Five Key Principles Of Raising Capital According To A Private Equity Investor
(My initial version of this article was originally published on Forbes.)
Raising capital is more of an art than a science. I have had the good fortune to work with world-class investors throughout my career. I have been on both sides of the table in many private equity transactions.
Between my days on Wall Street and currently on Main Street, I have participated in capital placements in the hundreds of millions. At The Profitable Leader, we blend this experience with methods to boost business owners’ systems and profits.Many venturers unknowingly undermine themselves while seeking investment, but you can sidestep the most common mistakes. If you follow the five key principles of raising capital, you will ramp up your chances of success – no matter the size of the raise. Access the art of raising capital and ensure your offering doesn’t end up in the recycle bin.
1. Have the goods.
This is a given. Do the work required to have a well-thought-through business plan. Support it with experience. Include comprehensive backup to instill confidence in your vision. The length, depth and scope of the plan must coincide with the level of investment sought. What works for $100,000 will not suffice for $100 million.
2. Do what you say.
One of the quickest ways to jettison your proposal from consideration is not being in complete integrity with your words and actions. My experience is that if someone can be trusted in handling the little things, they can be trusted in handling the big things. The opposite of this is rarely, if ever, true. Being consistently reliable and timely are fundamental hoops for any proposal to make it further in the process.
My experience is that if someone can be trusted in handling the little things, they can be trusted in handling the big things. The opposite of this is rarely, if ever, true.
3. Don’t be needy.
As Bob Hope said, “A bank is a place that will lend you money if you can prove that you don’t need it.” Many proposals showing up in the “seeking capital” pipeline appear to be Hail Mary touchdown pass attempts. Many principals unknowingly reveal their dire need of investment. They betray their own proposals during the presentation or due diligence phases.
Unless you are prepared to walk away with very little equity, don’t even attempt the proposal if you have no other option. Your best chances of success come from strength. Flip the dynamic. Interview investors to find the right partner for you. Everyone loves to be chosen. The key is having the goods to be the choosing party.
4. Provide full disclosure.
I have a close relationship with the owner of a large regional bank. He believes the most valuable trait of his loan officers is that they have good judgment. Similarly, when my company conducts due diligence on projects, we dig into every aspect of the plan, venture and people. If it’s there, we will find it. It’s this judgment and diligence that determine the success of any investment.
Disclose all information material to the project regardless of perception. If something needs more context, address it upfront. There is no space for appearing that you chose not to share something for any reason.
5. Establish your why.
This is the crème de la crème. If there is a secret sauce in our selecting the best investments and avoiding the worst, this is it. I personally learned this from one of the top investors I have had the pleasure to know – a very public and successful individual. Though it’s much subtler than the first four principles, get this one right, and you can raise all the capital you seek. Even if you meet every other principle, this one can overrule them.
When my company evaluates capital investment requests, this is a non-negotiable for us. We must look beyond the investment, the business and the data. We focus on the principal responsible, the leader of the effort. Our intention is to gain access to the core motivations of the individual. How we do this is beyond the scope of this article, but you can determine for yourself how to influence the result.
A common factor exists in successful investments: The key leader of the venture is a team player with a strong sense of making an impact beyond themselves.
As the saying goes, “There is no I in team.” A common factor exists in successful investments: The key leader of the venture is a team player with a strong sense of making an impact beyond themselves. They may have a sense of service, a higher vision or a desire to benefit others around them. This can be through the business, its profits or its products. In short, the focus is not solely on the leader and their brilliance, greatness or expertise.
Another common factor is usually present when a post-mortem of avoidable failed investments is being performed: Often, there is a significant influence of an overactive ego in the leader or key personnel. Again, this is subtle. Investors seek leaders that see themselves as certain, powerful and confident, but the key is that these personality traits are not a centerpiece. If there is no space for others in the leader’s life before an investment, it is unlikely they will welcome an investor’s influence afterward.
In my college days, one of my earliest mentors gave me valuable wisdom. He said, “Dan, it doesn’t matter how good the business is or how much money it makes. People can mess it up every time.” Proper application of this fifth principle screens out the majority of people who undermine the effort. The takeaway here is that you must be a leader whose “why” is greater than a need for your own recognition.
In summary, the majority of the five key principles have little to do with the merits of the investment proposal itself. Investors are keenly focused on who they are betting on. Who that individual is and how they handle themselves speaks volumes about the odds of success for the investment.
Utilizing these five principles maximizes the chances of success in raising capital. However, a word of warning: You can’t fake these principles. Savvy investors are excellent judges of character. Do the work required to be authentic and transparent. It works.
P.S. Whenever you’re ready… here are three ways I can help you stop profit leaks and surprises and maximize the value of your company:
1. Take a deeper dive into The Private Equity Perspective™ and discover the next steps to create more predictability into owning your business. Just message me "PE Perspective" to receive it.
2. Join Our Implementation Program and be a Case Study: I’m putting together a new case study group inside Boardroom. If you’d like to work with me on minimizing stress and surprises while boosting your bottom line, send me a private message and put “Case Study” in it. I’ll get you more info.
3. Work with me and my team privately: If you’d like to work directly with me and my team to increase your profit margins and ease in your business… just send me a message and put “Private” in the first line. Then, tell me a little about your business and what you’d like to work on together, and I’ll get you all the details.
About The Profitable Leader™
When Dan Smith worked as a Wall Street Private Equity advisor and investor, he employed a very specific process to analyze companies for purchase or investment. He employs the same methodology to analyze and manage companies on Main Street today. Having participated in capital raises and placements into the hundreds of millions, Dan and his investment funds use key processes to accelerate the returns. We call these methods the Private Equity Perspective. We created The Profitable Leader™ to partner and share this strategy with select business owners to rapidly expand their profitability.