Then there's the valuation problem. Chances are, you and your prospective investors will have different ideas about just how much your company is worth. What accounts for those differences? Self-interest and subjectivity, to be sure. Another factor, according to Amit, is that entrepreneurs and investors disagree on how a valuation should be calculated. "With private companies, there's no correct method that everyone uses," he says.
19 % of the Inc 500 CEOs surveyed tapped family or friends for seed capital.
How can entrepreneurs make the best of things, in the absence of an objective valuation technique? Amit suggests that you avoid relying on a single investor. "Attempt to get multiple offers," he says. "Competition keeps people honest." By learning what several investors think of your company, you'll obtain a range of valuations -- and learn which valuation methods put your company in the most positive light.
You should also consider your own personality before signing on with VCs or angels. Could you tolerate reporting to anyone, let alone a group of investors with great expectations?
Brent Habig can't -- at least not now. The CEO of Tigris Consulting (#221) doesn't rule out the prospect of equity financing down the road. But for now Habig is sticking with his bank. "When you deal with the bank, it takes maybe several hours a month. I can do that," he says. But he turns up his nose at the idea of interminable meetings with investors. "I don't want that level of distraction for me or my management."
Even if you embrace that level of distraction, you're unlikely to encounter it at start-up -- only 2% of this year's Inc 500 companies received seed capital from VCs. Most Inc 500 CEOs who get venture capital receive it as later-stage financing. Of the 61% of this year's companies that raised later-stage capital, 19% got VC money.
8. At what point in my growth should I try to raise more money?
It depends on your long-term goals. If you're happy with your company's rate of growth, then there's really no need to raise more money. But if you're dissatisfied with the rate, then it's time to raise capital.
23 % of the Inc 500 CEOs surveyed turned to their buddies or relatives for additional money to finance their companies' growth.
For a couple of years Andrew Field, founder and president of PrintingForLess.com (#285), had been happy with his company's growth rate. Then, in 2000, his company reached critical mass in both the number of employees and the number of projects it was handling. Suddenly, Field needed more high-powered software -- something called an "internal-work-flow database" that could help him track each and every project and employee. "We were at a pivotal point in our development, when we literally needed to go into the red in order to grow larger," recalls Field. "Investments in infrastructure and marketing simply couldn't wait for internally generated capital." Field raised a total of $500,000 from two venture-capital firms. In addition to hiring programmers to develop the database, he also spent money on marketing, since the database system gave PrintingForLess.com the ability to handle many more projects. "Both investments have more than paid for themselves, from both an ROI perspective and an internal-efficiency standpoint," says Field, whose company grew 143% in the year following the investment -- the largest percentage increase in the company's history.
9. Should I go for a larger credit line, or is it worth my while to get a round of formal investment?
It's no surprise that virtually every Inc 500 CEO has asked himself or herself that question at some point -- a capital shortage is one of the primary symptoms of fast growth. Entrepreneur Rick Inatome once said, "I've always heard that the definition of an Inc 500 entrepreneur is a person who's guaranteeing $3 million at the bank and has $15 in his pocket."
49 % of the Inc 500 CEOs who raised later-stage financing got it from venture capitalists or other private-equity investors.
One easy way to make that decision is to examine how you're putting your existing credit line to use, says Richard McGinity, founder of School Street Capital Group, an Ann Arbor, Mich., consultancy that advises owners of private companies. Most banks require that companies pay down their credit lines once a year. If you're struggling to do that, it probably means that you're using your credit line not for short-term cash crises but to provide working capital -- a sign that your company needs additional investment. If your banker is on his toes, he might even detect such a problem before you do. "When a credit line starts to be used for long-term purposes, bankers get nervous," says McGinity. "If you can't pay off your line once a year, your banker will probably say, 'What's going on here?' And it's either that the company is not generating the cash that it hoped or that it's growing much faster than it expected." Bankers have a healthy suspicion about the ways in which growth companies use their credit lines, which isn't surprising, given the stresses of hypergrowth and the brashness of Inc 500 CEOs.
So if you find yourself looking like Inatome's definition of an Inc 500 entrepreneur, it may be time to take an angel investor out to lunch.
Ilan Mochari is a staff writer at Inc.
The Capital Gang
The Numbers Game
A Little Goes a Long Way
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