Find Investors-Part III-Term Sheets

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Hosted by Dave Dambro, The Capital MatchPoint, 770-433-8250 http://capitalmatchpoint.com

When you raise money for your company as an entrepreneur or capital seeker, you are going to find that there are many legal and financial vehicles that can be employed that will balance the needs of the individual and mutual concerns. In this part we're going to discuss the mutual needs. And again you should have retained a good securities attorney at this stage and additionally this is a part where you're going to need a good solid CPA or accountant to get guidance on what suits your needs best as well as the mutual needs. We can offer some more  ideas here as well with regard to the mutual needs.  This part you're going to have some help because the investor is working with you be it private equity, a venture capital firm or an angel investor. We are going to be looking at both parties coming out with the best possible scenario here, so one of the things is retention of the key management. You've got to consider this very carefully. What does your management structure look like now? Are you looking for key people? A lot of times you're going to find that the capital provider is in a position to provide resources in the form of management for you through their experience in dealing with many, many companies. Another thing is the composition of the board of directors. Ultimately you’re probably going to see a representative of your capital source on your board of directors and I would welcome that, there’s some valuable insights that you’re going to be able to get from that. Another thing is governance documents. When you get into this stage and you’re at a term sheet, you’re going to be establishing some guidelines that may be a little bit more than what you started out with previous to the funding. This provides a forum for making decisions, changing things that may have been established, and resolving any conflicts between the investor’s wishes or needs or wants and yours. So this is one that you want to take very slowly and carefully. Now another item that is a mutual need in the term sheet would deal with the health of the post funded company. In other words after the funds are in there should be mutually agreed upon uses of proceeds and governance documents are put into place to look at expenditures, investments, ratios. The investor is going to want to check up and see that those funds are being put to use in the places that were agreed to mutually. Additionally some of the items under that would be things like the tax consequences of the investments that are being made and the expenditures that are being made. For example, expenditures on payroll have ultimately some tax consequences, whereas expenditures in other areas may have some tax benefits.

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Find Investors-Term Sheets-Part II

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Hosted by Dave Dambro, The Capital MatchPoint, 770-433-8250, http://capitalmatchpoint.com

 This is part 2 of a 3-part series where we’re going to talk a little bit more about term sheets. In this section we’re going to discuss the needs of the investor with regard to the term sheet. Now, the structure of capital transactions such as those that would involve private equity or even angel investors are more reflective of the needs and the preferences of the parties involved. So you are going to see a lot of differences between term sheets and you should have at this point already consulted with and retained a good securities attorney to get guidance on which suits you best. From the investor’s perspective, his needs are pretty clear. First and foremost is return on investment is what he’s thinking about so you’ll see various different items addressing what his expectations are. Also the risk level that the investor is taking, you’ll find some mitigators in there as well. Liquidity is a big concern as well so regardless of what structure you’re going with look for clauses that are going to address his rights to liquidity. Now your company’s valuation at exit, there may be a benchmark set for that. And here is one that you’ll definitely see, the investor rights. In the event you are headed for a market liquidity event such as an IPO, the investor’s going to want to be first in line to some extent, so look for that. The level of participation in the management of the company; think about this, having been on both sides of the table for many years, I can tell you that as an entrepreneur we tend not to want to give up control. Plan on giving some up. You’ve got to cede some of your control in exchange for investment, whether it be a seat on the board of directors or a voting right, you will be bringing in a partner of sorts and these are your financial partners. The next item is rights in future rounds of financing. Typically an investor gets in with a company and you meet your benchmarks, they’re going top want to be there for you and do what they do best which is financing, so look for language on that. And opportunities to provide future rounds of financing are easier for the investor group so you’ll see language on that.

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Find Investors-Term Sheets-Part I

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Hosted by Dave Dambro, The Capital MatchPoint, 770-433-8250, http://capitalmatchpoint.com

I'd like to talk a little about term sheets. A term sheet is a document written early on between the entrepreneur and funding source such as venture capital firm or angel investor.  The term sheet is much like a letter of intent, in that it is pre-cursor to due diligence but with more detailed information about terms of financing and rights and privileges.

Term sheets are non-binding except for confidentiality and exclusivity in negotiation.  Nevertheless, the term sheet is complex and should be negotiated vigorously before signing as it is difficult to materially change during the construction and negotiation of the final agreement.

The structure of capital transactions such as those that involve venture or angel capital are less dependent on boiler plate stipulations and more reflective of the needs and preferences of the parties involved.  Many legal and financial vehicles can be employed to balance the needs of both parties individual and mutual concerns.  You should consult your attorney to get guidance on which suits you best.  However, we can offer some food for thought when considering a term sheet.

Your personal needs:

Capital

Maintain Control of Company

Dilution of personal stock

Stock re-purchase in the event of retirement or termination as manager

Operational support and guidance that investor can offer-now many of us as entrepreneurs, and having been on both sides of the table, don't like to surrender too much control. Be careful what you give up as far as guidance and investor control-they are all going to want to have some role as to the future of the company so be prepared for that and govern yourself accordingly. If you have any questions about dealing with term sheets, just give us a call at The Capital Matchpoint. We deal with these all the time and will be happy to guide you through.

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Find Investors-Emphasize the Strengths in Your Business Plan

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Hosted by Dave Dambro, EVP, The Capital Matchpoint, http://capitalmatchpoint.com

770-433-8250

Okay, so you have spent countless hours building the best business plan you know how; maybe even 100 or 200 hours researching and compiling information into a presentation. But, I have to tell you something. There really is no perfect business plan. So, during a presentation, here is a strategy you want to adopt. You want to highlight the strengths of the company and you want to down play, but acknowledge and make the investor aware, of any weaknesses that you perceive in the company. Have a compensating strategy for them too. Now, a good example would be, you have a good business. It is in a great growth industry. You have stellar management, but maybe you are a little weak on the financials. Well, it is your job now to make the investor impressed with your strengths.

