Situation: Now in its 10th year of operation, the business has close to 40 employees and is attracting major clients and larger projects. At $15 million/year, profitability looks good on paper, but cash flow has become a persistent challenge. Bankers don’t like the balance sheet because so much money was drained a few years ago to buy out a partner. There is a core group of capable loyal leaders, but the turnover in lower management positions has been a bit troubling. Department heads, especially the sales manager, often feel understaffed. The President has negotiated phantom stock deals with a few key people so they will receive some extra money upon the eventual sale of his S Corporation.
Question: Would this be a good time to bring on venture capital?
Answer: For venture capital to be considered for this (and many other companies for that matter), the owners would need to do some significant research, already have substantial contacts within the venture capital community, or retain the services of a professional who can quickly sort through the possibilities, initiate contact, and facilitate the negotiations. In other words, they need an intermediary. If this company becomes too distracted making multiple presentations and wasting its time chasing after venture capitalists (VCs) who have no interest or in dead end negotiations with a wide variety of prospective venture capital partners, the growth of the business could be stunted at just the wrong time.
Like any business, venture capital funds have unique positions in the market place. Their specializations often flow from the expertise of the founder or the initial group of investors. While one VC will be receptive to three or four industry segments like biotech, software, and telecommunications, another VC will go deep and wide in a single industry investing in a full range of healthcare-related companies including pharmaceutical, surgical instruments, diagnostic testing devices, nursing homes, and clinics. Another VC firm will really be angel investors and favor start up companies. Another will be looking for companies between $20 and 50 million/year in gross revenue that need $6 – $10 million and be open to a full range of industries. Some VCs favor investments in companies based in the Midwest or New England. Some VCs are busy replenishing their funds while others are flush and ready to make deals. Simple directories don’t convey many of these important distinctions.
I have found that despite the existence of hundreds of venture capital firms, there are usually only 4-5 that will truly match/fit a given company’s situation and needs. Then there are the intangibles.
The President of this company will have made all of the major decisions up to this point in time. If the results of due diligence are favorable and an acceptable deal can be negotiated with a VC, the President will still need to decide if he can work with the people from the venture capital firm over a long period of time. Remember, this president had recently bought out a partner, so there could be some negative history or reluctance involved. Obtaining venture capital involves much more than the transfer of money to the company’s operating account. Typically, the VC firm gets to appoint two board members to the company in which it is investing. Also, even if this President gets to remain the majority shareholder for the first round of VC financing, he now has very interested often opinionated outsiders as partners at his board meetings.
Frankly, during negotiations, it can be difficult for a President to assess how much the VC can be trusted and if he will later be able to trust and respect the VC’s knowledge. Financial negotiations bring incomplete communication, hidden agendas, and often a win/lose mentality. The VC will want the company to be viewed as quite valuable later on, but during initial negotiations, the VC’s priority will be to assign a low valuation to pay as little as possible for as many shares as possible.
With an intermediary facilitating the process, the President and the Venture Capitalist can focus on important issues like the premises behind the valuation formulas and can get to know one another as prospective business partners before a letter of intent is actually signed.
The entire process can be unsettling for Presidents and Controllers who have never experienced negotiations at this level. Even the brightest people will experience alternating days of confidence and insecurity, disinterest and anxiety, etc. However if an experienced intermediary has been involved to select the 3-4 VC firms with the best fit, facilitate the negotiations (as far as each entity will have permitted), and kept things moving along, that same person can be a source of reassurance.
Having an experienced intermediary involved not only results in a business obtaining outside investment faster and more easily, it also permits a company to retain sufficient focus on growing accounts, attracting and retaining top talent, improving cash flow, and making money.
Known as The Growth Strategist®, Aldonna R. Ambler, CMC, CSP helps rapidly growing midsized companies (typically $20 – 200 million/year) realize their goal of Achieving Accelerated Growth With Sustained Profitability® through opportunity/resource analysis, executive coaching, strategic working sessions, and her intermediary role regarding growth financing. Her clients are among the brightest, most ambitious business leaders whose names now appear on published lists of the fastest growing privately held corporations. The recipient of 23 prestigious awards for her success as an entrepreneur and industry leader, Ambler hosts a peer-to-peer Internet radio program, aptly called The Growth Strategist®, which features lively interviews with CEOs of midmarket companies who have successfully executed the growth strategy of the week. She can be reached toll free at 1-888-Aldonna (253-6662), by e-mail at Aldonna@AMBLER.com or online atwww.ambler.com.