"The problem with many small companies' business plans is that they don't actually meet their projections."
--Fred Marcusa, partner
COMPANY: Kaye, Scholer, Fierman, Hayes & Handler, with headquarters in New York City
BUSINESS: Represents corporations, lending institutions, and investors in financing and other transactions
"The capital markets ? most especially, but not only, the IPO market ? are driven by psychologies," says Fred Marcusa. "Right now they've been affected, in the most general terms, by a change in the perception of credit risk, a change that has taken place at every level, ranging from countries to large corporations to small private companies as well." Many investments are perceived as potentially more risky, and that's affected the liquidity of capital and the terms of investments.
What does all that mean for capital-hungry entrepreneurs? They need to adjust to the changing mind-set of investors and creditors, in large part by demonstrating that risks are under control within their companies. How not to do that: by building unrealistic expectations into a business plan's financial projections and trying to inspire excessive optimism in prospective bankers and investors.
In capital markets as uncertain as today's, those strategies can come back to haunt entrepreneurs. "The problem with many small companies' business plans is that they don't actually meet their projections," Marcusa says. "When they try to raise additional financing early enough, that doesn't necessarily hurt them, because their failings aren't yet obvious."
But these days some companies may decide to delay new rounds of financing, especially IPOs, because they're dissatisfied with interest rates or valuation levels. "If they now find themselves waiting an extra six months or a year or longer, prospective bankers and investors may find that they're better able to evaluate a more realistic growth curve and cash-flow capabilities for their companies," Marcusa says. "And that could further weaken an entrepreneur's chances of working out the right deal even in stronger markets." To avoid that risk, keep your projections more realistic the first time around.