and Business Resources
magazine - November
By David R. Evanson & Art Beroff
Can I Get a Little Help Here?
You need experience to hit up investors, but no one said it had to
be your own.
David Macrae is a serial entrepreneur. After successfully growing three
technology companies, he's at it again with Atlanta-based Bulletin.net.
With this new company, Macrae hopes to capitalize on the need for expanded
services from wireless carriers. Bulletin.net's software products enable
a range of wireless devices to provide users with messaging, wireless
applications, e-mail and wireless Internet access, and help integrate
future technologies as they emerge. "The large telecoms are not equipped
to develop and deploy these services to mobile professionals," says Macrae.
"But a nimble company such as ours can." Like McDonald's, Macrae sees
billions and billions to be served.
But, as Macrae is the first to admit, "No matter how many times you
start a business, you almost always get to a point where it needs an infusion
of equity capital from outside investors." That also means you'll have
to face one of the greatest entrepreneurial quandaries: Should I try to
raise the money myself, or should I hire a consultant to help me find
the capital my business needs?
Macrae, 49, who has been down both routes before and has learned the
ropes, is going it alone for his new company's $3 million raise. But he
cautions, "Entrepreneurs should seriously consider outside help when it
comes to raising money."
Russell Robb, managing director of Atlantic Capital Management and president
of the Association for Corporate Growth, a trade group for deal-makers,
is less ambivalent on this point. "If you are raising capital for an emerging-growth
business," he says, "in most instances, an outside advisor is the safest,
smartest way to go."
Robb's opinion is biased, of course. He is just such an advisor and therefore
has a vested interest in the topic. Still, he concedes that advisors are
more necessary in some situations than they are in others. While there are
lots of exceptions to the rules, Robb says if you fall into one or more
of the following categories, an outside consultant is the way to go.
1. You have few contacts. If you don't
know anyone who is in the business of investing in emerging-growth companies
or if you have never made anyone a pile of money from investing in one
of your companies, then you're just the type of entrepreneur who will
get the most out of having an outside advisor in on the deal.
"To successfully raise capital, you must have a champion in the community,"
Robb says, "someone who is willing to say 'You know me. Look at this—it's
a damn good company, and I am putting my reputation on the line.'" When
you're able to show them you have that kind of backing, top investors
will be willing to look at your deal. When you don't have that kind of
support, the chances of someone taking an active interest in what you're
doing are greatly diminished.
2. You're in a time crunch. If your
business is busting out all over the place, the fact is, you don't have
the time it will take to successfully raise money on your own. "You need
the extra arms and legs just to qualify leads," says Robb. Truthfully,
however, some early-stage businesses can sit on the shelf for a few months
without suffering many drawbacks whatsoever to their competitive position
because nobody is out there attempting to offer the same products or services
as they are. For companies in that situation, time is not an issue they
need to concern themselves with. Likewise, a profitable business seeking
expansion funds may also qualify for the slower do-it-yourself approach.
In relation to the time aspect, you have to consider the speed with
which you need to get your hands on fresh capital. "If you need money
fast, within three to six months, get a consultant," says Robb.
Macrae concurs. "It can take three to four months just to get a memorandum
together," he says. "And in today's environment, a company can get itself
into trouble much faster than that. Speed matters more than ever."
3. You don't have experience. Finally,
there's the experience factor. "If you have never raised capital before,
get help," says Robb, adding that you will likely get a much better deal
with someone who has been through the process than if you're getting an
education on your first deal.
"When I raised money for the first time," says Macrae, "there were so
many things we did not know: valuations, how to put together a board,
how to manage expectations. In particular, we did not have a capital plan
for how we would get more cash in when we needed it and found ourselves
unexpectedly in a crisis mode. Having professional help could have saved
us a lot of that pain."
The only conundrum larger than deciding whether to hire a financing consultant
is how and how much you should pay one.
Often the first great divide in the compensation question is whether
equity—aka a piece of the action—is involved. Robb says that while it's
common to give up equity, in general it's not a good idea. "You want to
limit the number of minority shareholders you have," he says. "They can
cause problems down the road by themselves or in the eyes of other investors."
Second, he says, if you issue stock to intermediaries before they raise
any money, and they fail, you end up with shareholders you might not want.
The optimal compensation structure, according to Robb, consists of an
upfront retainer and an accomplishment fee to be paid on closing and receipt
of funds. "The upfront retainer might range from a low of $5,000 to as
much as $25,000," he says. In the crudest sense, this is so-called "pay
attention" money. It lets the consultant know you are serious and will
listen to the advice he or she gives you. "The problem with pure contingency
arrangements is that any and all advice prior to a deal is perceived as
free and is often treated that way," says Robb.
As for the percentage of the amount raised, Robb says 5 percent is typical,
though he points out that there are very few hard and fast rules. He adds
that while 5 percent may seem like a lot, it's fair if you get a good
deal. Says Robb, "If an advisor costs you 5 percent of the amount you
raise, it's a good value because that allows you to concentrate on the
true cost and terms of the other 95 percent of the deal."
David R. Evanson is a principal
at Gregory FCA, an investor relations firm.
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