Attracting investors is a financial game, but make no mistake, it is also a marketing game – but get that it is not to your client, but to a whole different beast, to the investor. Just as in marketing, you want to know the investor’s needs, understand their pain and be able to address quickly how you can ease that pain. When your company is presented by a CEO who understands the investor needs – you will the right attention and, hopefully, the investment.

You know how to do marketing to your client - carefully picking your target audience, understanding what they need to hear, and crafting your message. When you market your business products, you learn about your clients’ priorities. When you are raising capital, switch it up. Same methodolgy, but now you are marketing your business to investors. Your prioritiy is to learn your investor’s needs.

By signalling that you understand how to work together, how to be a leader, how to communicate without hiding the truth, or being someone different when they are not in the room, you will get their attention. The next steps of building enough trust to gear up the relationship to get beyond the dating will begin to happen. Soon, you will be going down the aisle together. I will spare you the marriage metaphor, you get the point. To get to this moment of bliss, here are a few major potholes to avoid:

Assuming you are losing control

“Even with a minority position, you still have control,” says Eric Berke, Torquest Partners. “As the CEO, you are the one making the operating decisions and having the ultimate say over strategy.” Berke says that when the Torquest private equity investors pushed for Granby Steel Tanks, a company making storage tanks for fuel, to increase their price, the final decision did rest with the CEO. Once implemented, customers paid the new rates as they recognized there had not been an increase in decades but the CEO had made the choice.

Mistaking Private Equity for the Bank

Each private equity investor takes on the real risk of working side-by-side with your company for the next five to seven years. They are not collecting a comfortable banker’s salary while they wait for you to return their investment. Thomson Financial cites the average holding period of a company investment to be six years. How’s that for harsh? Certainly not for the faint hearted. Why not park that money in real estate instead?  Frankly, it’s because the private equity investor lives and breathes business.

Not recognizing it’s negotiation

Jack made all the usual mistakes of entrepreneurs in love with their business (a good thing) but not realizing that he was in a negotiation situation, not a sales pitch. (Very different.) What was he selling to these investors—his product? No! He was supposed to be selling shares in his company.

Not being a CEO

As he droned on about the product—Jack exposed himself as less than CEO material. The investors want to see you are a leader who can execute. Jack needed to show he thought big and that the business could grow well, even if competitors with deeper pockets tried to copy his product, instilling confidence that others would be unable to wrestle away client contracts. Remember this, as you start to chat with investors: before you even begin, they assume your product is the better mousetrap, now they want to know how you are going to get people to buy it and how much money you could make. History books are littered with tales of smarter products that did not capture the attention of customers, entrepreneurs who did not manage their cash flow and failed. 

Even if you are at start up stage, move from being a marketing guy or a product developer to being a CEO. Product guys do not get out enough to the finance community. When they do, too often they stay stuck to their skill topic rather than speaking like a CEO and talking financial projections, cash flow or balance sheets. Product focused leaders think numbers are for accountants, but mature leaders know the business future cash needs. 

Not gathering a team

When Fund Managers asked Jack who was on the team — who were the people involved — he name-dropped. He knew the head of Loblaws, the head of a large advertising agency was his best buddy and he could get the President of IT at IBM to come over to his place for dinner. Jack missed the point. 

Private equity is not an employer employee relationship. Level 3 Legacy companies understand that dynamic and appreciate why investors are seeking companies run by mature, team players.

Investors are betting on the people who are actually involved, not floating around loosely. You don’t need to have big names working in the business, nor does your team need to be 100% working in your business. You do need to have names and profiles of solid people willing to be written into your plan and ready at the drop of a hat to support your plan in person when asked.

Not talking about return on investment 

It’s not about the money but it’s about the money. Simple as that. Simultaneously, as the investor sees if the size of investment fits their own Internal Rate of Return (IRR) goals, they will take into account far more than the pure financial valuation. 

The investor’s IRR is the rate of growth a project (in this case, investment in your business) is expected to generate. The higher this number is, the more interested an investor will be to invest in your company. This number will also give the investor an indication of how many years it will take to get his principal back. Weighing up all of this, the investor now looks at the market. He asks himself, what is the value of my money now? I want an IRR of 25% to 30%. Why should I take the risk with Jack when I can get an income fund for 10%? If the lower risk is 10% to 12% return, then I want 30% on my money because I am not getting any security on equipment to sell if things go south.

The absolute keystone is the additional money to be made beyond the initial investment. What would be the future revenues and the rate the investors could expect? In a nutshell, the people holding the cash want to know “how much money will I make?” and “What is my risk?” They will want to know the yield. It is much like a mortgage, which gets 5% a year back. 

Assuming valuation of the business is just the money

As one investor said, “More so than a bank, private equity will recognize a strong CEO and team. If I believe in the leader, but the business is struggling or even failing, I will invest and give that business a new life with my time, effort and vision.” Value of the business is around what the future earnings could be, not the present situation.

Not being clear about what you want from Private Equity

“A huge destroyer of value in a business is if you are not clear about the role private equity will play, “ says Peter Carrescia of Information Venture Partners, “I have the most important piece of advice for owners looking for capital — you really want it? Be clear and understand that if you are not clear, then it is inevitable that infighting breaks out between investors and the company team.”

Imagine if you can (and you probably don’t want to) the day you get a cheque for your business. That’s right - a cheque signed by someone interested in your business, perhaps you imagine it’s a 10% or 75% partnership. Whatever. Pick a figure. It’s money for your business. How much do you want to see?

On your desk, next to the money, your business plan lies gleaming. Inside is the outline of the remarkable growth of a well planned and executed strategy. In fact, it tells the tale of a business started from the kernel of an idea with a few people, which has grown (with pain and horrors) to a full oak. Excellent. Now imagine the last day in your business. Write down the year. Don’t panic. No one is going to hold a gun to your head and force you to sell. Whatever you do is not the point. With that final day in mind, and the final money value in dollars clearly set, you are ready to get the financing your business deserves. It’s that simple.

Get my insights sent right to your inbox. Sign up for the newsletter.