Potential Tricks that Comes With Yes!

Positive response from investors come with challenges. Their individual interests should be managed, delegated and incorporated into your business. Every private investor knows what to invest in, including usage of resources and possibly different tricks. Let’s go through some of them! The first is vendor financing. It’s effective! Let’s implement it in a scenario. If a founder ask for $30 million for 50% equity, and investor wants to pay $25 million – both parties compromise.

If founders only accept $30 million, investors will make a very “generous offer”. They will pay $30 million, but with a condition. It can be something like, “because I am new to your business, and don’t have the same intimate knowledge you have, I will pay half now and the other half in 5 years. The real deal is they paid $30 million, but lend out $15 million. The deal is usually sweetened with paying a very low interest rate. The founders get less than original amounts, while thinking they are getting original amount. The real value will be little less than $25 million – expected fund return/opportunity cost for the funds.

Another trick is contingent earn-outs. Just like the $30 million for fifty percent scenario. The investor will pay first half now and the other in 2 years, if obtaining $10 million EBITDA (Earning Before Interest, Taxes, Depreciation and Amortization). For example, if the business currently obtains $10 million EBITDA without debt and maintain it, then the investor will pay $15 million – 2.3x multiple. However, if the business grows, which shrinks it to $9 million, then investor pays $15 million – 1.6x multiple (15 x 2)/9. Even if the business earns $10 million, it is still the same. Two elements matter – time values of money and contingent payments. This mean investor only pay about half of expected amount.

Another trick is demands for Company-Paid Earn-Outs. It is very efficient for a highly charismatic and skilled investor who knows how to adapt tricks. Concepts of money and contingent payments make it possible for investor to demand the company being liable for earn-outs. For example, if the investor applies a company-paid earn-out and pays the other $15 million contingent upon EBITDA of $30 million a year after a sealed deal. If a founder holds a minority stake, he/she might miss what it means.

With the right negotiation, you could easily miss that the company – not investor – is paying the earn-out. It means if the company gets $10 million EBITDA in revenue, the private equity investor will pay about $7.5 million of the earn-out, because the investor own 50% of equity. The founder pays the other $7.5 million. The investor only pays $15 million + $7.5 million (further discounted) to the business. Another trick is equity clawback and ratchets. It is based on knowing the business owner. They knows that you are very optimistic. Without it, no one wants to invest in your business.

Let’s say the business has $2 million EBITDA, and founder wants $10 million for 50 percent – approximately 10x multiple. The optimistic business owner tells the investor that the business will get more than $4 million EBITDA within a year. They use that to their advantage, and pays the $10 million. But says: “due to information asymmetry, I want equity ratchets. In order to prove that you are confident in your strategy to maintain earnings, the equity ratchet will reduce the equity by 1 percent for every $20,000 the EBITDA is below $4 million.”

The investor is playing on your optimism and want you to doubts your own numbers. You have to agree. If you refuse the ratchets, then it questions your faith. However, if the book only shows $3.5 million EBITDA after a year, then we’d have a problem. Here is the problem: the founder owned 50% of the business, and since he/she agrees to the ratchet terms – investor has overtaken the company. If using the old understanding of EBITDA, it might be $4.1 million, but it is irrelevant. The new one takes home the price.

Investors are financial and legal engineers, who always creates/find loophole when making any business deal.

Presentation for Investors

If given a time for presentation, then you have done a good job so far. The best process begins with preparation. It has to be suitable, efficient and productive to the end-result. You will fill the gap and prove everything you have been saying to the investors. It is about sculpting stories from anecdotes that investor(s) could possibly find as an interesting angle. It is not about creating a tall tale that might come back to haunt you. For example, don’t promise your investors 200 million ROI within 10 years! If you have a complicated business, try to focus on the solution. Proof to the investors that you are passionate about your business. You must genuinely connect with the audience.

It is a closure of the whole process. One of the greatest challenge is getting the points through. The best strategy to tackle this challenge is using maximum 10 slides in PowerPoint. These slides are combination of a problem, solution, your team, and other information that tells a compelling story. These are cover (1), opportunity (problem and solution) (2), team (they are actually investing in you) (3), the product (4), market size with research to support it (5).

The business model that tells how it would make money (6), discuss competition – describe what makes you better than your competitors – without disrespecting or back-talking your competitors (7). Market strategy (8), traction – things you already achieved in life (9). You can use the business’ current success. It strengthens your credibility – you are not just saying it, you are living it. What your business needs to circulate for achieving the objectives (10).

