Many entrepreneurs are so desperate to raise growth capital that they lose sight of the fact that not every investor is right for their company. How can they tell?
Perform the same kind of due diligence on prospective investors that you would expect them to perform on you and your company, advises Steve Geller, CEO of Empire of Carolina, a Delray Beach, Fla., toy manufacturer. Thanks to Geller's exhaustive analysis of his company's management (as well as financial) needs -- and the strengths and weaknesses of potential investors -- he was able to select an investment partner that catapulted Empire into superfast growth.
Here's how it all happened: Geller, an entrepreneur who had built a successful toy business that he sold to Mattel several years ago, was looking for a new business involvement. He identified Empire, a 30-year-old-plus company, as a sleepy underperformer with good growth potential. With financing assistance, he aimed to acquire a controlling stake in Empire (a public company trading on the American Stock Exchange) and use it as a base for the acquisition of other toy manufacturers. Its 1994 sales were more than $50 million.
He first began interviewing representatives from several major banks. "It became clear to me that they'd give us money and expect a big profit, but that they'd have little desire to be involved with the actual growth of the company," he says. Geller wanted more.
"I wanted investors who would fill in the gaps of our management team -- mainly, our lack of experience in running a large public company." Figuring out your own company's preferences -- at this stage -- is essential. To some entrepreneurs, a cash-only investment (with no management meddling) is ideal, which would tip the balance toward a banking deal. For others, management aid might be more valuable than financing, so hiring a consultant might be a better route.
Ultimately, Geller chose a New York CityÑbased group of private-equity investors, Weiss, Peck & Greer, in part because its members could provide expertise in the public arena.
Steve Hutchinson, a managing partner at Weiss, Peck, applauds Geller's "realistic self-assessment." "He understood -- in a way that many entrepreneurs never do -- that the key to growth was recognizing his weaknesses and correcting them through the right strategic financial partnership. We were able to combine the depth of his market expertise with the breadth of our financial knowledge and contacts."
Weiss, Peck initially invested $15 million in return for convertible subordinated debentures that are convertible to 2 million shares of common stock. With that investment, Geller was able to transform Empire into a company with projected 1996 sales of $200 million.
"The right financial partnership was essential," Geller emphasizes. "But money alone just wouldn't have cut it."