Five Topics for Management

Seeking Financing by Laura Emerson Entrepreneurs are, by nature, visionary and optimistic. Perhaps as a result, many may be wooed by pie-in-the sky investment discussions that never result in bona fide term sheets. (There are a lot of time wasters out there). They may discourage realistic but less flattering offers, which might be more realistic. For these reasons, I recommend that the entrepreneurial management teams discuss the following five tough questions amongst themselves and update a file of written answers for their eyes only as the company fortunes wax or wane. You will note that they approach the same go/no go question from different perspectives. Question 1: If your company has no other clients or revenue sources other than those currently active, how long can it sustain its burn-rate? Question 2: How time sensitive is your financial need? Question 3: Under what investment terms are you willing to sell 51% of the company, step aside from a management role, or give up a Board seat? Question 4: What upcoming milestones will make the company cash flow positive? How much time and money are required to meet the minimums? Question 5: If all goes well and the company grows, at what point will expansion exceed the competency of current management? This “reality check” will help your team ask discerning questions of potential investors early and to assess and negotiate offering terms at various points in the company’s future. INTERNAL DISCUSSION: Question 1: If your company has no other clients or revenue sources other than those currently active, how long can it sustain its burn-rate? Analysis: Entrepreneurs may project fantastic valuations after aspirational milestones, but investors and other financial sources also evaluate the present, so entrepreneurs should, too. The more immediate a company’s need for money, frankly, the less sense it makes to spend time and effort seeking private equity and the more sense it makes for the company to spend time hawking its widgets to paying customers, increasing its profit margin, and cutting costs. Due diligence by investors will ALWAYS take longer than a financially strapped company wants, and its financial vulnerability will be obvious to the investor, who will either regard that deal as risky enough to (a) abandon or (b) offer less than the entrepreneur needs or (c) propose onerous terms, essentially banking on the entrepreneur failing. To Do: Figure out how long the company can remain in business with no investment and nothing other than organic growth. Calculate the cost of the number of months required to turn a profit and repay debt. This is the amount of money the company needs (vs. wants). How much of the company would you sell to an equity investor or how much interest would pay on a loan that carried you through this time period? Is it a make or break decision? Question 2: How time sensitive is your financial need? Analysis: Some companies face seasonal or cyclical highs or once-in-a-blue-moon marketing or sales opportunities they must hit or they are doomed. Others enjoy a short term competitive advantage that is significant, so they could make more money expanding rapidly now than growing organically later. In such cases, money invested or loaned now is worth much more than money invested or loaned later. Calculate a bonus value for the timing of money. To Do: Look at a calendar and identify a date before which investment is highly valued and after which it is valued less. Determine what you are willing to give up or pay to get an offer by that date. Question 3: Under what investment terms are you willing to sell 51% of the company, step aside from a management role, or give up a Board seat? Analysis: Many investors have a clear and public preference for roles, such as majority or minority control, a Board seat, their own management team in place. Many investing firms identify this on their websites or will let you know in a timely manner so no one wastes time. It is important to know their preferences. Know what you will accept. Also, smart money is worth more than “dumb” money – that is to say that investors who know the industry, and have sales, merger, or vendor contracts can bring terrific value in addition to needed dollars. So the value of the money to you may vary according to the source. To Do: Think about all the RESOURCES your company needs to grow – not just money. Calculate the time/cost to achieve goals on your own vs. inheriting professional resources (contacts with suppliers, customers, market analysis) with investment dollars. What is that worth to you – what percentage of the company or what management role? Question 4: What upcoming milestones (realistic) will make the company cash flow positive? How much time and money are required to meet the minimums? Analysis: Most private equity sources will not invest all promised funds up front. Rather, they will release a portion to be followed by later tranches if the company meets identified milestones, usually in sales revenue or development. These increments and goals should be negotiated in the contract. To Do: Figure out various fast and cheap tracks to profitability. Calculate the bare bones cost to each and add some pertinent allowance for extra time and costs. Read the term sheet carefully. If accepting less money in a first tranche decreases the likelihood of meeting the milestone, you could lose your company to that investor. Some unsavory characters have written contracts in such a way that they can acquire control of your company for the cost of that first tranche from non-detailed entrepreneurs who were starry eyed about the big number at the end of milestones they were ill equipped to meet. Question 5: If all goes well and the company grows, at what point will expansion exceed the competency of current management? Analysis: Many entrepreneurs are great at starting companies but weaker at maintaining or growing them. The success of the company may depend on recognizing management’s strengths and weaknesses. For example, running a public company is different than running a private one or merging with a competitor. Management of local success may not translate to national or international results. To Do: Develop a graceful transition and departure plan based on realistic self and company-assessment. There is nothing wrong with being the "Founder and Emeritas." CONCLUSION: You will notice that several of these questions approach the same question from different perspectives. The gist is this, “if you cannot achieve your goals without investors or additional capital/skill resources, then the most important valuation to acknowledge is not how much the market will value your company when it is successful, but rather, how much YOU value the EARLY money that takes you the first, steep step to get past the impediments that block you from getting there.