Have financial projections, milestones or timeline in your possession to show when asked. It makes you look good. The next thing to do is to rehearse until you can do the presentation without reading on the screen. Start the presentation from an interesting basis. Depending on the situation, use a suitable strategy to tell your story. After you finish telling your story, ask them if they have any question. If they didn’t ask any question, then you did a poor job!

When the ask questions, answer them accurately. If they ask you something you don’t know, just admit it! You are better off saying, “I will answer you later” than fabricating an answer. In the end, if they have asked questions, and you provide satisfactory answers, just ask for the check – politely!

Follow-Up on Approach

It is important that you follow-up on your communication with prospective investors. You can communicate through the phone or a face-to-face meeting. The main goal is to book a meeting for presentation. It does not matter what you want to do, everything you want are goals, how you get them are plans, and plan’s execution is a game. How you achieve this depends on your strength and desire, and the person you approach. If you have truly captured their interest during first approach, they could call you.

Regardless of if they call you or vice versa, it is extremely important to increase their interest. But first, you need to realize one thing – investor(s) are your friends. But, you have to be a professional when you talk to them. Try to remember that people are not the same! It is possible that you talk to 50 investors before one find your proposal interesting and wants to explore presented opportunities. The golden rule is: your failure to successfully get investors for your company is because you gave up! Don’t give up, and keep trying until you get investors for your business.

Some investors are more excited about financial data than plans and strategies for the business plan. Others rather see strategies you want to use to achieve the objectives. Regardless of interest, discuss both financial data and strategies to achieve the objectives. The strategies that work for one person, might not work for someone else. For it to work, try using different strategies. When you fail with a follow-up, try to find out what you did wrong, and use what you learn to approach another.

However, I don’t recommend that you ask too many questions, because too much information could leave you paralyze. It is when two or more details collide against one another, and you don’t know what to do. It could lead to your knowledge being useless. If your strategies work or not solely depends on you! Strategies are all about communication with objectives’ achievements. The communication should always be in a professional, yet friendly manner.

All your data/research and so on are very important, but don’t discuss all of them yet. Because, they could be extremely boring for investors trying to make use of the information. However, the information could be useful. Success can also depends on them going through the entire data. Most – if not all – investors are financial engineers who like to analyze data.  It helps them to determine and assess if your proposal before making a decision.

Don’t think they are bad people because they say no! It is best to acknowledge and accept that the person whom say no has a reason. The reason will most likely be something not working out. I always belief that a negative result is because the investor and you cannot work together. I belief I am better off with someone saying no in the beginning, than us (he/she and me) working when strategies do not correspond with what is happening on the market.

For example, if my business plan suggests that I only compete against local companies within the state, and has objective to obtain $110 million/year in revenue within the next decade: investors will say no! That negative response is better, because the investor know something I don’t!  He/she knows that when I to start make over $100 million/year, I’ll get new competitors. These new competitors won’t be the local businesses, but national/international that will notice me. These are the big boys & girls. My business will be a threat, and they won’t accommodate it. They will try to stop me! That is a risk very few investors want to take! But, I won’t know that until I ask why I get a negative response.

Approaching an Investor

In a previous blog, “Choosing Investors”, we said it is best to list about 100 investors. It is based on the fact that not every investor you talk to will respond positively. Choosing investors is merely a pre-beginning of the whole investment process. The process of choosing prospective investors is useless, until you approach the investor. Before you approach an investor, you have a goal and plan. It includes how you find the investors, and research you made on him/her.

It begins with fully mastering the message you wish to send. One of the greatest challenge is getting the message through without saying much. People tends to explain everything at once, which could make it tough to maintain others’ curiosity. The best strategy is to ask yourself a very simple question: “how do I get my message through with maximum 250 words? This does stop you from writing everything you want to say, even if it exceed the 250 words – first draft – and keep editing until the message gets through within 250 words.

Now, you can begin to think of how to best approach the investor. It is mostly important for you to be your professional self. The first approach should not be strong. It should be welcoming, interesting, curiosity arousal, and open door to new opportunities for the investors. Fortunately, the traditional way of forming a relationship still begins with a simple hello, and followed by “going with the flow”. Since both parties (you and prospective investors) have a common interest (business branch), it is much easier to communicate. The flow is directed by the topic, which you choose.

Traditional approaching techniques for investors might work. You can use one of the communicating channels he/she uses – email, text message. It might be more suitable to visit somewhere the investor love to go to, and interact with them there. It depends on your circumstances and strength. This is all about a game – that is exactly what you developed in the plan. Everyone know that plans are like a window that construct everything you need to take a position to play the game that simplify the plan execution.

