5 Items to have ready for an investor

You are going to have to do a lot more than pray for money when seeking investors. You are going to have to get "investor ready" as once they look at you, like what they see, then they will want a whole truck full of information...NOW.
I get asked all the time, "Where do I find investors?"
That part is easy, actually.
The question everyone should ask is, "what will get the investor to put cash into my business?"
This is the part which separates the men from the boys (and the women from the girls.)
Before you begin looking for people, get yourself ready. As sure as the sun rises in the East, there are items that us investors will require from you. First up, let's look at the 5 items about finances that we will need to tell us more about your business or idea:
1. The income statement is paramount.
If nothing else, if, at the very least, we can look at the income statement from one year of history we can judge how big the company is and how large of a financing it can generate. We would simply look at the earnings, calculate the EBITDA and get a rough idea of the general size of the company
Multiplying this by 6 times would give a very rough idea of the valuation of the company (enterprise value) and how much financing it can withstand. Some people are saying multiple it by 3 times but I think that is a little cruel.
2. The balance sheet is also very important.
From this we can determine the capital structure of the company.
3. Then there's the structure.
Looking at the capital structure allows us to determine what the structure of the financing might look like. It also allows us to determine a more accurate valuation (equity value) and determine the amount of dilution to management.
4. Cash is king, as the saying goes.
Cash flow statements can be derived from having both of these statements, but it is helpful in determining things like how much money management must invest each year to maintain the operations of the company.
5. We are history buffs for a reason.
History: we like to get three years. This is because at least three years allows an analyst to see any financial trends in the company. Having more than three years is even better, but three years is the minimum for noticing trends.


If you are wanting to learn more and get a simple explaination on this in far more details, check out Money Magnet: Attract Investors to Your Business.
It's written by J. Loewen and is simple and, surprisingly, readable because it is written for business owners.

What's a Great Job Now?

One of the hottest jobs for B-School graduates is Private Equity and this article in the WSJ is a good reflection of the trend. (If we count the resumes flooding our office, I would agree.)
I suspect many of these recently minted MBAs think that the private equity asset class is where the big salaries lurk and may be disappointed. Private equity is about far more than the money, the best PE people are fighters for the businesses they bring into their portfolios. They have to know the full range of business - in particular, cash flow. You can not get that from an MBA. Anyway, here's the WSJ article in brief:
"The percentage of graduates from the world's top business schools taking private-equity jobs has more than doubled in the past six years, according to the business schools' numbers.
"Financial News analyzed figures from five of the most popular M.B.A. schools:
- Harvard Business School,
- Stanford Graduate School of Business and
- the Wharton School at the University of Pennsylvania in the U.S.;
- the U.K.'s London Business School; and
- Insead, based in France and Singapore.
The percentage of Harvard M.B.A. graduates moving into private equity and venture capital has more than doubled, from 8% in 2003 to 21% among last year's graduates. In that time, the proportion moving into investment banking rose far less, from 7% in 2003 to 9% last year.
Data from Stanford showed a similar trend, with 9% of graduates choosing private equity in 2003 rising to 19% last year, compared with 4% and 5% for investment banking. Harvard supplied the highest number of M.B.A. graduates moving to private equity last year, with 191. Stanford was second with 72, ahead of Wharton's 45, Insead's 25 and London's 22.
Private equity's rise in popularity reflects the perception that graduates could make more money working in the asset class than in investment banking, but also follows substantial growth in the size of the private-equity market. However, an M.B.A. isn't a prerequisite for joining many private-equity firms. A sample of 10 large European and U.S. firms showed that 52% of the executives at partner level or above had obtained M.B.A.s.
Firms' Web sites showed French group PAI Partners had the lowest proportion, with 21%, or four of its 19 partner-level executives.The private-equity units of U.S. firms Kohlberg Kravis Roberts and Blackstone Group also had high proportions of MBAs among their senior staff, 61% and 63%, respectively.
Patrick Dunne, group communications director at 3i Group PLC, where 48% of partner-level staff had M.B.A.s, said: "For some people, [an M.B.A.] can be fantastically helpful -- for those without a finance background, for example, it can be a useful way of picking up necessary skills and knowledge."

How's your AQ?

I was reading the lists of the businesses that made it the Profit 100 fastest growing companies list, and I was reminded of one of Rick Spence's recent Twitter postings. He commented, "Being an entrepreneur is like being punched in the face, frequently, but to have the ability to keep on going."
Something like that.
Like Rocky, my favourite movie character, said, "It's not how hard you can hit, but how much you can take and still keep moving forward.
So, when I emailed the many entrepreneurs I knew from the Profit 100 list, I mentioned that their adversity quotient must be very high. Most of them understood what I was saying, but a few wrote back asking if this was their "pig-headedness" quotient too!
Here's a quick summary of AQ:
Adversity Quotient, called AQ, is like Intelligence Quotient or IQ.
AQ is the science of human resilience.
People who successfully apply AQ perform optimally in the face of adversity — the challenges, big and small, that confront us each day. In fact, they not only learn from these challenges, but they also respond to them better and faster. For businesses and other organizations, a high-AQ workforce translates to increased capacity, productivity, and innovation, as well as lower attrition and higher morale.

5 Ways GE is charging up their tired batteries

Jeff Immelt spoke before the Detroit Economic Club yesterday and I got summary notes from Judith Ellis via Tom Peters web site. Here is some of what he said:
"Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy — and somehow still expect to prosper. That idea was flat wrong."
"Recently my colleague Peter Loescher, the CEO of Siemens, extolled the importance of Germany as an exporting country. In my career, I have never heard an American CEO say that the United States should be leading in exports. Well, I am saying it today: This country ought to be, and we can be, not just the world’s leading market but a leading exporter as well. GE plans to lead this effort. We have restructured during the downturn, adjusting to the market realities. At the same time, we are increasing our investments. We plan to launch more new products during this downturn than at any time in our history. We will sell these products in every corner of the world. We are creating a better company coming out of this reset. Similarly, America needs a dramatic industrial renewal. We have to move forward on five fronts."
First: Increase investment in research and development.