How Do Starlight Conferences compare to…

In advance of Starlight Capital’s online PropTech and Real Estate investment conference on the 8th of December 2022, this Article explains the differences between this and other, similar conferences. Please register now for the upcoming December 8th forum here. Investment Banking:

Bryan Emerson’s investment banking clients are served through a contract with his FINRA licensed broker-dealer, Great Point Capital, which is headquartered in Chicago. The client pays a commission on funds raised and often a small equity stake in the company. These contracts can be exclusive or non-exclusive. If the latter, the client usually pays a monthly retainer of several thousand dollars. Services can include deal structuring, business writing (such as PPMs, press releases, website revisions) as well as investor outreach. Target clients for GPC tend to be real estate oriented, profitable, and raising more than $10 mm. Bryan has had his securities licenses since 2000 and raised funds for a variety of industries, including oil and gas, real estate, and technology (see testimonials at www.starlightcapital.co.

Starlight Conferences:

Presenting at Starlight Capital conferences is a cost-effective way for entrepreneurs to generate warm leads through a lower-cost, self-help model. Starlight charges no commissions, just a flat presentation fee that depends on the amount of exposure a client chooses. There is no competition, ranking, or judging. Most presenting companies are already generating revenue or have raised a first round of funding. Few are startups unless they are spin-offs of going concerns.

Companies purchase a 5 or 10 minute presentation slot followed by a 5 or 10 minute Q and A delivered to an on-line audience of investors. The investors ask questions but provide no public assessment, judgment, or vote. After the conference, Starlight sends each presenter a spreadsheet of contact information for not only all attendees, but also those who registered but did not make it. In 2022, this list ranged from 600 to 1000 registrants per conference. We are unaware of any competitors who provide so many warm leads at a cost of less than $3/lead. Starlight provides best practice suggestions for follow up by email and telephone. The entrepreneurs then get to work, reaching out to the people on the spread sheet.

Because this can be time consuming, presenters can engage Starlight staff to email each registrant individually on behalf of the company, to schedule appointments in the presenter’s Calendly account in the month following the conference, while the presentations are fresh in the minds of the attendees. Frankly, we have been astonished to discover that some presenters never follow up at all. Maybe they wait for the phone to ring.

Pitch Nights:

These are usually low-cost events for startups to present their business idea to a small group of advisors. Some have a panel that provides public feedback. Prices range from free to a few hundred dollars.

Angel Networks:

Companies present to members of a particular angel network, which is usually geographically based and which may favor companies in that geographic region. Some are free to present and others charge a fee under $100. Angel events we have attended in 2022 ranged from 8 to 20 people other than the presenters. The angels may ask questions or give feedback. Some angel networks require a financial commitment each year from members, which they invest in some of the presenting companies. Others do not. Check their websites.

Service Provider Conferences:

These often feature speeches by sponsors and panelists of sponsors, professors, and other business professionals regarding aspects of entrepreneurship. They may include judging, ranking, and competitions of entrepreneurs for prizes or services by the sponsors.