First approach should be about grasping their interest, and make him/her wants to know more. One of the best strategy is excluding your perspectives. This means focusing on what you want the investor to see when you first approach him/her. For example, if you want the investor to see an opportunity, then your message might include something like:

Beauty Sustaining Corporation (BSC) is a two years old company that sell accessories and cosmetics. We focus on female gender. The market size is 4.5 billion dollars, and our objectives are to gain 100 million dollars within 10 years. Expands to a national level within five years. Be an international supplier within the next ten years.

This is achievable with solid marketing strategies, and delivery. Our current circulation is 5 million per year. Our objectives and your identity are perfect match, and we will love to discuss how we can work together.

As you can see this tell the investors your company’s success, and your desire to grow. The fact that your two years old company is already making 5 million dollars is rare. It is more than enough to see that your team, investments and plan are solid. This has the potential of developing a good curiosity for him/her to find out more about the company. But every detail you provide must be true, and verifiable. These are some useful strategies for approaching investors.

In conclusion, first approach include providing what the prospective investors need to consider your company. This allows the possibilities of moving further in building a solid and attractive relationship. It includes offering him/her something exciting, believable, realistic, achievable and/or productive.

Choosing Investors

There is a huge quantity of investors that will invest in your business. However, just because the person is an investor does not mean that he/she will invest in your company. For that reason, it is very important to narrow the numbers of investors down to only the ones that are in a specific branch – yours! Your choice of investor has a lot to do with building a relationship – long term – that will benefit both parties. If you approach an investor in a branch that is not the same as your business, you will likely get a negative response – and at best a new contact. This contact is based on the possibilities of the investor neglects the proposal, but know someone who is in your branch.

You know who you – and business identity – are, which makes it easier to identify your investor. People only interfere in something that they know very well. It will be easier to discuss the whole investing topic between you and your prospective investor, and what you present will be easier to verify in comparison to what the investor already know. People will always have different perspectives, but will only put their money in something that they belief in.

An investor would rather invest in a macro-team, than in a macro plan. A macro team has different skills/expertise and know what respective team member needs to improve on. The team also knows where to strengthen each other, and in the eyes of all investors, you are only as good as the member that performs least in the team. This is where they would gain some insight on performance to expect. A macro plan on the other hand is too weak – and needs more improvement before it can be taken to the field.

In such case, you must re-develop the plan. When you contact an investor, you must provide all relevant information. The investor will carefully screen through the information provided to them – and your presentation has to rhyme with what they already know. It makes it easier for them to verify what the business propose, the plans, strategies, business’ infrastructure and execution of plans – it ultimately simplifies the relationship.

There are a lot of investors in all branches of the business world. They have different interests and goals. You must narrow down the list of investors. After narrowing down the list to branch, try to write a list of about 100 different investors in that branch. In conclusion, when choosing an investor, it is extremely important to make sure that the investors are interested in the same branch your business specializes on – if they are, you get yourself a prospective investors.

Efficiency in Resolving Business/Personal Issues

There are different ways people deal with problems! The key concept in it is how we see the problem! Our perspectives is what drive how we handle problems. For example, if someone slaps you, the general perspective is, this person wants to fight, which makes you slap the person back. Another person might just walk away, because he/she has a different perspective. Our problems often falls in four different categories – emotional/social, psychological, physical and spiritual.

One of the most effective way is to get to the root of the problem holding back your motivation. For you to walk the path to your motivation – you must begin with knowing the problem. Some problems are simply solved – while others require more severe solution, which includes speaking to therapist and/or psychologist! Thousands of research on motivation and problem resolution have led to one conclusion! No therapist or psychologists can give you motivation.

This is because that motivation is within you, and the only thing they could do is bring it out! What therapists, psychologist and business consultants have consistently done in this field is walk you through the path to bring out the motivation and problem resolution in you. It is a lot like watching a movie, and the good guy got the bad guy in the beginning. The audience knows that the bad guy will somehow escape, but the path to his/her escape is exciting and the screenplay walk our way to that.

I am not trying to make your business perfect! Perfection is impossible – maybe in an imaginary world. Business is dynamic – how you approach one market is not the same you would approach another.  That is why we only focus on making you more proficient and effective in dealing with your business! Over the years working with different kind of people – I have consistently adapt seven simple statements. They were written/said by top CEOs and executives in the business world.

