Winning Investors Without Losing Your Way
Sustain growth for long enough and you’ll reach a point where your company can’t self-fund further expansion. The spark could be a market opportunity, a new product or a change in the competitive landscape. The result will be that you realize it’s time to seek outside investment. How much would you know (and how much would you need to learn) about the way investments are structured, the role investors play in day-to-day operations and the prospects for change in your own role?
When Alexandre Wentzo, CEO of Casewise, began his search for investors, he knew that his choice would have an impact on everything from questions of dilution to the character of the company’s business plan. As he weighed the options—venture capitalists, private equity firms, an IPO—he discovered that the search, too, could take its toll. “The process is very disruptive for a small company,” he says. “People should know that at a small company, the CEO and CFO spend hours, days, weeks and months on the process.”
Investment Beyond Money
Although it is time consuming, that is the best strategy for finding “smart money.” David Belasco, executive director and Adjunct Professor at the Lloyd Greif Center for Entrepreneurial Studies at the USC Marshall School of Business, uses that term to describe partners who invest both capital and business intelligence in your company.
“You want to get people who can truly open doors to customers, to manufacturing, to vendors, all the things that really determine whether your business is a success or failure and what your margins are.” He notes that sources of smart money can include strategic partners, customers and vendors as well as “professional investors.”
One key to negotiation of a successful agreement is “to read the documents and understand the ramifications if things don’t go well,” because in that case, “the protections that are there for the investors can get pretty draconian quickly,” Belasco says.
That means it’s a good idea for entrepreneurs to temper their natural optimism and enthusiasm during negotiations. It’s easy to get swept up in the upside potential and downplay the consequences of missing a financial covenant. For that reason, it’s essential to work with legal and financial advisors who have investment experience and “can push back on things that are negotiable,” Belasco says. In the worst case scenario, where results are poor and the investors control the board, the founder, owner and CEO can become the founder and former owner/CEO.
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Wentzo was well aware of those risks as he narrowed his search to venture capitalists. With that in mind, he and his team “were very careful about how much equity we were ready to give away to the VCs. When you choose a VC, it’s how much you get at what cost.”
In evaluating his options, he considered not only business and financial aspects of the terms, but also their dedication to and interest in the company, its market, and its business model. He was especially attuned to the softer elements that he refers to as the social and emotional dimensions. Focusing on these considerations helped guide Casewise toward investors who were a good fit for the company in their cultural attitude and outlook.
The social factor involves assessing whether a prospective partner is well equipped to help you hit your business targets. For example, he met some VCs whose networks included potential clients. Their value was higher because they were offering not just funding, but the connections necessary to support the venture.
Wentzo considered the emotional dimension equally important because he saw his prospects for success as tied to his prospective investors’ culture and EQ. If they didn’t align with his values and goals, he considered the match a poor fit.
He likens the search process to courtship that’s heading toward matrimony: “They’re selling you the honeymoon, but the honeymoon is not going to last forever.” With that in mind, he posed questions to prospects that gave him a sense of what the relationship would be like if everything went well—and if it didn’t.
That meant asking not only for references of companies who were transformed and improved by their investment venture, but also with those in which still-active partnerships had yet to deliver the target results. “I think it’s very interesting to see how they react,” he says. “That was something I wanted to know.”
His due diligence led to an agreement with an investor who offered both the capital and business intelligence that Wentzo sought to move forward. By thinking through all the opportunities and obligations that external investment entails, business owners can negotiate the agreement that best supports their business plan and growth targets.