RSS feedsAs the financial crisis deepens and the corporate environment gets tougher, traditional forms of funding, such as bank loans and share placements, have become rarer. Other sources of financing, such as traditional hedge funds, are suffering.
But there are still companies looking to grow and, with funding still available from innovative sources, it is important to be investment ready.
History has shown that some of the world’s best companies have risen from the ashes of nasty downturns. They can choose to ride it out in one of two ways. They can sit tight and simply wait for an upturn or they can see turbulent times as an opportunity to take market share from less active rivals and revamp their products, services and balance sheets. In fact, the best time to launch a new concept can be in a downturn – when times are tough, people are particularly concerned with buying a good product. During the great depression, Proctor & Gamble invested in its brand and emerged as the strongest company in its market. In the US recession of 1981, IBM marketed the first PC.
Laying the groundwork
The key for companies of all kinds is to give themselves a head start when looking for financing.
Don’t wait until an opportunity has arisen but start building relationships with investors before you need the cash. Too many companies treat their capital partners like a one night stand and are only in contact when they need investment. But investors should be treated like any other component of your supply chain. Talking to them early and getting to know them ahead of needing a transaction can help build trust and the relationship essential for a quick decision when you actually need it. Getting your hands on cash quickly can make the difference between taking advantage of an opportunity, such as a time-sensitive acquisition, or losing it.
If you are establishing your investor relationships through an adviser, such as a nominated adviser (nomad), make sure you pick the right one. An intermediary should not only be a facilitator; you should make sure they could truly broker a relationship and make a real contribution to meetings. Check your adviser’s credentials in this area.
When approaching the pitch, make sure you do your homework on the investor. Learn about the company and the people you are meeting ahead of time. Many people fall down because they adopt a ‘one-pitch-fits-all’ approach. Each investor will have a different background; be sure you know what it is and don’t talk down to them if you know they are specialists. For instance, I once had the non-technical CEO of one business come in to pitch for investment in his business making aerials for mobile phones. I have a career in technology – I was once the vice president of a large cellular business and my first job happens to have been in aerial research. He assumed I had no knowledge in the area and made inaccurate technical claims. I have no idea if he raised money but he certainly didn’t from me.
That particular CEO missed more than just an investment opportunity. Investors can offer more than just money. When presenting your opportunity give room for ideas and innovation from the investors. They have cut more deals than you and can sometimes create options you may have never thought of. Take investors’ counsel – they can have good ideas and put you in touch with the right people, such as relevant contacts in the academic world. Such contacts can potentially yield fruitful help on the research front.
Knowing an investor’s needs is just as important as knowing their background. An investor has objectives too, so make sure they understand the benefit they will receive from investing in your company. Too many people just present the solution to their own investment problem, not the opportunity for the investor. For instance, if you know they need a two-year exit, tell them how that option is available through an investment in your company.
The pitch itself
It sounds obvious but, when it comes to the pitch itself, your job is to make the investor understand your company. I am constantly amazed by how many companies fail to really articulate what their company is all about, what makes it unique, what their vision is for its future, what their game-changing plan is. Rather than tell me about their products, their markets and their competitors, too many companies focus solely on the balance sheet, the financials. In short, companies need to sell their story.
Start with clearly articulating your business sector. While you might find an investor with a background in your industry, the chances are they will not be. Make sure you take the time to educate them and make things very clear. While I do know about mobile, for instance, I have been pitched to on plenty of subjects I know little or nothing about, from tin mining in Iceland to exploding chocolate reindeers!
Then make sure you are clear on the basics – who you are, your main products, your place in the market, your customers, your competition and your financials. In particular, where a business is placed in the market is so often missed and it undermines a company’s credibility if the response is a fumble. The same goes for financials. If both the CEO and CFO are pitching, make sure they are both familiar, comfortable and bulletproof on the numbers. I once had the CEO and CFO of a company ask for £10m and neither of them could explain their own financial model. We ended up having a working session on their numbers, when it should have been a presentation.
Dry run the presentation to make sure you are comfortable with it and have not missed out what inspired you. Inspiration is what the company is built on. Investors back people as much as business plans, if not more so. In a recent discussions with several top venture capitalists, I learned they spend 30% of their time finding executives like CEOs and CFOs for their portfolio companies. Why? Because they know people who have made money can make more.
Finally, tell the whole truth. Investors need to trust. Fuzziness on potential problems and white lies are counter-productive. They do not build a healthy relationship. Don’t ever lie, even if there is an issue. Breaking trust can mean game over. I had one CEO tell me he was moments from closing a deal with a major telecom company. I knew that telecom company well so I called and discovered that the CEO’s company had been kicked out of the process three weeks earlier. Needless to say, our talks stopped at that point.
The overall issue here is that investors can help companies to meet their objectives only if they understand the company and those objectives.
Those companies that are wise enough to seek advice and share information are most likely to survive and thrive. Companies should pursue capital in an effective manner, because if they don’t, then their rivals will.
Preparing for investment
As the corporate environment grows tougher, now more than ever it is important to be investment ready. With strong competition for available financing, here are some tips on how to stand out to potential investors for companies seeking finance.
- Manage your capital partners. Start talking early to investors, before you actually need the funding. It builds trust and a faster and more flexible process when you do actually need the cash.
- Be careful when picking your adviser. Get yourself an adviser who can truly facilitate and broker a relationship.
- Learn about the people you are meeting. One pitch doesn’t fit all. They will have a variety of backgrounds and might have some ideas for your business and contacts that can help you.
- Understand investors’ needs. Don’t just present the solution to your investment need. They are also looking to meet their own objectives. Show them how they can through investing in your company.
- Be able to clearly articulate your business or sector. Investors may not be experts in them. Educate the investors.
- Be very clear about the basics. Who are you? What are your main products? Where do you sit in the world – your markets, customers, competition and financials? And don’t miss out the inspiration.
- Be very clear about what you need the money for. How this will support growth – have a game-changing plan.
- Be clear and tell the whole truth. Investors need to trust – fuzziness on
potential problems and white lies are counter-productive. Break trust and the
game is often over.
Paul Strzelecki is managing director of structured
finance house Yorkville
Advisors UK LLP