"GE has never forgotten the importance of R&D. Each year, we put six percent of our industrial revenue back into technology — so much that more than half of the products we sell today didn’t even exist a decade ago. As a consequence, we are a huge exporter… GE’s R&D budget has not been cut. And that’s a course of action I’d recommend to every company that wants to get through the economic crisis even stronger than before."
Second: America should get busy addressing the two biggest global challenges — clean energy and affordable health care.

"There is no question whether there will be break throughs in these areas — just by who and when. The leader in these fields will dominate the global economy in the decades that come."
Third: We must make a serious commitment to manufacturing and exports.

"This is a national imperative. "We all know that the American consumer cannot lead our recovery. This economy must be driven by business investment and exports… America has to get back in that game … and it starts with a strong core of innovation."
Fourth: We should welcome the government as a catalyst for leadership and change.

"There’s a long history in this country of government spending that prepares the way for new industries that thrive for generations. Think of the NIH or NASA, and all the new innovations that came out of these programs — from computing to communications to health care. America has that kind of chance with unprecedented levels of new government investment. ... The key is making sure those hundreds of billions of dollars fall on the fertile ground of innovation, and not bureaucracy."
Fifth: It is possible for a global business leader to also be a good citizen.

"We must partner in our communities. Big business should work with smaller companies in our supply chain to help them compete globally. And we should partner with local governments to fix our education system. In the end, business leaders are accountable for the competitiveness of their own country. We must say so publicly. This will not hurt our ability to globalize. Rather, I think it will make other countries admire our business leaders more. We must end the impression that American CEOs are short-term speculators."

Fighting words from Immelt and interesting themes.

Here in Canada, our Government is certainly listening and asking what they can do to help business. Government can play a big role in driving markets and being the first customer of size. At least Jeff Immelt is an American leader taking all the criticism about the US and, as a result, doing something differently today. Lead on, Jeff.

An equation for valuation

Mary Bitti has a good article in The National Post. Read online.
Armada Data Corp. is a bright spot in the auto industry. With car sales down 15% to 20% in the past three months and GM and Chrysler continuing their downward slide, Mississauga, Ont.-based Armada Data is enjoying a 40% to 50% jump in sales and a doubling of market share, and it has plans to expand through acquisition.
In its 10th year, the company listed on the TSX Venture Exchange in Vancouver, gathers new car pricing data and sells the information directly to new car buyers via Car Cost Canada.
"We help consumers save money by giving them the information they need to negotiate a better price," says Paul Timoteo, president of Armada Data. "In these times, people are shopping around more. The more research they do, the more they see the value in our service. We've seen a huge spike in sales in the past six months."
Strong sales plus a debt-free balance sheet have placed Armada Data in shopping mode, and it is now looking at potential acquisitions. "When it comes to assessing value, I know what to look for," Mr. Timoteo says.
Namely: the company's ability to grow; its market share; its rate of growth; its history of profitability, current profitability and potential for future profitability; and its debt load. That's the financial side. Then there are the less tangible questions such as: How uniquely is it positioned in the marketplace? Who are its competitors? How does it compare to those competitors? What kind of marketing initiatives is it involved in? How do consumers and investors look at the company?
"If your company is profitable, typically the market says your company is worth anywhere from five to 10 times its annual profit," Mr. Timoteo says.
"That said, if we feel that merging a company with ours will disproportionately increase the value of our company, I may be prepared to pay more than it's theoretically worth because I know together we'll grow faster than either of us would have on our own."
That is why Jacoline Loewen of corporate finance firm Loewen & Partners and author of Money Magnet: How to Attract Investors to your Business, describes valuation as an art not a science. "It's expectations. How you sell yourself is huge," she says.
"It's about a lot more than money. Sales revenues give you enormous credibility but many companies get investment without any revenues. Angels will want to help because they like you and your business. At the end of the day you have to be able to stand by your valuation, build a case for the amount of time you've put in, the goodwill of your brand, your intellectual property," Ms. Loewen says.
How you choose to build that case may take different approaches says Steve Gedeon, professor of entrepreneurship at Ryerson University's Ted Rogers School of Management.
"There are essentially three reasons an entrepreneur would put a value on their business: To attract investment or if you are selling shares or selling the entire company; in the event of divorce or for estate-planning purposes; or if you want to offer employees stock options," he says.
"There are many different ways to go about placing a value on the business. The valuation method you choose is the starting point for negotiation. Ultimately, a company is only worth what someone is willing to pay for it."
Mr. Gedeon outlines three approaches to business valuation:
-Discounted cash flow, which is the net present value of all future profits of the company. "The trouble, of course, is nobody knows what the future will hold," Mr. Gedeon says.
-Similar company transaction, where basically, you adopt the known price someone was willing to pay for a company like yours.
-Replacement method, which pegs value at the cost to recreate the company.
When it comes to startups a rule of thumb applies: "Early stage businesses that don't have revenue will never be worth more than $2-million," Ms. Loewen says.
To build value, Mr. Gedeon, shares this rule of thumb: "The larger your profits and the more stable they are, the higher the valuation. How do you build stability? Diversify your client base and increase your differentiation in the market."
For Mr. Timoteo, the key to being profitable is simple: "Either increase revenue or lower your expenses. If you can do both you're in good shape."
The National Angel Capital Organizations' Best Practices Guide for Angel Groups and Investors ( angelinvestor.ca/Best_Practices.asp)has a detailed review of valuation methods.