During their initial conversations and quite apart from the deal that they were discussing, the investor, who ran an investment bank in the Midwest, recommended her own personal business coach to Osolind. "It was in a very offhanded way. She said she'd seen her before and that she was really wonderful," Osolind recalls. Osolind was looking for an adviser and made an appointment with the coach. She was sitting in the coach's nicely appointed downtown Chicago office, and they started to discuss Osolind's situation. Then the coach did something startling. "She suggested quite strongly that I execute the contract with the private equity investor, without doing any further due diligence," she says. The coach even picked up her phone to call Osolind's would-be investor.
Osolind realized she was experiencing a bizarre high-pressure tactic and immediately walked out of the office, called the investor, and called the deal off. "I laughed really hard and had a couple of drinks that evening," she says. Osolind decided to revamp her billing procedure, and soon her company had solved its cash-flow problems, sans investors. Reflecting on it now, she says, "Not all investors care about your interests as an entrepreneur, and some will do whatever it takes to close a deal. They'll prey on your cash-flow crisis, they'll prey on your lack of confidence. You have to find the strength to walk away."
While you're not likely to experience such strenuous bulldozing, you will feel the pressure of the rush to close--from yourself and from your investor. Just knowing that will happen in advance will help you prepare for it.
2. You don't know what you want
The offer in front of Darrell Pittard, CEO of MagnetBank, was $100 million in funding. Pittard had intended to raise only $50 million, and this was the first offer he'd received, so you'd think he'd be thrilled. After all, he'd already shepherded his Salt Lake City-based industrial bank through its start-up phase and was looking to open more locations and expand his lending operations. Wouldn't more cash on hand--perhaps, even, a more aggressive expansion plan--be a good thing?
This particular investor, a wealthy individual, had owned a bank and offered more than just his funding. "It would have been very easy to take his money," says Pittard. But before he'd set out to find investors, Pittard had given a lot of thought to what, exactly, he was looking for. And for him, the right investor was a group of smaller ones. He didn't want any single private equity investor to have more than a 20 percent stake in the company. This investor wanted 80 percent. "We'd be the hired help," Pittard says. "Working for him would be no different than working for IBM." In the end, he talked to 35 more potential investors before settling on six different ones who offered what he was looking for.
On the other hand, a similar offer in front of Christopher York, CEO of InfuScience, a Gurnee, Illinois-based company that provides intravenous medication services to patients, would have been just right. York preferred to give up more equity--even majority control--to a single investor, get one chunk of change, and get back to work. He recently raised $50 million in private equity, and it came from a single investor, who took a stake of more than 60 percent. Sure, he's giving up his majority control, but the money and the guidance and contacts that come with it make it worthwhile, in his view. "I have a friend in the middle of building a company, and he goes and raises $2 million here, $2 million there; his entire life revolves around talking to investors and raising money," York says. "I raise money once, and then I spend the rest of my time recruiting people, meeting with customers, running my company."
The first step to a good deal is figuring out what it looks like well in advance. After all, you can be sure that serious investors will sort out what an ideal investment looks like for them. Without a detailed picture in mind, you're already a step behind in the dance.
You may be like York and prefer one big kahuna. Or you may be more like Pittard, who likes his investors diluted. Either way, what really matters, and what sets York and Pittard apart from many entrepreneurs, is that they gave lots of thought to what they were looking for--before they'd even cleared their throat in a conversation with a potential investor.
What factors should you consider as you create your ideal investor profile? Tackle the basics first. How much money do you want? How much equity are you comfortable giving up? How quickly is your company growing? How long do you expect the investors to stick around? When you get all of this sorted out, stick with it, advises Alex Temel. He mentions one client he has been advising for seven years. "He told me he wanted to make $200 million when he sold his company," Temel says. Now the $200 million is on the table, and the CEO is dithering. After all, if he can get $200 million, perhaps he can get $300 million? Perhaps. But as often as not, Temel says, deals fall apart when an entrepreneur changes the terms in midstream. "Pick a number and stick with it," he says.
3. You're not ready to cede control
Dean Stoecker wanted to expand SRC, his business-intelligence software firm based in Orange, California, into a $100 million powerhouse. To get there, he figured he needed to invest between $12 million and $15 million to fund new sales and marketing initiatives, and he set about the task of raising the money through private equity investors. The fun part, he says, was figuring out how he'd spend all the money he was raising. But actually talking to the investors? "It was horrible," he says. "I was very turned off to the VCs and to their approach to business." He felt that he was talking to "young whippersnapper M.B.A.'s who know a ton about money but not a lot about the entrepreneurial spirit." When investors mentioned exactly how involved they planned to be in managing the company, his blood ran cold.
