Archive for category Exit Plan
Talking money for money with a potential investor
Posted by Steve in Capitalization, Exit Plan on March 1, 2010
Money for money? An investor is going to put money (or something else in your company) and then get money (or something else out). People start throwing around fancy terms like stock, warrants, debentures, etc. Okay, maybe some of those terms are not that fancy, but I like to keep it simple.
What can the investor give you?
What can you give the investor in return?
It boils down to this:
1. What and when do they pay in?
-cash
-effort
-stock in something else
-preferred pricing
-goods & services from another company free or at preferential pricing
2. What do they get for it?
- stock
- sell at IPO
- sell earlier
- when do they get the stock
- can they sell the stock back to the company
- can they buy more stock (warrants)
- preferred pricing on product
- cash out
- other rights
As a reminder, it boils down to these basics. Before you get too fancy, find out what they can provide and what they want! They means investor.
Bottom Line it to the Investor in the Executive Summary: How will you pay them back
In this series of installments I am discussing the executive summary and how to make it stand out. The executive summary should present the compelling reason for the investor to buy into the company.
Another common mistake is that entrepreneurs do not worry about how they will pay back the investor. Imagine you were going into a bank to by a CD. They say it will cost you $5000 but they do not know when it will mature or for how much. Would you still buy it? Of course not. The same thing applies to investors putting money into a business. Without knowing the intended rate of return and when they will get their money out (with profit) why would they invest?
They would not.
The focus on this last section is how much the investor will get out, when, and how. Consider the following two points:
- Are you going public, selling privately, doing an LBO (levered buyout offer), paying back in cash over time?
- How much and when?
Question 1 is not necessarily written in stone. The best way to answer this question is to first consider how do the other businesses in your arena exit? Do they go public, or LBO? The next consideration is what is currently in favor at the time of the presentation: IPO or cash flow stream for example. Any investor knows that you will consider other methods, and this can be discussed in the business plan.
Question 2 needs to be within the typical timeframe of most investors (5 years, ranging from 3 to 7) and for the typical target amount.
The target amount can be as high as 100x the original investment (or more) and as low as 10x to 20x. Anything lower should be like a cash flow stream from the company. A cash flow stream from the company is lower risk, more likely, and thus does not need to be as lucrative.
Investors like to see that the entrepreneurs have considered their point of view. By showing the investor what they will get out of investing in the business, the entrepreneur also shows that they consider the investor a key customer that must be satisfied.
How can studying about investors and entrepreneurs be used?
Posted by Steve in Exit Plan, Introduction on April 6, 2009
Part 2 of 3.
Last Monday (Mar 30, 2009), I Bart Kemper of Kemper Engineering (www.kemperengineering.com) posed a question about why should someone who is not actively seeking investors or being an investor read this blog. How would they use this information? Why is it important?
The first answer is that it provides information that in the right setting can open up more opportunities leading to more clients. This is especially vital for a growing company working in high technology.
This week, let us look at another use for this information: how it relates to the future of the company itself. What is the exit plan?
Will they go public and be considered by the underwriting firm?
Will they merge with another company and have to evaluate that potential merging firm? How will that firm evaluate them?
Will the owners seek to sell the company?
In each case, someone is acting like an investor, the underwriter (and public), the two merging companies, or the buying entity. What if the firm treats the buyer like an investor? What if they prepare like they are seeking funding? The company will increase the likelihood of getting a better price and selling sooner.
Of course, the owners could make it a family business and give it to their children, leave it to other partners to run, or just shut it down and retire.
Next week, we will look at one final, but maybe obvious answer.
Investing in Film – SWVF
I recently attended the Southwest Venture Forum in Dallas, TX. The subject was about investing in a non-traditional business, specifically Entertainment.
Non-traditional companies sound like a misnomer but it really only means non-traditional to VCs and Angels. In the past, they invested in either solutions to specific problems or new technology. With the crisis of the past seven years they are looking more at funding companies with existing revenue and cash flow. Since they are used to technology, up until recently they only looked at companies with new technology.
Non-traditional does not mean they did not use corporate structures like C-corp, S-corp, LP or LLC. In another post, I will discuss that in more detail.
While the focus was on entertainment at the meeting, the discussion can apply to any non-traditional company – to anyone who is trying to get investors in their market changing business:
Point 1: Investors invest in people. The key qualities they look for are values, positive, and thoughtfulness. Film projects previously did not display those values and this was a deterrent. Now, more projects are showing those values which make the investor much more comfortable putting their name with the project.
Point 2: Plans, goals, and the financial return to investors must be at the forefront of any company seeking investment. The majority of film projects did not (and still do not) have a plan for success, goals, or a financial return for the investor. The investor must see that the producer has plans for the money, plans on paying back, and provide very good levels of return.