Crowd funding:

The business models vary. Some require a minimum fund raise in order to access funds escrowed. Others pass through directly, deducting a percentage, often 4%, rather like a credit card fee for businesses. Most require that the listing company do its own outreach and marketing to attract funders. They do little due diligence, so beware of scams. The companies that fare best are those that have some concrete gift for funders, such as a product made by the company. (If you donate something you get this. If you donate more, you get that).

Some sites specialize in non-profits and emotional appeals, such as raising money for a disaster zone or a family’s funeral expenses.

To conclude: Starlight conferences are not for everyone. For some companies, an investment banking contract will provide a much more personalized, targeted investor outreach, but for a higher price because of the time, skills, and contacts required. Bryan Emerson can discuss those services. For startups, he can refer people to angel networks and pitch nights that he respects. Companies well suited to Starlight conferences are those that have a strong and compelling business model in real estate, prop tech, or other technologies, have generated some revenue or previously endeavored to raise investment, and want a self-help model of follow up with the warm leads generated through all of the conference registrations of the event in which they participated. If they want Starlight staff to follow up for them during the month following the conference, that is an option, too.

Mistakes that Entrepreneurs Make to Secure Investment and Ways to Avoid Them

Delivered by Bryan Emerson, President, Starlight Capital, www.starlightcapital.co on August 26, 2022

To a group of Argentine and Brazilian entrepreneurs assembled by Sergio Cuzmai.

Summary:

1. Make a good first impression by advanced preparation that investors expect

2. Research and approach appropriate capital sources for your industry and stage of development

3. Interview well

4. Be attentive and knowledgeable in negotiations

PRESENTATION

Hello, I am Bryan Emerson, President of Starlight Capital in the US. Thank you, Sergio, for inviting me to speak. I attended your last event and found it very informative.

For 22 years, I have been an investment banker who simultaneously ran an angel investment group. My comments today are based on four categories of the best and worst practices of entrepreneurs seeking investment that I have seen during those two decades.

Previous to that career, I worked in the telecom industry, for three years in Mexico City, where several friends and I had rolled up 6 small telecom companies into a public shell.

Feel free to raise your hand anytime that you have questions or comments.

1. You only have one chance to make a good first impression.

Investors are unimpressed by entrepreneurs who seem to be making it up as they go along or who have an idea but have done little to advance it but hope someone will fund them anyway.

First impression mistakes include:

*Not being incorporated in an investor friendly state or country so that the investors’ rights are protected. In the US, DE and NV are the most common states for this because they are shareholder friendly. In terms of countries, some, like Brazil, do not allow foreign majority ownership which may deter some large investors that like to take majority control. Look into Argentina’s laws for foreign investors.

* No logical financial model. Investors want to see that you have profit and loss statements, balance sheets, and are able to answer questions about what you have accomplished with money so far and what your use of funds will be if they invest. They want to see that their money is used to make more money or make more widgets to make more money, not go to fancy offices and expense accounts.

*Negative internet records about you or your company, such as bankruptcies, litigation, complaints, contradictions in resumes, or lack of relevant experience. Investors will research you and your company. In Latin America, many private companies are staffed with family members because the leaders trust them the most. In the US however, many companies have policies against nepotism, because they believe that this leads to relatives put in positions for which they are not qualified. So make sure that your staff resumes are as strong as yours, or put extra effort into training those people.

* No skin in the game. If you have not invested your own money in the company, have not put in the time to develop proof of concept, prototype, market analysis, or first customers, but just have an idea on paper and want someone to fund it, you should turn to your family and friends rather than professional investors or angel investors that you do not know. They will likely turn you down as greedy or naïve, and not capable of running the company.

The last mistake I will mention is:

* No money set aside to pay attorneys, accountants, and perhaps other professionals, such as business writers. For this, ask about fees in advance. When you do attract the attention of investors, you will want a professional looking out for your interests by researching the investors, reading the fine print, developing the financial reports that the investors asks for, and developing a business plan and other documents. Never accept an investment without professional advice and support.

Example: A man who talked with me about our conferences really wanted to change the world with socially responsible investments of about a billion dollars. He had an impressive PPT, but no details. Who puts the money in? How will he find them? How is the money deployed? How and when do the investors get a return? The company did not exist except in his lengthy PPT. Despite his lofty goals, he could not pay service fees to engage professionals to develop his idea or to meet investors that he did not know.