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Find Investors-What is your competitive advantage

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 Hosted by Dave Dambro, The Capital MatchPoint, http://capitalmatchpoint.com

 770.433.8250...I would like to address the subject of competitive advantage. For those of you seeking capital out there, you need to know if you have a competitive advantage and you need to know how to portray that to our investors when you are seeking capital.

Warren Buffet, arguably the worlds best and most successful investor, boils it down to just one thing when evaluating a company that he want's to invest in. That is competitive advantage. So, ask the question, does your company have one? Here is how you portray it to the investor. There is a formula to it. Take your business name, add to it what you are the best at, and then, why?

I'll give you an example. We are the Capital Match Point. We are the best at matching quality capital seekers with quality funding providers. The reason why is, we take the time to use our propriety matching process in order to put our capital seekers in front of our investors [who] are interested in their opportunity. We do it with pin-point accuracy.

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Find Investors-Ten Steps to Funding- How Long Does Funding Take?

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Hosted by Dave Dambro, The Capital MatchPoint, 770-433-8250, http://capitalmatchpoint.com

...One burning question in the mind of the capital seeker, since the dawn of time has been, how long does it really take to get a funding done? Now, in my 25 years, being on both sides of the fence as a capital provider and also as a capital seeker, I could tell you ultimately, plan on about six months. It could take longer, rarely does it take shorter.

Now, there are eight key steps in the process and being aware of those will help you understand the process and the time.

The first thing that happens, typically, is a review of the business and an evaluation of your financials. This is the point where the capital provider is making a decision on whether they want to interview you and take some further time up for consideration.

Number two, there's going to be a meeting and a presentation. Typically this one is going to be done in person and it is what we call a "dog and pony show." It is where you present your company and parade the merits of it in front of the capital provider. The capital seeker then will find themselves in a due diligence period. Now, this cuts both ways. They're doing due diligence on the capital seeker, our investors want to know, are all the facts there? Is everything in line? Do a little homework, check some facts. You should be doing the same thing as a capital seeker while they are doing there's, know who you are dealing with.

Number four, there is going to be a series of follow up questions, ultimately. You need to be prepared to answer those.

Number five comes; finally a term sheet. This is a first take, or draft, at a letter of intent to provide the funding and it will spell out: what are the terms of the funding, what type of funding equity get, what have you.

And number six, what always follows a term sheet is a negotiation. Because you never, as a capital seeker, want to take the first deal that's put on the table.

Number seven is, after negotiations conclude, typically there is a formal agreement.

And number eight is the closing. So, there are a lot of steps that you go through on the way to being funded. Being aware of those will help you to understand the time that is involved with that.

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Investors-Should I Seek the Assistance of Professionals when Raising Capital?

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Hosted by Dave Dambro, The Capital MatchPoint, 770-433-8250, http://capitalmatchpoint.com

I'm often asked, should I go it alone when it comes to funding, or should I seek the assistance of a professional? I think the best way to answer that is ask yourself a couple of questions. I've got four in particular that you need to keep in mind.

First of all, you have limited contact. You're probably great at the business that you are engaged in, but you do not want to call your friend the lawyer, or your buddy the accountant, and see who they know who raises money for your company.

Number two, you are probably strapped for time if you're running a business, and let's face it, time is a precious resource, treat it like one.

Number three, you've got to ask yourself, do you have the experience? And if you haven't been down the road of funding a company before while running it, you probably want to seek the advise of a pro.

Lastly, you want to keep in mind this one, raising capital is a two headed monster. You've got to ask yourself the question, am I capable of running this company effectively and efficiently while raising capital?

I typically recommend help. Now, you get back to the business of running your business, and leave it to the people like Capital Match Point. We have been doing this a long time. We are here to help capital seekers like yourselves, and we are happy to take your phone call at any time and help you decide whether you should go it alone, or get some assistance.

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Find Investors-What is Going on in the Mind of the Investor?

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 Hosted by Dave Dambro, The Capital MatchPoint, 770-433-8250, http://.capitalmatchpoint.com

What is going on inside the mind of the investor? Every capital seeker needs to answer that question and I've got a couple of key points to make on that subject.

First of all, you want to realize that as an investor, especially on the professional level, you're listening to stories for several times a day, several days a week, several weeks out of the month, months turn into years, you do the math. It's an awful lot of presentations. So we're looking for sisync answers to the questions we're asking, as opposed to stories.

Secondly, we're looking for specific things and in fact the questions are generally formatted in a very pointed way to get those answers out.

So, thirdly, you wanna be on guard not to oversell your opportunity your company or your companies merits. Answer the question, don't tell a story.

And fourth, when you're asked a question, you need to be prepared to answer it. So, go over questions in advance, have a presentation, organize in your mind, and expect that question to come up.

An investor, overall, really is just trying to answer this simple question, "What happens if I put one dollar in the front end of this company? What do I expect to see come out the back?" And capital seekers that keep that in mind really will know what's going on inside the investors head.

And those that have questions about the nature of what's going on inside the investors head, and how to speak to them, are always welcome to give us a call at Capital MatchPoint. That's what we do and we'll be glad to help.

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Find Investors-Stages: Seed, Startup, Early Stage, Mid-stage, Late Stage, Special Situations

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Hosted by Dave Dambro, The Capital Matchpoint, 770-433-8250, http://capitalmatchpoint.com

Capital seekers at all stages need to understand: what stage they are really at, how to classify and clarify for our investors, and how to speak the language a little bit. So I want to tell you about business stages that we classify and use in our matching process in the Capital Match Point system.

First, you have the light-bulb stage. And, as a reference suggests, this is just an idea, a great idea. It could be as crude as scratched on the back of a napkin, but it has some merit to it.

Number two is where you have seed stage. Seed is where you are structuring and developing the business plan and the financials, and there is some capital expenditures going on there.

