Equity capital mystery unveiled

Equity capitalists do not advertise their activities; their dealings tend to be shrouded in secrecy. Because of this, there are a number of myths enveloping equity capital, and I'd like to lift the shroud on the most common untruths.

Investors aren't interested in start-up companies.

While it is true that most venture capital fund executives prefer deals with established companies, some of them will look at a start- up business if the company has an experienced management team, and a select few of them specialize in early-stage companies with inexperienced management (and these few require a high degree of interaction with the business, as they help "train" the management team).

If you have one of these companies, ask your state's economic development office, your nearest SBA office or your banker for the names of "seed" capital investors. However, regardless of the stage of your company, it never hurts to talk to professional venture capitalists. It's not likely they will invest in your start-up company, but it may lay the groundwork for a future relationship.

Investors are looking for some secret ingredient in a business plan.

What they are looking for is a sound plan, and the vast majority of the ones they see aren't. They aren't just looking for technology; they are looking for unique companies with strong management that have the potential for rapid growth and substantial profits. Investors are looking for a healthy company to invest in, and they are also seeking an average return on their investment of at least 25 percent per year.

Equity investors won't meet with novice entrepreneurs.

Nothing could be further from the truth. Just have your CPA, banker or attorney arrange an introduction. Even if they are not interested in your business right now, they can offer some good advice and might suggest names of other investors you should contact.

Equity investors want to take control of my company.

The intent of equity financiers is not to control your company but to make a profit on their investment. They would like nothing more than to give you money, leave you alone, have you meet your projections and reward them with profits. However, if you keep asking for more money to bail out the boat because rocks keep punching holes in the bottom, sooner or later investors are going to ask why you keep sailing onto the rocks. Furthermore, the younger a company is and the less experienced management it has, the more risk the investors will perceive, and the larger share of the company they will demand in exchange for their investment.

Don't be afraid to offer them majority interest to close the deal, but insist on a clause in the investment agreement that gives you the right to buy back their shares at a pre-determined price if your company performs according to your projections.

It takes forever to secure equity capital.

It all depends on how solid your business plan really is. If you have done a sloppy job of market research, they will take more time to check it out. In general, the more holes they see, the more thoroughly they will examine the foundation. If you push to get your money fast, they will immediately slow down their efforts, fearing your company is already on the brink of collapse. Give them a solid plan and a solid team and you should have your money within a few months. Otherwise, this myth could prove to be accurate. If you have been trying to raise capital for a year and still have not succeeded after pursuing a number of financing sources, don't blame the investors. It is no myth that something is seriously wrong with your proposal. Master the mystery by asking potential investors what you should do to strengthen your proposal.

Scott A. Clark welcomes your comments and contributions. You may send him your ideas for column topics by e-mail at mail

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