RESULTS

What are the results of these mistakes? These entrepreneurs will either not be taken seriously or will be taken advantage of. Investors evaluate hundreds of stronger deals with well-prepared entrepreneurs every year. Alternatively, unscrupulous vulture investors may make an offer with tricky elements in the contract to take advantage of your great idea and business naiveté in order to shut you down because they favor a competitor or to buy your whole company for a peso because you fail to meet some exorbitant milestone that you neglected to notice in the contract.

WHAT TO DO to enhance your first impression?

· Demonstrate commitment with your own time and money to convey that you are both a visionary and a committed leader. Show that you understand the investors’ expectations and that you respect their industry knowledge.

· Know your market potential, competition, competitive advantages, and weaknesses. You may seek investors whose team can shore up your weaknesses with their expertise, such as supplier contacts in cheaper locations.

· Showcase your expertise in speeches, white papers, testimonials, industry association memberships, press releases, etc so that you look impressive when they research you.

· Enhance your resume, and those of your staff, with additional credentials to build credibility in your industry

· Scrutinize your staff resumes and internet reputations. Are they the team that you want investors to assess? Any weak links?

2. The second common mistake is a poor outreach strategy to reach investors

· No targeting: Blank, general emails to info @ capital source where you know no one.

· No due diligence: Not fitting their investment criteria. Many investors’ websites have a full section outlining their investment criteria, such as geographic limits, industry segments, stage of company development, monetary range, and debt or equity investments. They list this info to invite appropriate opportunities and shut out inappropriate ones. They will also list their portfolio companies. It would be fruitless to offer your restaurant opportunity in Buenos Aires to an investor whose site specializes in oil rigs for Alaska.

· If you seek less than $1 mm, do not approach professional investment firms. You are too small.

· The last mistake I will mention in investor outreach is not utilizing your own network for personal introductions to investors and just sitting at home, waiting for the phone to ring.

· Example: Several people, from the US and Latin America spoke with me months after they presented at my investor conferences. They said that they had heard from no investors. I asked, “What do you mean “heard from?” I gave you the database of everyone who registered so you could email and call them to assess their interest, criticisms, suggestions, and to set up meetings. Did you?” No. To my surprise, each year, there are some people who pay good money to present their business very efficiently to dozens of investors at one time, but never follow up, despite the contact information I provide and recommendations for best procedures in contacting them. Instead, they hoped that investors would call them.

RESULTS

You will get no response.

WHAT TO DO

· Find ways to network with and get introductions to capital sources for your industry. Ask your banker, accountant, university alumni group. Join groups online and in person that support your industry and entrepreneurship. Start to develop a contact list that includes notes about who knows whom and when you spoke. Build the trust and respect of others by helping them, too, with referrals.

· If you want less than $1 mm, research websites of angel Investor groups, not professional investment firms. Many have names that identify their city or state, like Washington DC Angels or New Jersey Angel Group. In the US, venture capital research indicates that about 20% of companies that present to angel investors get funded, usually less than $400,000 per individual.

· You can also research LinkedIn with keywords for your industry plus investors. An extra feature that LinkedIn offers is called Sales Navigator. It is free for the first month, so you can try it out. It allows you to search for companies, job titles, locations, with much greater specificity.

Does this take time? Yes. Trying to reach investors will take time away from running your business. So assess whether it is better to grow organically to a certain stage of development first, when, perhaps you can hire help, or to approach investors earlier. Certainly the stronger your company, the better deal you can negotiate with investors. Early stage money is the most expensive to the entrepreneur because it is the riskiest to the financier.

3. The third mistake category is ways to fail in the interview or presentation when you do get an appointment with an appropriate investor.

· Participating as though the meeting is a long monologue. This should be a dialogue, because any investment will be a partnership.

· If you do not understand the investor’s question, do not rattle on about something else. Ask for clarification.

· Taking so long to answer one question that there is no time for them to ask all the others you should hear and answer.

· Not respecting their time and constraints on the meeting. For example, if they are interacting on a smart phone or in the car, your tiny PPT text will be useless.