Three, there is a start-up, and a start-up is usually broken into a series. Series A, typically, a lot of times you'll see a series B when milestones are reached. Occasionally you'll see a series C and even a series D.

Number Four is early stage. Generally an early stage company is considered to be generating revenue and probably within about a million dollars, plus or minus, break even.

And number 5 is late stage company's. These company's are typically established, and mature, and looking for expansion capital.

Six, we've got a category called special situations. This is a pretty broad category, but it encompasses things like: leverage buyout propositions, mergers and acquisitions, anything at all that would enhance the company's business model, beef up the balance sheet, and add assets as well.

Now, if you are a capital seeker and you are not sure what category you fit into exactly, give us a call at the Capital Match Point. That is what we're here for. We look at companies all the time and we'd be glad to help you sort this out. It's important to know which stage you're in, so that we could target you to the correct capital provider.

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Find Investors-Angel Investor, Venture, Private Equity, Capital Funds, or Hedge Funds?

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Hosted by Dave Dambro, The Capital MatchPoint, 770-433-8250, http://capitalmatchpoint.com

...I get a lot of questions from capital seekers about the type of money that is available on the Capital Match Point. I have several categories, and we classify them and categorize them for a reason. There are angel investors and angel investor groups. There are venture capital funds, commonly referred to as "VC's". We also have private equity funding sources. Then there are hedge funds; additionally private investors. Then we have a category called "other", which pretty much encompasses all other accredited investors, that would be investors of significant net worth and sophistication to make investments on their own. Now, what is important here, as a capital seeker you need to understand the differences between capital providers. They're very specific. And secondly, you need to be able to identify the source that you need to target for your particular capital needs. Now, getting in front of the right capital provider is paramount to getting your company funded. So, what we're looking for here is, the key is efficiencies. Don't waste time chasing the wrong kind of money, and don't waste money doing that either. The thing you need to be doing is running your business. So, take the most efficient route to capital. If there are any questions on this subject I always invite the capital seekers to call. That is what we do on a daily basis here at Capital Match Point, and we can easily help you identify the type of capital sources that would be most efficient for you to use.

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Find Investors-10 Key Points to Catch the Investors Attention

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Hosted by Dave Dambro, The Capital MatchPoint, 941-462-2728, http://capitalmatchpoint.com

You know, in talking to capital seekers, inevitably, I mention this three-minute review that a capital provider will do, and there's a lot of, what I call "eye catchers" that happen during that process. And these are the things-- I'll give you ten items that jump out and really make an impression.

One, patents and trademarks. Hey, if you've got something that has a patent or a trademark on it, chances are it's worth taking an extra look at.

Second item, capital invested person. What we like to call "skin in the game." Want to see that management has a financial commitment to the concept or idea before they come looking for money from us.

The third thing is the management themselves. We're looking for executive gems, big names, experienced big companies, big achievements.

Ok, #4 would be milestones achieved by the company so far. If they set out in their business plan to hit goals, I'd like to see some of that in a pattern developing.

Six, a growing market demand. This one's pretty obvious. You don't want a shrinking market. If you could have got in on the Internet, for example, when there were just a couple professors talking to each other, that's a growing market. You see where you'd end up.

Marketing strategies. I like to see innovation in marketing, not just, "We're going to hire a Madison Avenue advertising firm to do a few commercials and sell our product."

Revenue growth year over year. That's one of my favorites. I like to look and see a pattern, particularly one that's on the up-swing.

Now, strategic partnerships are important. That's my #9 gem, and I like to see that there are businesses that want to do business with your business.

And intellectual property is the tenth gem. Intellectual property is always worth taking a look at. A little esoteric sometimes, but valuable, and it is an asset that you're going to see on the balance sheets, so you're going to want to know what that's about.

That's my ten gems. If you've got some questions about what looks good in your presentation, I always welcome capital seekers to give us a call at Capital Match Point, because this is what we do and this is why we're here!

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Business Plan-Balance Sheet and Investors Interpretation

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

One question that frequently arises among entrepreneurs when seeking capital for their business is how will investors interpret the financial statements that I provide in my business plan?  Its a good question and something every entrepreneur should understand when dealing with investors, whether they be angels, venture capital, hedge funds private investors or any other source of funds.  Lets talk briefly about the balance sheet.

The balance sheet is a snapshot, if you will, of your companys financial position at a given point in time.  It is expressed in terms of assets such as cash, receivables and physical items owned by the company, liabilities, or money owed by the company against those assets and stockholders equity which represents the initial investment by owners and any past profits that have been retained in the business. 

The balance sheet is aptly named because the assets of must equal the sum total of liabilities and stockholders equity.  Said another way, a companys assets less its liabilities is the stockholders equity in the company.  Obviously, this is a very important indicator a companys overall value to an investor.

An investor that is considering funding your company will look to the balance sheet to get an indication of your companys financial strength.  The investor will look at assets to see what your company owns.  Large amounts of cash and marketable securities, sometimes called liquid assets or current assets, are attractive as they give a positive indication of the ability to meet near term obligations.  Other assets such as intellectual property and brand names could also be attractive because the potential to monetize those assets is sometimes substantially more than the value reflected on the balance sheet.  Large amounts of goodwill, or the amount you may have paid for your company above its book value, relative to total assets could be a red flag due to its intangibility and illiquid nature. 

A view of your companys liabilities gives an investor a picture of leverage, the amount of debt your company is carrying relative to your companys net worth.  In other words, if the company were forced to liquidate could it pay all of its bills and have something left over for them?   A close examination of your companys liabilities will also give the investor an indication of how much cash will be required to meet near term obligations and, by comparing to assets, your companys ability to meet those obligations.

 

In addition to telling a potential investor how much equity the owners have in your company the stockholders equity section of your balance sheet will also give an investor insight as to how much money has already been injected into your company, the number of outstanding shares in your companys stock and your companys use of earnings.  The line entitled additional paid in capital and shares outstanding lines plainly tell an investor how much capital has been put into your company and how much stock you had to issue in return for this capital.  The retained earnings line will tell an investor how much of past earnings you have retained in the company.  A historical analysis of the retained earnings account will also give an investor hints regarding dividends.