Point 3: Today, investors are attracted to shorter life-cycles and repeat investments. Film projects are short term when compared to companies. That means, they get the investment, make and distribute their product, and then get a return in much shorter than a company that has to seek out customers and then go public. Within two or three years, film projects can pay an investor and then seek another investment. This is an advantage film projects can leverage over other forms of companies.
Point 4: Investors prefer simplicity and only invest in what they understand. In the past, film projects were too complex and required much expertise from the investor. Film producers would not make it easy for them to understand how they would get their return. The film industry is addressing their complexity on several fronts. First, through technology, the make process has become a lot simpler and accessible to more people. Secondly, the same technology has drastically reduced the costs to where much smaller teams can make the product/service. Thirdly, there is more visibility in their new distribution to the costs which directly affect profit. Fourth, the structure of the investment and payout are simplified to match what an investor is used to seeing.
Point 5: Investors are very technically savvy informed. Film is becoming more technical in the IT arena, and therefore, investors feel they can understand it. This can be leveraged to an advantage by showing investors they have something in common via a common knowledge base.
Point 6: Investors are both wowed by the arts and put on guard by it. They are enamored to be patrons, but at the same time realize that this luxury comes with a price. The challenge for the film maker is to make a business model that works. Your company may be the complete opposite; there is no wow for the arts. However, there is WOW for the cash returns. The challenge is for most companies are to alter their model to make it worthwhile for an investor. Investors need to see an economic basis for the relationship.
Point 7: A successful entrepreneur is one who can identify the challenges and then devise a system to work more efficiently with them or around them. This attracts investors who see these activities as game changers. The film business challenges are bottlenecks in distribution to the theaters and the fixed number of screens. The way the film business has overcome their challenges is through using independent contractors, finding unique and creative offerings and methods to provide a solution, and creating investment vehicles outside the mainstream system.
Likewise, other companies can do the same. One can lower their overhead by relying on efficiencies working with other subcontractors that are not integral to their process.
Point 8: The new model that makes film more attractive is based on breaking down only certain barriers to entry into industry. Through technology, capital investing, and proper financing, the hurdles are lowered. Hedge funds are looking at film projects as investment vehicles.
However, talent and good product are still the major hurdles for film to overcome.
Point 9: Investors should still use a portfolio approach to pick winners. Bet on between four to 10 projects. These faster return projects can also be used to bolster an existing portfolio. By providing return sooner, more cash is raised for the investors’ backers or to be used in the management of the other investments.
Point 10: There are pitfalls, especially because of the business’ history. Look for managers that manage with financial integrity. This includes visibility to the numbers, being upright with the customers (distributors, theaters, etc.), paying people properly and holding people accountable. Film has a very colorful history, and so comes with a reputation. However, due to new managers showing financial integrity and track records, this stigma is being overcome.
Point 11: Businesses need to show what makes them different. Often, this is an element of control over what others deem uncontrollable. In Film that is distribution; but by opening up new marketing channels they are able to display an ability to get to the consumer faster and retaining more of the wealth. In the other worlds, the company needs to find their points of difference to attack.
In conclusion, film is not the traditional vehicle for investors but because film-makers are changing their business model to be more technical, streamlined, and financially accessible investors are seeing them in a new light. The same thing can apply to any company in an industry that is non-traditional to investors.
The company may already be very technical, and streamlined. They need to be more financially accessible to investors by modifying the cash return model to be something they can use. Investors are very eager to find new opportunities, and using this one example of how film has become more attainable to investors, they can seek this source of funding, too.
Exit Plan for this Blog
Practice what we believe.
Years ago, in business school, I participated in the mentor program. A local business person would meet with the student and talk about whatever was on their mind. The idea was that the student would learn from the experience about running a business.
I met Cliff Marquart in the meet-and-greet. I asked him what he did: I buy companies, turn them around, and sell them for a profit. Very succinct (and as we will see later in Pitch, a very good Pitch). I said that I wanted to learn that.
Cliff and I only met a couple of times. In our first meeting, I reiterated his statement; and that I wanted to learn how he did that. His reply, I will never forget: Before you buy, before you get involved and devote your life to it, determine your exit plan. You must have an exit plan.
I do have an exit plan for this blog.
1. Produce material for a book. Publishing a book might mean I keep this blog and address more questions; however, when the book gets published will be the decision time on what to do next with this blog. FYI, I am seeking stories from you, the audience, on how you met some of the elements or did not meet them. We can change the names if you like.
2. Discover the next part of my career. By providing information and serving investors and entrepreneurs I hope to increase my understanding and gain some wisdom. Through continuous growth, I hope we open new doors, to realize the maximum of our potential. When I discover that next phase, l will decide what to do next with this blog.
Have an exit plan. The exit plan for this blog is a book and/or the next phase of a career.