I have been practicing these seven statements without even noticing them, maybe you have too! If we successfully harvest them, we will improve our abilities to do what we do best! Before you keep reading, please put your brain in diffuse mode (don’t focus on anything, just let the brain roam about). These statements do not only work for businesses – but also for private life – for their abilities to put your mind at ease! The first statement is “always be proactive”, everything in your business are in your circle of concerns (things that are bothering you).

This means you must be proactive. For you to be proactive, you have to focus all your energy into circle of influence! It is finding out the things that you must influence to minimize/neutralize the circle of concern. The second is “begin with the end in mind”, which means when you begin a project/task, you should visualize what you want to see as the end result. Use that to delegate your effort and allocate your resources into ensuring that you get what you visualize as the end-result.

The third is “put first thing first”, which means prioritizing things/tasks/projects as they are relevant to the big picture. It means knowing important things for you to progress in what you do. For example, to write this blog, I must first do research (1^st priority), then write a blog article (2^nd priority), edit it (3^rd priority) and publish it (4^th priority). The fourth is “think win win”, which build a mutual beneficial relationship. It means people you associate with (customers, investors, friends and others) will win, and so will you/your business.

It simplify the possession of three vital characters: Integrity, maturity and abundance mentality. The fifth is “seek first to understand, then to be understood”, which is essential in all areas of business and personal life. If you don’t understand what the other party is saying, chances are you will drive the topic to a different direction. The sixth is “work as a team and synergize”, because the team working as one have the ability to be open-minded, experience the adventure of finding new solution to old problems.

Synergize to keep the team solid, and have team members collaborate and collectively work as one! The seventh is “always sharpen the saw”, because it gives room to preserve and enhance the greatest asset you and your business possess – you and your team! It provide a balance program that renew yourself and the team – psychologically, socially/emotionally, mentally and spiritually. With these seven statements – you should be more efficient in dealing with things that matter to you and your business.

Don't Do It - Live the Life

In all developed countries, a corporation is identified as a juridical person, who has the ability to interact with others. It can sign contracts, make deals, recruit other people/companies and so much more. As a juridical person, it has its own identity, characters, culture and tradition. When starting a business, it is crucial to become one with the company! Business is not a style, or a short-term activity that we can start and stop after a short period of time. It is a life. If you want to sustain that life, you must also become one with it.

In a previous blog – “You + Four Things = THE PERFECT TEAM” – it was clarified that a business needs a team that works together as one. The team has different – and similar – characters that build the business identity. These characters are what the company projects to the society in different ways. Each member has high performance in different ways, and they know how to bring the best to the business. It makes it the greatest team your business need!

Running a business is not a paperwork – it is a lifestyle. Someone once say, “When you run a business, you’d have to work like someone is working 24/7 to take it away from you!” If it is just a hobby or something you do, it is tough to use that perspective. If you fully embrace the lifestyle, there is a price to pay! Successful people will talk about how hard they work to get to where they are. The things that most successful people would not tell us is, how many bridges they burnt to get to where they are. But, they might be implied in how hard they work. This is the price of elevating to become one with the business.

People are picky about who they let into their business for a great reason. They’d have certain vision and desire, and fully comprehend the value of high performance in workplace. It is because they and their company has become one – the life! The success of a business also depends on the dedication of a team to a collective goal. The person you’d let into your business must have the same dedication – it should not be a job to them either – but a way of life.

In eyes of government and related agencies, your business is a juridical person with its own life. Any character that does not do your business any good will be excluded the moment you enter the business, because it holds back your company. Have you ever hear the phrase “put your money where your mouth is” before? In other word, your mouth is useless, while putting your money into what you use it to say strengthens its credibility. This means putting your characters into benefiting the business.

Some of my favorite:  “if you can’t handle the heat, get out of the kitchen”, “nothing personal, it is just business”, “if you can’t proof it – you don’t know/got it” and “if you get game, take it to the field”. Heat represent the effort, dedication and strength you’d put into getting what you do through, while the kitchen is a lifestyle!

There is a strong distinguish between what we do and who we are! But they relate to one another. When you characterize everything you need –take them to your company, and subtract the ones you don’t need in you – you make your business your life! For clarification – you have no idea what you are capable of – until it really matters to your life! When it is understood that this business is your life – then you will efficiently handle everything relating to it the same way you will handle your life!

The big objective is to master characters that matter to the business – and then you can turn those characters that your business needs to your identity. Bottom line – live the life that your business needs for it to be successful!