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Business Plan-Ratio Analysis of Financial Information

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

Entrepreneurs seeking capital from investors frequently find that the financial projections they provide are broken down and analyzed using ratios.  Every investor has their own idea of what is important and what ratios best reflect that aspect of performance.  Many times the task of keeping up with these and understanding them proves tedious and time consuming for an entrepreneur that has a business to run.  I advise entrepreneurs faced with sorting out this type of information to think of ratios in five broad categories.

First of all there is profitability ratios.  This category includes ratios such as return on equity, return on assets, earnings per share, return on sales and, In short these ratios express net income in terms of a percentage when divided by a chosen return criteria.

 

Next there are solvency ratios.  These help an investor determine the ability of your company to meet near term financial obligations.  The most popular solvency ratio is called the quick ratio which is the sum total of your cash, marketable securities and accounts receivable (from your balance sheet) divided by current liabilities (also from your balance sheet and typically defined as obligations due within 30 days).

 

Activity ratios give investors a sense as to how fast assets turnover within your company.  This also gives important insight into cash flow.   For example, receivables turnover (credit sales divided by average accounts receivable) calculates the rate at which receivables are collected.  A higher number indicates that you are collecting receivables more quickly and are hence bringing cash into the company more frequently.  Likewise inventory turnover (COGS divided by average inventory) give an investor a sense of how efficiently inventory is being managed.  A high inventory turnover means that product is being sold much sooner after hitting the warehouse and hence turning into cash more quickly than a product that lags in inventory before being sold.

Capitalization ratios such as financial leverage (Return on Investment  Return on Assets)  and debt to equity gives investor a sense of importance of debt and equity in your companys capital structure.

Market ratios are very important to investors as they will ultimately play a part in the value an investor places on your company and the amount of stock they will require in exchange for investment.  Two very important market ratios that companies seeking capital should understand are price to earnings and return on investment.

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Business Plan-Cost Categories Cost of Goods Sold (COGS) and Overhead

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

Let’s take a few minutes to discuss two major cost categories from the perspective of an income statement, cost of goods sold, sometimes called COGS, and overhead. When an investor is reviewing your historical and pro-forma income statements they will want to understand which costs are necessary to provide the product or service you sell and which cost support your business from an administrative standpoint.

Cost of goods sold, many times called COGS for short, is the sum of all costs directly associated with the product or service your company provides. This could be items such as raw materials and labor for a manufacturer, the cost of inventory for a retailer or cost of delivering web based services for a technology company. Cost of goods sold is important to an investor because subtracting this number from revenue allows them to determine how much raw value, if you will, your product creates (called gross margin) and how much your company can afford to spend on overhead and still generate an acceptable return.

Overhead, sometimes called indirect costs, is the sum of all costs of doing business not directly associated with providing the goods and services your company sells. This could range from accounting costs to legal costs to insurance to rent to salaries for management. It is important for an investor to understand overhead so that they can determine how much cost can be curtailed in times of slumping sales or falling prices without compromising the base function of delivering goods and services.

A detailed understanding of cost is important for investor and manager alike so that your business can perform most efficiently and maximize return by continually eliminating excesses.

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Business Plan-Income Statement and Investors Interpretation

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

 Lets take a minute to talk about your company’s income statement.  The income statement, by determining profit, measures the success of your company’s operation over a given period of time.   Plainly put, the ability to consistently generate profits is the ultimate indicator of your company’s viability.

The income statement is divided into two sections, revenue, the money generated from the sale of goods and services, and expenses, the money it costs you to generate those goods and services.  The dollar difference between these two sections is called net income, earnings or profit.

 

Revenue and expenses are generally divided into sub-categories so that investors can more easily understand how businesses generate revenue and incur expenses.  For example, if your company generates revenue by selling products and providing services it is a good idea to show an investor how much revenue comes from each source.

Likewise, expenses are generally incurred in two ways, those directly associated with providing goods or services such as raw materials or labor, generally referred to as direct costs, and those associated with supporting operations such as rent and management salaries, typically referred to as indirect costs.  The sum of all direct costs is referred to as cost of goods sold, sometimes called COGS for short.  The sum of all indirect costs is typically referred to as overhead.

An investor will want to see your income statement broken down into the appropriate revenue and cost categories so that they can determine your gross margin, revenue less cost of goods sold, and understand how much of that is required to support overhead before delivering a return in the form of profit.

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Business Plan-Debt Financing vs. Equity Financing-Which is Best for Us?

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

 

A common question is, What type of capital structure is best for my company? The answer to that question is individually dependent upon your company, its stage of development and its needs. In the broadest sense there a two types of financing, debt financing and equity financing. Lets take just a minute to consider the broad implications of both.

Debt financing is the infusion of capital by an investor in exchange for an agreement or repayment and interest over a specified period of time. Debt is usually backed by collateral and subject to other restrictions the investor may impose to secure their position. Common examples of debt capital are loans and the issuance of bonds. Debt may be an attractive means of securing capital for your company because you are not required to give up equity in exchange for the infusion.

However, carrying debt on your balance sheet requires that you have sufficient cash flow to make periodic interest payments, projected resources to pay off principal at the time of maturity and collateral necessary for securitization. Debt financing is many times not an option for early stage companies because of lack of positive cash flow. An exception could be debt put in place alongside owners cash for the purchase price of hard assets, such as plant equipment or real estate, thats liquidation price would be sufficient to cover the amount of the loan

Equity financing is the infusion of capital by an investor in exchange for stock in the company. Equity issued to investors in exchange for cash can take many forms such as common stock, preferred stock or warrants. Common equity investments are those made by venture capital funds, angel funds and hedge funds. Whatever the agreement structure, equity investors expect a return in the form of dividends and appreciated stock value at the time of a company sale or public offering.

