It was a sunny spring day when I had lunch with a Profit Top 100 Fastest Growing business leaders and most of the conversation revolved around his search for capital.
You would think that his many listings as Ernst & Young Entrepreneur of the Year or Profit’s Top 50 Entrepreneurs or Rising Hot Stars to Watch would make it easy. He thought it would be but forgot the first rule of finding capital: Swim in the Right Pond.
What the heck does fishing have to do with raising money? People with cash have what is fondly referred to as their preferred “bite size” which is the amount of money they will invest in a company. This bite size could range from $200,000 right up to $50M and private equity investors cluster according to this investment size. My friend, the cover story of Profit magazine, could not understand why funds were passing on his company but when I asked who he was seeing, it became very clear. He was swimming in the pond for much larger bite size than required for his stage of business. He was wearing out the leather in his shoes walking around Bay Street and visiting what he termed the “best” investors. One of the people he saw was Brent Belzberg of Torquest who is one of Canada’s leading private equity investors. Torquest raised capital for their private equity fund from a range of high calibre sources such as CIBC and these sources will be expecting a high level of return. Torquest is under pressure to achieve their client expectations and have delivered so far due to their focus on size of investment or deal they will do. They are familiar with investing $20M and know how to work with this size. Anything lower would require a different type of involvement with the management team and a different financial structure. Quite rightly, Torquest politely declined and explained the company was not their "bite size".
My CEO friend could not understand how the size of money put into a business could be so different until I asked him if he fished: he glowed as he described catching bass up at Georgian Bay. I asked him if he gone salmon fishing in BC or deep sea fishing for marlin – yes, to the former, no to the latter - but what about catching a whale? It became instantly clear how each of these fish sizes would require different bait, hook, equipment and boat. Above all, the attitude of the investor becomes evident. Is this a weekend jaunt with beer in the cooler or is it for a living where if the fisherman does not bring home the big tuna, it means not being able to make a living? Torquest fishes where there are the big tuna and takes their risks out in the big sea. My Profit Hot Shot CEO needed to fish with the private equity funds who put in their own money, with a far smaller bite size.
But here’s the real hair raiser: the CEO went to a Whale sized private equity shop where one of the financiers advised against private equity but then said, “I’ll invest as I have just made a bonus and have $2M sitting on top of my dresser.” The irony is that $2M investment is private equity! This rich individual was putting in money - which is labeled as Angel investing - but he did not have passion for the business, it was just opportunistic. It is private equity at its worst!
By now though, the CEO was exhausted from swimming in all the wrong places which is the worst time to make a financial decision. He thought the big name of the rich investor would be good for his business and he went ahead and accepted the valuation thumb suck without even checking with a third party agent. This CEO believed the investor knew what he was doing. Absolutely correct – this private equity investor knew he was dealing with a great upcoming company with a vulnerable CEO/owner and jumped to put in his own money. He knew if the company grew, he would get a great payout and if it did not, well, he had the cash to burn. The situation was the equivalent of a Whaler captain deciding to fish with you but with a cooler of beer and no big deal if you don't catch much. Would you want that type of investor in your boat with you?
If this CEO had taken the time to even skim the book Money Magnet: Attract Investors to Your Business he would have known how to swim in the right pond.