Preparing your business for outside investors
Just like staging a house for sale, business owners interested in attracting outside investors need to primp and prep. If your business is fast-growing, scalable and has potential to serve a global market, you may be a candidate for venture capital.
VCs, as they are called, tend to invest mostly in Internet-oriented companies, life sciences companies, biomedical devices and software. In 2008, before the economic slump and recession, VCs invested $30 billion in 4,156 deals.
“VC investing in 2012 will fall short of the nearly $30 billion invested in 2011 but will exceed the $23 billion invested in 2010,” said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US.
“Software and Internet companies continue to be attractive industries for VCs since most of these companies tend to be capital efficient and don’t require large amounts of capital to operate.”
New technologies are a sweet spot for venture capitalists. For example, PixelOptics, a Roanoke maker of high-tech eyeglasses, has attracted about $100 million from venture capitalists, according to Brett H. Craig, president and CEO.
The company, which holds about 300 patents, adds liquid crystal to prescription lenses so they can change focus with an electronic signal. Swiping the ear piece of the glasses instantly changes them from distance to reading glasses. The glasses retail for about $1,200, but company officials said the price may fall as they increase production.
Craig said the target market for PixelOptics’ emPower® glasses is baby boomers and tech-savvy people who are tired of wearing bifocals or progressive lenses. PixelOptics has attracted outside investors because it has the right mix of innovative technology, strong management and a potentially huge global market. Prior to joining Pixel, Craig was the president and chief operating officer of Transitions Optical, the largest maker of lenses that darken in sunlight.
If you have the magic formula of a great product and huge marketing potential, here are some tips.
“Private investors are all about the exit strategy,” said Carol Nichols, managing director of Circle C Ventures LLC. The Dallas-based company invests in a variety of companies.
“Investors want to know when am I going to get my money back and how much?” she said. Despite economic conditions, VCs still want to earn 10 times their initial investment.
Like other VCs, she’s always looking for attractive investment opportunities. But before she invests any money, she needs to hear ‘the story.’
“Often a small business owner doesn’t have the financial staff, a CFO or controller to tell the company story in a way that is persuasive to a sophisticated lender or investor,” said Nichols, who worked as a banker for 26 years prior to co-founding the Texas Women’s Venture Fund.
Nichols said step one on the road to financing is to determine how much and what kind of capital you need to grow your business.
“If you don’t have personal assets, then you need other people’s money or OPM,” said Nichols. “That’s when I ask company executives, ‘Who is going to listen to your story?’”
When your goals are clearly articulated, it’s time to ask yourself, ‘Who knows you, who trusts you and who has made money with you before?”
Nichols said this question often stops business owners cold. “But, if friends and family won’t lend you money, why should a stranger?”
Another barrier to attracting outside financing: If you are lucky enough to find investors, be prepared to step aside.
“Often the person who has invented the product or the company’s current CEO is not the one who can take the company to the next level,” Nichols cautioned.
When it comes to her own funds’ investments, Nichols said she looks for well-managed, fast-growth businesses, including “leading edge biotech.”
“Companies needing $5 million to $10 million are my sweet spot,” she said, noting that as soon as the money is in the door, the management team needs to be able to discuss who will buy the company.
Meanwhile, things are definitely looking up for companies seeking outside investors. Venture capitalists invested $7 billion in 898 deals in the second quarter of 2012, according to the MoneyTree™ Report from PricewaterhouseCoopers LLP and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly venture capital (VC) investment activity increased from the first quarter of 2012 when $6 billion was invested in 809 deals.
The number of early-stage deals reached the highest quarterly total since Q1 2001, with $2.1 billion going into 410 deals.