Equity financing may be attractive because it allows for an infusion of capital into your company without the immediate cash obligations associated with debt service. Additionally, bringing in equity investors means that youre bringing in new owners and possibly new board members which may a change in the corporate culture. Many times these new owners are experienced businesspeople in their own right and can offer management valuable insight and perspective as your company grows and changes.

While equity financing does not make significant demands on cash flow, except when dividends are paid, it can come at a high price. Equity investors take on a lot of risk when investing in your company at an early state but generally reap handsome returns on their investment at the time of company sale or public offerings.

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Business Plan and Pro-Forma Financial Statements

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Hosted by Mark N. Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

Let's start off this vital part of any capital formation strategy and talk about the building block of your company, its telltale value and how well the company is doing by its financials.

Entrepreneurs seeking funding and preparing business plans frequently ask me to explain the concept of pro forma financial statements.  Its a very important concept and is a critical part of any business plan.

Pro-forma financial statements put your vision for your company into language private investors to understand: dollars and cents.  Pro-forma, in this context, is another word for forward looking.  Therefore, pro-forma financials state the financial results that your business plan is expected to generate.  This includes a complete set of financial statements which are a balance sheet, income statement and statement of cash flow, and looks out three to five years. 

Generally speaking, the first year, when assumptions are more clearly defined, financials are expressed on a monthly basis and the remaining years on a quarterly basis.

Making assumptions about your business and market place is perhaps the most important part of assembling pro-forma financials.  Investors generally give more credibility to bottoms up assumptions as opposed to tops down.  An example of a tops down assumption is estimating a market size at say $200 million and assuming that your company will get 5% market share for annual sales of $10 million.  A more credible bottoms up approach would be to assume that you will initially hire five sales people who will each realistically call on two clients per day, close 30% and make annual sales, on average, of $2 million for a total of $10 million in annual revenue.

Macroeconomic assumptions are also a very important element in assembling pro forma financial statements.  When seeking funding the entrepreneur must demonstrate a firm grasp of how the larger economic environment will impact their business.  For instance, is your business sensitive to changes in energy prices?  If so, then what are your assumptions about the coming months and years?  Will your business be impacted by changes in the housing market?  If so, then what do you think about the near to intermediate term housing market?

When analyzing your business plan investors will realize that your pro-forma financial statements are based on assumptions and will discount accordingly.  However, it is important to show potential investors that you have given careful consideration to the real forces that drive your business.  The confidence you inspire will go a long way in establishing credibility.

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Business Plan-Valuation Method - Price to Earnings Ratio

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

One question we almost always get at the Capital Match Point is, "What's on the mind of our investors?" And the honest answer to that is, "A lot." But one thing you can count on that's front and foremost in their mind is the value of your company. The reason they're interested in that is because they want to see how much equity in your company they're going to get in return for a capital infusion, and they're going to go about that in several different ways.

One method that they're going to commonly use, though, is what's called the price-to-earnings ratio. And what the price-to-earnings ratio is is it's, quite simply, the price of your stock divided by the earnings per share of your stock over a 12-month period. For example, let's say Company A's stock price is $20, and let's say the most recent annual earnings for Company A was $2 per share. The price-to-earnings ratio of Company A is 10. Now, the way our investors are going to use this information is, they're going to go out, and they're going to do some research on publicly traded companies in your market space, and they're going to look at an average of price-to-earnings ratios across those companies, and they're going to arrive at what this industry can support, and then they're going to make some determinations about how long it's going to take you to achieve sufficient revenue and sufficient earnings to execute an exit plan, and they're going to make some assumptions about what the stock markets at that point and time are going to have an appetite for in terms of public offerings or sales, and they're going to accordingly assign a price-to-earnings ratio to your company. And it's also important for you to understand this, because what you want to do is, you want to do your own homework so that you can go and, when the time comes, negotiate with the investors and really be prepared to defend the value of your company, because, after all, you're going to be giving up a portion of your equity in your company in exchange for the cash infusion.

And if you think you need help, get in touch with us at the Capital Match Point. That's what we're here to do. We're here to put you in the best position to negotiate when the time comes.

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Business Plan-Valuation Method: Price to Sales Ratio

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com...

Entrepreneurs always ask, "What's the value of my company?" And I usually respond to that question by saying, "Maybe the correct question to ask is, 'What's the value of your company to our investors?'" And that answer is not as straight forward as it seems, because a lot of the entrepreneurs that we deal with here at the Capital Match Point are emerging growth industries, and one of the most common methods of determining the value of a company is a price-to-earnings ratio. Well, in emerging growth industries, the market is usually not defined enough such that there is an earnings history that you can go back and make a real price-to-earnings estimate for companies in that market space. So, a surrogate the investors sometimes use is the ratio called the price-to-sales ratio. Price to sales is very similar in its calculations to price to earnings. Let's take Company A for example. Let's say that Company A's stock price is $20, and let's say that the most recent 12 month period, Company A had sales of $20 per share. Company A's price-to-sales ratio is one. Now, an investor's going to take this information, look back, and, instead of going out and digging up price-to-earnings information on companies in your market space, they're going to look at price to sales, and they're going to use this as an indicator of value of your company, which is ultimately the indicator of what they're going to be willing to accept in terms of equity in exchange for a cash infusion in your company.

It's important to an entrepreneur to understand what their price-to-sales ratio is, again, especially if they're in an emerging growth industry, because they want to be as well prepared as possible when the time for negotiation comes.

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Business Plan-What is the True Cost of Raising Capital?

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com...

A conversation we have with capital seekers early on in the process is, what is going to be the cost of the whole capital raising process? The answer to that, like the answer to a lot of questions, is, it depends, but there are some general guidelines to follow.