· Not asking for feedback or questions, criticisms and suggestions

· Not asking about follow up. When should you call them again? What else do they want to hear or see?

· Only taking and not giving in the meeting.

· Overstating a pre money valuation that undervalues what the investor can offer in terms of both money, and often, industry expertise and contacts.

· Not knowing whether you want equity or debt investment. Equity is a long term partner who owns part of your company. Debt is a short term loan that you have to pay out of profits.

· EXAMPLE : A man wanted to raise a fund to buy real estate that he would then sell to put into other endeavors. When he appeared at my investor conferences, he was unprepared with a video, so he spoke live, rambled, went off point, and addressed no key points, like financial projections or his background for success. He came across as a very nice, sincere person, but not investment worthy.

RESULTS

*Your “out of tune” behavior may put them off. They may not like or respect you.

* They may not get the answers that they want to hear.

You will not get the feedback you should hear, even if it is negative.

*They may infer that you cannot answer tough but fair questions.

*They may feel that you undervalue the contribution of early money, without which you cannot launch.

*You may appear to underestimate the number of early companies that fail, and the risk that the investor takes with each portfolio company.

* Long winded entrepreneurs who monologue and ask for no feedback may leave the meeting thinking they did a great job and will get a check on Monday. Often, these are the ones who do not keep pounding the pavement, rejection, after rejection, to find the right investor. Hint: there is nothing wrong with competitive bids.

WHAT CAN YOU DO

· By networking, you can get a referral to an investor who will take your call or meeting. Be sure to thank that person, give them feedback on the meeting, and help that source in some way.

· Practice short answers to logical questions in advance of any meeting

· Invite other questions and feedback that indicate that you respect their level of knowledge and realize that any investment will be a partnership. Their responses will help you realistically assess their degree of interest

· Demonstrate respect for the investor’s risk in investing money by talking about how it is protected, paid, etc. Escrow account, quarterly payments or reports, etc

· Ask about follow up. Do they want to see more details? In what format and by email or in person? Do they want to see the prototype or detailed financials? Etc

· Send a thank you note to all who attended. Include some personal comment about their good question or sage advice.

· Even if you get a LOI, continue to speak with other investors. Many deals fall through.

4. Ways to fail in the negotiations of a LOI or investment contract

- Presenting a pre-money valuation that is way too high

- Offering too little equity for an investment without which you cannot launch or achieve an important milestone of growth

- Not knowing if you can repay a debt investment, on time, with interest

- Not knowing the general criteria of an equity investment

- Not reading or understanding the fine print

- Not being represented by a business or securities attorney

- Not understanding whether the money will be paid up front or paid in tranches, upon certain achievements, like increasing sales by x% or increasing profits by x %.

- Believing what they said without noticing key differences in the contract

EXAMPLE: a man in the cannabis industry with a little public company wanted to raise $40 mm, at a $1/share when his stock was trading at 29 cts/share, and declined to 6 cts. Of course, no one invested.

RESULTS

· Some offers are insulting to the investor or insulting to you.

· Some offers will be too little for you to achieve what you need to avoid failure

· If you cannot pay the debt or reach the contractual milestones, you can lose the company to that investor, or he/she can withdraw from the contract

WHAT TO DO

· Know the norms for valuations, debt interest rates, and equity investment deals.

· Contact some of the portfolio companies of this investor to ascertain their satisfaction with their deal (the details of which they will probably not disclose).

· Run best and worst cash flow scenarios to pay debt financing

· Negotiate the milestone/tranche components if the milestones are unreasonable

· Engage an attorney to review the contract

· Early on, research the reputation of the investor. Some people who pose as investors are really service providers who will charge you for their services. Others intentionally offer misleading contracts to naïve entrepreneurs.

In conclusion, successful entrepreneurship is challenging. So is securing investment or loans. Being prepared to make a good first impression, researching appropriate capital sources, interviewing well and be attentive and knowledgeable during negotiations will elevate your chances of success.

Written by Laura Emerson, Laura@starlightcapital.co

For Bryan Emerson, President, emersonb@starlightcapital.co, +1 907 795 5586 (WhatsApp/cell)