs don't always agree, but there are five fundamental elements that can position a good company as an attractive investment.
1. Great products: All investors want to put their money in strong companies with great products. To find out if your products or services are unique and competitive, be prepared to compare your offering to all sorts of competitors and possible substitutes. One financial sign that you are on the right track is strong margins. For a product company, gross margin is a good barometer of the value you are adding to products. For service businesses, net operating profits may be more relevant. In either case, companies squeezed by excess competition are unlikely to show long-term profits.
2. A large and growing market: There is little room for growth if you have a niche product in a niche market. Investors want to know that you have, or can grab, a commanding share of a growing market. Show an investor how you can double and redouble your business by capturing (or acquiring) a commanding position in the market. Having the wind at your back will greatly impact not only an investor's overall interest in financing your dream, but also the valuation it will assign to your company. Investors are interested in knowing that your company is in a rapidly growing market, says Evans. They want to know how large the market is, your company's share of the market, and whether there are adjacencies that represent additional expansion opportunities.
Bold agrees that market fundamentals are what motivated his investors. Most of the customers of The Mutual Fund Store have come from the baby-boom generation, and that demographic continues to fuel the company's growth. Says Bold, "Baby boomers are in their peak earning years and their peak savings years. That creates real opportunity for our investment services."
3. Clear financial records and projections: Investors may differ in their willingness to fund growth without immediate profits, but all can agree on one thing: The entrepreneur must understand the economics of the underlying business model and have excellent records of the company's historical financial performance.
Bold says he not only implemented strong financial record keeping and controls, but he also paid for professional audits. "It cost more," he says, "but it gave [the investors] a lot of confidence in the financials."
4. Smart management: It is often said that money follows management. Of course, not every high-potential company has a complete management team in place, but the executives who are onboard should be able to work well together and have more than a little industry knowledge. A deep understanding of industry trends and customer needs is vital. That kind of knowledge is reassuring for investors who are typically less involved in the operational side of business. "We don't have to know everything about the market, but we have to know that the entrepreneur knows," laughs Evans.
Investors are attracted to companies and CEOs with a vision of the future and the management team to implement it. A smart entrepreneur will know which way the market is moving and drive the company in the right direction.
"There are some things I am good at and some things I am not," admits Bold. "So in 2000, I got a CFO and a COO, and they set up systems." And good thing, too: The first thing his investors wanted to do was speak with his finance team.
5. Deal or no deal? In the end, this is perhaps the most important question an entrepreneur can ask himself or herself: If an investor calls and offers to buy in, am I willing to make a deal?
Bold says that he was ready for the benefits the investor offered, but not necessarily the demands it made. "The [negotiation] process broke down a couple of times," he says, "but we were able to work through those things and put the deal together."
There are a hundred things to consider before agreeing to a deal: Can you arrive at a fair price? Can you accept the typical rights and terms that go along with an outside investment? Can you get along with the investor on a personal basis?
"A fair deal is when both parties are satisfied but nobody's really happy," laughs Bold. "A big part of [completing the deal] was having really good legal and accounting help. There were opportunities for [the investor] to get the better of me, but that didn't happen because I have really sharp people."
Of course, the investor has the same concerns about you. "The product and service could be terrific, the team could be great, but when we get to the deal terms, if the company is not interested in raising money, there's nothing for me to do," laments Evans. When opportunity knocks, you've got to be ready and willing to open the door.
David Worrell is author of the e-book Finding Funding.