The first consideration is the business plan. Does the capital seeker's company have a business plan? Well, if not, they are obviously going to need one. So, they should consider what it is going to take to put one together. If they have the time and capability to write one themselves, great. But even at that, they should also plan on spending at least a month in putting it together. If they do not have that kind of time or need some help with part of it, and if they want to get advisors to bring in to help in writing the business plan, plan on spending $5,000 on the low end and, for a really complex business with a lot of content in the business plan, upwards of $30,000.

Another thing to think about is advisors. Does the capital seeker know enough to catch all the pitfalls of the capital-raising process? If not, advisors may be money well spent. Depending on the type of advisors you get and the amount of time that a capital seeker would use them, $7,500-$10,000 is a good place to start.

Marketing expenses, just think of all the color copies of the business plan, all the flying around to the different presentations and meetings, those costs easily get into the $10,000-$15,000 range.

Legal and Accounting costs. These are probably the costs that you cannot avoid unless the capital seeker happens to be an attorney, and their partner is a CPA. There are documents involved that are going to have to have legal review, and there are financial compilations involved that are going to have to be done by a CPA. I would think a minimum amount to budget there would be $5,000.

You know, how much all in? It is hard to say, but if you wanted to start with a nice round figure, I would think that $30,000 would be a good place to start and then take a real solid look at your business and add/subtract accordingly. If a capital seeker has problems in quantifying this cost or what it may really cost them, I would encourage them to contact us at the Capital Match Point. Because at the end of the day, we are ultimately in the business of maximizing their chance of getting funded.

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Business Plan-What is Fixed Cost and Variable Cost?

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

When discussing financials with capital seekers and preparing the financials for the whole capital raising process, we generally get to the subject of distinguishing between fixed cost and variable cost. It is important to know this, because it conveys some very important information to investors.

First of all, let's talk about what fixed cost and variable costs are. Fixed costs are just as the name implies: expenses that are fixed. These are expenses that you have no matter what your sales are whether they are good one month and bad the next month, the rent is going to be the same, the management salaries are going to be the same. There are a lot of costs of this nature. Variable costs are, as its name also implies, costs that are variable with the level of sales. Examples might be sales persons' commissions. This is a cost you do not incur until a sale is made. If a company makes sales on credit cards, the merchant fees that a credit card company charges are not incurred until that sale is made.

The distinction between fixed cost and variable cost are important, because it helps investors to determine two very important financial ratios when evaluating a company; the burn rate and the break even analysis. The recommendation I always make to capital seekers is, if you do not feel comfortable categorizing your costs between fixed and variable, give us a call at the Capital Match Point. We deal with this a lot, across a lot of different industries, and we will be happy to help. Because at the end of the day, we are in the business of maximizing the opportunities of capital seekers to get that funding.

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Business Plan-What is EBITDA?

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

You know, another financial term that an entrepreneur may hear when they start the capital raising process and start to communicate with our investors that they may not typically hear is a term called EBITDA. And what is EBITDA? Well, EBITDA is really an acronym. It stands for "earnings before interest, taxes, depreciation, and amortization. "The second question is usually why is it important? Well, what EBITDA does is it strips away a lot of the structural and non-cash expenses associated with the company. It really allows and investor to make and apples-to-apples comparison of two different companies.

The question usually comes up, well aren't interest, amortization, and depreciation all legitimate expenses? Yes, they are, and interest and taxes, those are cash expenses. But at the end of the day, those expenses are more structural than they are operational. So, what our investors try to do when they are trying to get a real sense of the company and the earnings potential is strip away all of those structural expenses and look at the real income generated by the operations. That will allow that to make some really apples-to-apples comparisons against another company they may be considering for investment.

A couple of watch-outs regarding EBITDA. It should not be used as an inference of cash flow. That is always a temptation, but it should not be used as an inference of cash flow, because EBITDA comes from the income statement. An income statement is very susceptible to interpretation of accounting principles and gap guidelines. I would caution anyone against using it as an inference of cash flow. Second thing about EBITDA is that it is also a good internal metric for management in that it shows management the performance of the company within their boundaries of influence.

If an entrepreneur has any questions about EBITDA, would like to really dig into EBITDA, understand it, and maybe do some EBITDA calculations for their own company, I would encourage them to give us a call. Because at the end of the day, we see this a lot, and we are here to help maximize our entrepreneurs opportunity to get funded.

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Business Plan- What is Burn Rate and Why is it Important?

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

Once an entrepreneur gets in the throes of the whole capital raising process, one of the terms they hear is burn rate. A lot of times, we get the question, what is burn rate? Well, classically defined, burn rate is the rate at which a company will exhaust its capital base. Let's take an example. Let's say a company has a burn rate of a million dollars per month. That means that they will exhaust a $12-million capital base in a year. Burn rate is synonymous with negative cash flow, and this is important to investors for a couple reasons.

#1, an investor wants to know if the money that they are putting into the company, or potentially putting into the company, I should say, is enough to sustain the company until it can reach positive cash flow.

#2, that is going to give them some indications as to whether or not another round of fundraising is going to be necessary before the company is up and on its own.

Also, investors typically look at companies in light of their ability to reduce their burn rate when revenues do not meet projections. This is important for two reasons as well.

#1, a lack of cash just diverts management attention from the crucial business of running the business, the day to day operations.

#2, a lack of cash severely hamstrings growth necessary to reach positive cash flow and eventually exit. It also prevents the company from taking on new customers.

If an entrepreneur has any questions about burn rate, how to calculate it, and what it really means, I always recommend that they contact us or give us a call at the Capital Match Point. We have seen this a lot. It is a topic we deal with daily, and we would be glad to walk them through it. Because at the end of the day, we are in the business of maximizing our entrepreneur's opportunity to get funded.

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Business Plan-Cash is King: Cash Flow & Case Management

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

One piece of advice that I would give an entrepreneur, no matter what stage their company is in, is that cash is king. I know that it is cliché, but it is nevertheless true. Cash flow is, in a lot of ways, the company's key to survival. Experience has taught me a lot of things about cash management, but there are a few specific pieces of advice and insight that maybe I can offer.

