For Growth, What Matters Most? Part II
In my last column (BusinessWeek.com, 6/25/08), the first of a three-part series on my top priorities for growth, I stressed the importance of people, business model, and money—they're the three most important parts of any successful company. I can't stress enough that you must have all three pieces nailed down if you want to have a viable business, which is why I'm taking the time to drill down on each in detail.
In my last column, I told the story of two entrepreneurs who were preparing to raise $1 million. They had a business plan and a dream—but that was all. They wanted to sell 20% of the company, thus making their post-investment company valuation $5 million. You'll recall my question—how is a business plan worth $4 million?
Fundraising Is Sales
Well, it's not. It's the dream, the story, the ability of the entrepreneurs to bring the investors into the glorious future they will be creating, and to make them hunger to be part of it. Fundraising, my friends, is sales. And what is sales? Seduction. Pure and simple. Today let's look at the logic, then the promise, involved in seduction. Because we all know when we're being seduced—we're hoping the payoff is going to be really good. Whether it lives up to our fantasy will be determined in time. And the great news is, when financing and building a company, you do have a stretch of time in which to deliver on your promise before the party you've seduced gets disillusioned.
I've split the money category into two key subcategories—financing and sales/marketing. Financing is the tougher one, considering the U.S.'s current economic climate.
To determine your financing needs, prepare answers to the following questions:
• What types, terms, timing, and tradeoffs are acceptable? You'll need a capital acquisition strategy to determine this. See my column (BusinessWeek.com, 3/12/07) on this topic. Perhaps angel investors are most appropriate. If so, you'll get the money in faster if you focus on a small bridge loan that will convert to equity later. Be sure to offer warrant coverage or a premium on conversion to make investing now compelling.
• Have you prepared for your financing round? Do you have a concise and compelling pitch (BusinessWeek.com, 2/20/07) and list of appropriate targets?
• Do you have your legal act together? You may want a sample term sheet, shareholder or loan agreements, and a confidentiality and proprietary inventions agreement (BusinessWeek.com, 5/12/08).
• Do you know the dos and don'ts of fundraising (BusinessWeek.com, 7/11/07)? An entrepreneur I met recently can't seem to raise equity investment. All the angels he attracts want to give him loans, at 12%-plus interest rates, with a three-year payback. He'd rather have equity investors, but won't take the time to learn what he needs to do to bolster investor confidence. So instead he is saddled with debt.
• Have you prepared a due diligence package (BusinessWeek.com, 11/5/07)? This process will be remarkably fast if you prepare in advance.
• Have you mapped out the long-term effects of dilution? How will you be reporting to your investors, lenders, and board of directors? How will you manage your board of directors (BusinessWeek.com, 4/9/07)?
To determine your sales/marketing plan, prepare answers to the following questions:
• What are your lead-generation sources and techniques (BusinessWeek.
com, 3/26/08), disqualification processes, and best practices?
• What are your online and offline marketing strategies? Do you have campaigns mapped out six months in advance? These will change and evolve, but putting a stake in the ground is crucial. Marketing campaigns don't happen in a vacuum—your tech team, operations and administrative team, and sales team will need to both be in the loop and probably contribute their time.
• Do you provide education-based marketing (BusinessWeek.com, 10/8/07)? Be generous. The more free information and resources you provide that are targeted to adding value and guiding prospects into and through your sales funnel, the better.
• What's your sales-force strategy: direct and indirect sales forces, joint ventures, affiliates, value-added resellers?
• Have you mapped out your sales-force compensation (BusinessWeek.com, 5/21/08), quotas, accelerators, recoverable vs. nonrecoverable draws?
• Assess your company's money status. Do you have enough? How much more do you want? When? You can get it through sales, financing or both, so be sure to map out your plans and proceed on parallel paths.
Now let's revisit the example of the two entrepreneurs who want to raise $1 million. With only a business plan and no company traction yet, the best way to do this is to form a capital acquisition strategy. In parallel, they must focus on ramping up the company as they sell. They should raise a small angel round that will convert to equity at the price of their series A, which will likely take six-plus months to raise. Offering 20% warrant coverage or a 20% premium on share conversion on the angel bridge loan will make it more compelling, and buy the entrepreneurs time to boost the value of the company before the stock price is set. They can't justify a $4 million pre-money valuation in today's economy, but if they cement some key alliances and develop and execute a killer sales and marketing plan, they just might pull it off down the road. See my column on value boosting (BusinessWeek.com, 8/27/07) for more ideas.
Remember, CEO stands for Cash Extraction Officer. What are you doing to extract cash?