Tips for Attracting Financing

Joseph W. Bartlett, Founder of VC

The woods are full these days of advice on how to obtain venture capital funding including the most pessimistic remark... `Don't even try.' Everyone is giving out their special rules, such as `Understand Your Market;' `Calibrate Your Competition;' `Keep Your Presentation Short and Sweet.' These gems are roughly the equivalent of `stop smoking and lose weight, if you want to be healthy.' I don't quarrel with those internal verities, but let me offer some advice one may not run across every day of the week. First, take a look at your burn rate and reduce it. Everyone advises this these days, the question is "reduce it to what?" If you could reduce it so that you immediately reach cash flow breakeven, well and good. However, this is not particularly useful advice because, if you could do that, you would have done it a long time ago. A somewhat subtler take on the landscape is as follows. If you have any cash at all in the bank, try to reduce your burn rate so that you can plausibly claim you have nine months of cash left. `Nine months' seems to be a magic figure driven by the common expectation that nine months is such a long time (in internet terms, anyway) that, if the market hasn't turned around by then, the entire game may be over. Next, if you're going to talk `IPO' you have to project a $500 million valuation i.e., be a big company. Five hundred million dollars is the point at which the dividing line is set between the "holy-grail," (a successful IPO) and the "orphanage" (public issuers whose market cap is too small to attract either analytical coverage or institutional interest on the buy side). To emphasize this point, read the following comments on the public markets from US Bancorp/Piper Jaffray at the IIR Family Office Forum (June 25-26, 2001, Chicago):

  • "Over 95 percent of the total market capitalization of companies on the NASDAQ, American and New York stock exchanges is accounted for by companies with greater than $500 million in market capitalization.
  • "Conclusion: Mergers and acquisitions represent the only real means for most mid-cap companies [i.e., those with market caps under $500 million] to realize a premium valuation and significant liquidity."

In short, if you cannot make a plausible case for a $500 million valuation, then start talking about a trade sale vs. an IPO as the exit event. Specify who is likely to buy your company and at what multiple. If you mention IPOs when your forecast won't support $500 million, you mark yourself a rookie. Thirdly, think "strategic." While you should always plan strategically, in this context I mean think of strategic investors. In my view, corporate venturing money is still around although not as plentiful as it used to be. Think of offshore players, hungry for strategic U.S. technology, and understand that the right kind of strategic partner will attract financial partners. Indeed, there are certain partners (some strategic and some financial) so illustrious in this game that it is worthwhile to give them stock in your company. Once the right people become shareholders, only good things happen. Finally, in the appropriate circumstances it helps to fall in with a fallen angel. It is well known that a high percentage of the energy of the VC community is being spent on bolstering the existing portfolio, both in time and money. Because of the time commitment, many VCs simply do not have bandwidth to look at new investments. One way to take advantage of the tide is to explore the possibility of an acquisition proposal to a fallen angel as one step in attracting new capital. If the acquisition proposal makes any sense at all, the VCs already invested in the fallen angel are ordinarily quite liberal in entertaining investment proposals for fresh capital into the combined entity. Thus, Company A, enjoying good management and a good business model but running out of cash, makes a proposal to acquire Company B, a fallen angel sitting in the portfolios of two or three prominent VCs. The psychology is that the VCs may be reluctant to throw good money after bad by investing in Company B in isolation... and they won't invest in new propositions, like Company A, no matter how attractive. Nonetheless, they are prepared to loosen the purse strings, given the advent of "new news" i.e., a consolidation between Company A Company B. Company A gets Company B and enough fresh cash to make the whole enterprise work. While investment has slowed in the VC community, there is still money that needs to be put to work. The companies that will get those funds will be the most attractive to VCs in a number of ways. While these four tips will not guarantee you will receive investment form VCs, they are specific steps you can take to make your business more attractive.