The first thing I would do would be to set a cash plan. Just like a budget. Set a plan. The second thing I would do would be to set goals. For instance, a cash goal might be t say by "X" date, we are going to have three months operating cash on hand at all times as an emergency fund. The third thing I would do would be to set some rules about the use of cash. For instance, you might say that any cash or purchase disbursement not in the plan has to get prior approval.

Periodically, take projected economic conditions into account. Have they changed since the last time you updated your cash plan? Are they different? What does that mean for my customers and my ability to collect payment?

The next thing that I would recommend is obviously to watch your receivables. If you sell on credit, you have to have continual flow of receivables. That does not mean you have to go out and offend your customers, but you could tactfully but firmly collect the money that is due.

The third thing would be to take control of what cash items in your plan and move them around such that you could smooth the flow of cash in your company. Other items you can move up when you have a lot of money or move back to times where you have more money. Take that into account and construct your cash plan accordingly.

Last thing, revisit the plan often. Make sure it is updated and make sure it is evergreen, so that it is always a meaningful document to everyone within your company. If an entrepreneur is putting together a cash plan or is having cash flow issues and would like some insight into doing this, I always encourage them to give me a call. We get a chance to see a lot of companies, and, at the end of the day, it is our business to maximize our entrepreneur's opportunity to get funded.

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Business Plan-Cash is King: Cash Flow & Case Management

Watch this video now:  http://capitalmatchpoint.com/content/business-plan-cash-king-cash-flow-case-management

         

Hosted by Mark Bass, MBA, The Capital MatchPoint, 770.433.8250, http://capitalmatchpoint.com

One piece of advice that I would give an entrepreneur, no matter what stage their company is in, is that cash is king. I know that it is cliché, but it is nevertheless true. Cash flow is, in a lot of ways, the company's key to survival. Experience has taught me a lot of things about cash management, but there are a few specific pieces of advice and insight that maybe I can offer.

The first thing I would do would be to set a cash plan. Just like a budget. Set a plan. The second thing I would do would be to set goals. For instance, a cash goal might be t say by "X" date, we are going to have three months operating cash on hand at all times as an emergency fund. The third thing I would do would be to set some rules about the use of cash. For instance, you might say that any cash or purchase disbursement not in the plan has to get prior approval.

Periodically, take projected economic conditions into account. Have they changed since the last time you updated your cash plan? Are they different? What does that mean for my customers and my ability to collect payment?

The next thing that I would recommend is obviously to watch your receivables. If you sell on credit, you have to have continual flow of receivables. That does not mean you have to go out and offend your customers, but you could tactfully but firmly collect the money that is due.

The third thing would be to take control of what cash items in your plan and move them around such that you could smooth the flow of cash in your company. Other items you can move up when you have a lot of money or move back to times where you have more money. Take that into account and construct your cash plan accordingly.

Last thing, revisit the plan often. Make sure it is updated and make sure it is evergreen, so that it is always a meaningful document to everyone within your company. If an entrepreneur is putting together a cash plan or is having cash flow issues and would like some insight into doing this, I always encourage them to give me a call. We get a chance to see a lot of companies, and, at the end of the day, it is our business to maximize our entrepreneur's opportunity to get funded.

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Business Plan-Financial Statements That Will Stand Up to Investor Scrutiny

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Hosted by Mark Bass, MBA, The Capital MatchPoint, 770-433-8250 http://capitalmatchpoint.com

I work with a lot of entrepreneurs seeking capital and putting together their financials. The question that always comes up is, what do the financials really need to contain to stand up to the scrutiny of sophisticated investors? Aside from the obvious, which is they need to be believable and the assumptions need to be able to be backed up and defended, there are basically five points that I give an entrepreneur to use like a check list.

#1, have a complete set of financials. This includes historical, en pro-forma, balance sheet, income statement, and statement of cash flows. Always be advised to look forward at least three years, five year if you can, but at least three. For the first year, summarize your information on a monthly basis. For years following that, do it on a quarterly basis because looking that far out is not that good.

#3, include historical financials as far back as you have accurate information. I say this because we work with a lot of companies in the early stages of development, and there may not be historical financial information back very far. So, go back as far as you can but do not go back any further than you have accurate information. Because at the end of the day, accuracy trumps history.

#4, make sure that your business plan and what you say in your business plan in your market analysis and your competitive analysis, make sure those hang together. Because if an investor picks up a business plan that says one thing and then looks at a set of financial that says something else, it is not going to make sense to them, and they will start to ask a lot of questions, and, in turn, the credibility of the whole plan in general is going to be called into question.

#5, dot your i's and cross your T's. Make sure your balance sheet balances. Make sure your costs are properly categorized. Make sure that the investor can take your three financial statements and do a flow-through analysis, and it makes sense to them. Because, at the end of the day, our investors see a lot of business plans, and what you do not want to do is give them an excuse to pass on yours.

When putting together financial statements, I always recommend that is an entrepreneur has questions, to give us a call.

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The Most Valuable Secrets to Raising Capital.Use These!

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Hosted by Ken Honeyman, The Capital MatchPoint, http://capitalmatchpoint.com

Should raising money in today’s economic climate be the equivalent of “pulling teeth?”  NO!  We know.  We’ve been on both sides of the fence, as entrepreneurs raising money and as professional investors.  We have used our experience and built the Capital MatchPointTM to address this daunting task and make it easy for the capital seeker and capital provider to come together with common goals.  That’s just the first, all important step…to get you in front of the right investors who’ll look at your deal.

Here are 10 valuable secrets as you plunge headlong down the path of raising capital that you MUST consider…  

1.         Who are you dealing with? Every capital provider, be they an angel, venture capitalist, private equity firm, or your favorite crazy, rich uncle, has their own set of investment guidelines they follow when making investments.   You should learn as much as you can about the people you will be asking to become a part of your company.  In today’s internet age everyone has a website.  Visit the on-line home to potential investors to learn about them and their investment strategies.  They will do the same to you.  Typical rules include geographic focus, investment stage preference, lead/follow-on investor, minimum and maximum investment amount, industry focus and board seat requirements.  Make sure that the strategy of the firms you are targeting match your funding needs.  Use the Capital MatchPointTM to automate this exercise.

