How to Go About Obtaining Private Equity
I can’t tell you how many times over the past five years I’ve been asked, “How do I go about getting equity financing?” My first response is, “What makes you think equity is right for you?” (Have you considered debt?) While you see your company as a terrific investment, professional equity investors see it, and the world, through a different lens. That’s because less than 25% of all equity investments result in a significant positive return. So less than 5% of companies that seek private equity each year receive it. And when you consider that 75% of those investments are in companies that have received private equity before, the odds for a first-time seeker are even smaller.
If, despite the odds, you still decide to go for equity financing, you need to live by the following principles:
Make sure they know that you want to make money. This is the big one, and you can’t take it for granted. Everything you do has to impress a potential investor that you are focused on creating value for your company and cashing in on it.
Run the process as if you’re an investment banker and your company is your client. The more professional you are — not just in your interactions with potential funding sources, but at every stage of the process — the greater the likelihood that you’ll secure the financing you need. This means you need to:
Wait to seek them out until you’re really ready. You need to maximize the first impression and be ready to act if the first response is positive. Be more prepared than a Boy Scout: Your presentation, business plan and financial projections and your due diligence documents have to be as good as you can make them before you ever go out the door.
Prepare yourself... and your company. Obtain sample financing agreements so that you’re an educated prospect and know what to expect along the way. Make sure your business plan emphasizes the things investors are most interested in: A significant market opportunity, a sustainable competitive advantage, a realistic look at the risk factors and competition, and, most important of all, their potential return on investment and the strength of your management team. This means you need to bring your senior executives into the loop so they can put their best foot forward.
Identify the right target investors. To increase their odds of achieving a high rate of return, equity investors tend to specialize in certain areas. Be sure your company fits their focus. Are you in the start-up, development or growth stage, and do they concentrate on your stage? How much will you require over time, and is that their typical deal amount? Do they have experience, expertise and contacts in your industry?
Conduct a two-way courtship. They’ll be with you until they sell their shares, so interview them and check their references. Spend time talking to them so you can figure out what they’re like to work with in good times and in bad.
Negotiate like a pro.And hire a lawyer who knows the ropes. Too often inexperienced entrepreneurs or lawyers waste valuable time, energy and goodwill over unimportant and unrealistic deal points.
Close. Sounds simple, but many deals die not because of their merits, but because the entrepreneur doesn’t drive to a close. Many deals fall apart at the eleventh hour. To avoid being left out in the cold, keep all your leads alive and don’t rest until the all the papers are signed and the money is in your bank account. And remember that if they haven’t said no yet, that doesn’t mean yes.
DROOMTM (Don’t Run Out Of Money) Don’t wait to finance your company until you’re running on fumes. It’ll put too much pressure on you during an already stressful time, and desperation is never attractive.