Archive for the ‘Financial’ Category
Where are the VC’s?
A question I hear often is “how do I find a VC to invest in my company?” First, there are many different institutional equity investors, both private and public. Venture Capital companies are best known by start ups and early stage companies, because VC’s are most likely to be found investing in these riskier ventures. With the dot.com bubble bursting and the current recession, it is much harder to find the VC we remember from the past decade. The reasons they are harder to find is that many of them have subtly lowered their interest in ventures (vC) or have dropped it all together and now look more like a merchant bank. If you approach one of these “new breed” vC’s, you will find them wanting evidence of an existing, sustainable customer base, revenues and patent office action on all intellectual property. For the legacy VC’s who are still willing to take more risk and keep the capitalize “V” in VC, you will probably find them looking for the following key elements before they’ll take a meeting with the entrepreneur; a solid product idea that is scalable, a prototype or working model of product or service, good chemistry with entrepreneur and or management team, and the entrepreneur and/or management teams who are willing to share in the risk (having skin in the game with their own dollars or willing to take less ownership). Most VC investors state that the value they bring to the company is operating/development capital (money), leadership (in the form of a majority of your board of directors) and contacts to help move the business forward more effectively. They are very good at the first two offerings, but don’t expect them to do the third very well (my experience anyway). Remember, bringing an equity investor into your company is the process of selling large portion of your company to someone who is looking to get at least a 10X multiple on their investment with 3-7 years depending on the opportunity.
The Importance of Cash Flows to Your Enterprise
It should be obvious, but unfortunately, it is not for many organizations- “Cash is King”. Especially in a downward business cycle or extended cycles called “recessions”. Cash levels will determine if your organization will operate offensively or defensively. Just because you have profits does not mean you have the cash needed for your operating capital needs. Profits look good on the Profit & Loss Statement, but are no true indication of the financial strength of the company. An organization can be “profit rich” and “cash poor”. Having cash provides many opportunities to make short term changes and purchases that will produce significant long term benefits. The influx of cash from debt or equity clearly come with strings attached, and in downward cycles, these actions may have severe consequences when there is a shortage of cash to repay loans or meet the terms of financing, which puts the organization on the defensive or unfortunately even “out of operation”. Leaders should always insure that cash collection is a priority to the organization no matter what business cycle you are experiencing. Resist the temptation to spend cash on activities that do not produce a positive ROI (Return on Investment) for either the short and long term, or both. Four “quick” strategies for increasing cash; reduce spending, accelerate the collection of account receivables, renegotiate or slow the outflow of accounts payable payments, and lastly, increase revenues. No magic there. What is usually forgotten is that the organization does not have a plan or processes to work these four strategies. Make sure everyone in your company understands the importance of cash flow to the ongoing operation of the enterprise, and spend quality time creating a cash flow plan during both growth and declining times; Having a plan, awareness and a commitment of the entire organization, and you have improved your chances for sustainability.
Using Debt to Finance the Organization
Organizations can finance their missions in several ways, but the two most common methods are equity and debt. Equity means you sell a portion of the organization in the form of stock or units of ownership, and the buyer now owns part of your organization. The other way to finance your organization is by Debt. Many organizations use bank loans and lines-of-credit to support their working capital needs to finance the day-to-day operations. There are pros and cons to using debt, the biggest pro is that you are not selling a part of your organization, you are just borrowing the money. That is also the potential down fall. Borrowing the money means you have to have a plan to repay the principal and the interest that are due at a future date. The key factor for determining if you finance the operation with debt is whether or not the organization has adequate cash flow to repay the loan and interest.