2.         Get personal. If you’re cold calling, stop the insanity!  It just doesn’t work.  You’ll hear the expression, “Deals thrown over the transom,” more than once.  It means someone just tosses their business plan over the door hoping someone finds it, reads it, falls in love with it and funds it.  We built the Capital MatchPointTM to eliminate this practice by selecting quality business opportunities and matching them with quality investors.  Capital providers are looking for good investments and tend to prioritize personal introductions.

3.         Get to the point, will you? You’ve secured your first meeting with the person with the money.  Hooray!  Now, get right to the point.  Time is money and if you’ve gotten this far, don’t waste their time or yours.  I’ve sat through countless meetings with a capital seeker looking for money; they usually have a great idea or concept, but can’t articulate it and loses me in minutia.  Be crisp.  Be clear on what you do, who buys your products, how you make money, and how you plan to grow.  Keep presentations under 12 slides and executive summaries under 2 pages.

4.         Is your team the right team? Does your founding team have the passion you do, or does cousin Eddie think he can help because he has knows someone who knows someone?  If you don’t have people on board that have the unique combination of experience, passion and who are smarter than you, it’s going to be a tough grind.  You don’t have to have a complete executive team, that’s what the new money is for.  Be flexible and be willing to listen and give up some portion of the deal to the capital seekers…and don’t think they’re interested in giving you a simple loan and you’ll pay them back when it gets huge, that’s for rookies.  One of my old mentors, the late, and very great Hy Federman used to say, “Money is honey, use the company’s paper as wampum for trade.  Never be afraid to give up equity for cash.”  It’s true. 

5.         I’m different…I really am! If you don’t know who your competition is and why you’re better than they are, at least after funding, then save the trip.  Everyone has competitors.  Those that say they have no competitors are not believable.  Directly present yours and the measurable difference your product or service offers.  Identify them, don’t be afraid of them, and make your deal better than theirs.  After all they were there first and can be picked apart for weaknesses.

6.         The ROI. What is your value proposition to the customer?  How does your business save time or money or both?  What is the cost to the customer of not using your product or service?  Show the investor how darn valuable your product or service is to the market you address.

7.         The real market size may not be as big as you think. Who exactly are your customers and what is the real market you are serving? Don’t be expansive.  Be realistic.  What is the exact size of the addressable market of purchasers of your product or service?  Don’t use “fuzzy math”.   If you tell the capital provider “if we capture 1 zillionth of 1% of the market we’ll make billions!” your credibility will be called into question.  The people with the money have resources necessary to corroborate or refute your claims.  After all they have the money for a reason. 

8.         Know your numbers! How will your company spend the money and how does this all come together to break even and make a profit?  Explain the key business drivers such as number of customers, sales per customer, cost per customer etc. Show a bottom-up analysis of how many customers you need to hit your numbers.  Be prepared to discuss what you would do with more money and how you could make it with less, which is usually what the capital provider wants to know.

9.         Tell me how I exit. These days, the public exit strategy is dead, and I mean DEAD!  Don’t even go there.  Assume the only way for your investors to realize a return (what this is really all about) is an acquisition of this wonderful business you are going to create.  Provide tangible examples of recent and related acquisitions by at least three different categories of potential acquirers (suppliers, distributors, competitors).  Be prepared to cite five companies in each category to show that there are plenty of viable of exit options.  Oh, and don’t forget to tell the investor the time line to harvest his reward.

10.        Valuations come last. Valuations for start ups and early stage deals are virtually worthless, so don’t get too excited. If there is virtually no operating history and financial data is spotty, be realistic.  DO NOT use the words “it’s based on conservative numbers”.   Early stage valuations are subjective, so get over it.  Your first round of investors will probably own 30%-50% of the business.

Keep these 10 points in mind when you set out to build your business plan, build your company and seek the capital you need to forward it.

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Raise Money-Part 5: 50 of the Worst Business Mistakes You Can Make

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Hosted by Ken Honeyman, CEO, The Capital Matchpoint, 770.433.8250, http://capitalmatchpoint.com

The fifth and final part to the 50 of the Worst Business Mistakes You Can Make deals with everything human.  People are elemental to your success. They are the lifeblood of any business, so if these mistakes are not identified and addressed, youre business will be doomed. Lets examine what these tried and true problems are.

Do not make these mistakes with your people:

1.Insularity: Detaching yourself from the people around you is an excellent way to destroy your business.

2.Unwillingness to Talk & Share With Competitors: Networking is a powerful part of business. If you fail to network effectively, you will surely crash and burn.

3.Poor recruits: Pay close attention to who you recruit and hire.  Look for employees that will stay for the long term.

4.Badmouthing Competitors: You dont have to like your competitors, but you do have to cooperate with them.

5.No Benefits: Offering benefits to your staff is the best way to keep them around. If you dont offer any incentives, they will go on to bigger and better things.

6.Staying Informed: Stay informed with what is current in your industry, or your competitors may pass you by.

7.Keep Things Fair: Keep things fair with your competitors. Dont steal ideas or products. Respect one another even if you are competing.

8.Cold Calling: Cold calling is not the answer to networking. Meet your contacts in person first.

9.Getting too personal: Getting to know your networking contacts is a great way to spread the good word, but getting too personal can be a deal killer.

10.Drinking at social events: Just because there is alcohol where youre networking, that does not mean that you should drink! Stay sober.

At the Capital MatchPoint, were here to make sure these wont be mistakes but addressable items that you can prepare for.  Call us at the Capital MatchPoint and well mentor you through the minefields and youll be prepared to further your business and raise the capital you seek.

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