Where Should I Start to Raise Money

Top 3 factors that influence venture fund and angel investors' funding decisions

Q.  My company produces hydro therapy spas for the rehabilitation market. The company has some patents pending. So, where do I start to raise money for growth? I've never done this before and need guidance.

A.   I have a checklist of "to do's" that help entrepreneurs approach the start of a new business in a productive, time-saving way. What my venture-bound students don't expect to read on this list is an action item to "study the finish."

Yes, I know it's hard to imagine the finish when the start seems so hazy and uncertain. But, it is worth the effort if you want to appeal to investors to help fund the business of your dreams.

Unlike entrepreneurs who find success and satisfaction in obtaining patents, serving customers and beating the competition, individual investors, called "angels" and venture fund investors ultimately only look at one benchmark of success. It's the finish. It's the point when the business is sold to Wall Street in a public offering or to a corporate acquirer for a big profit. It's the point when every shareholder's stock certificates are turned in for a pile of cash.

So why do they buy? What factors motivate companies to bid up the acquisition price of one company over another? What points of what I call "transaction value" generally lead to a good company sale? And more important, what do venture investors consider when making investment decisions?

Here are a few factors to actively research and consider:

• Know the Numbers: What are the profit margins of established companies in your industry? How does your company's projections compare? Do you have a practical, realistic chance of beating the industry average? Obviously, acquirers prefer to buy businesses that are more profitable than their own.
• Market Size Trends: Investors like to invest in businesses that not only operate in large markets, but fast growing markets too. They reason that there will be more orders, more customers and ultimately more companies interested in buying the business down the road. To get confirmation of these important trends, investors buy research reports, observe the activity of industry trade groups, and look at sector employment growth. Your job is to confirm the long-term vibrancy of your chosen market. Investors will ask for it. Get as much credible information as you can before calling any investor.
• Wall Street's Opinion: Venture investors back companies that are more likely to be "in favor" by Wall Street, especially if the company has the potential to go public. While Wall Street can be highly fickle, one more enduring measure of Wall Street sentiment is the price-to-earnings ratio or "PE." Venture investors prefer to invest in higher PE multiple industries than lower PE multiple industries.

For example, Internet advertising companies like Google trade at a whopping 60 times earnings, demonstrating Wall Street's willingness to pay a premium for Google shares. Your industry, medical equipment and appliance companies, trades at a more subdued average PE multiple of 31. And the PE industry average for home equipment, spas and furnishings is approximately 16.

Here is the primary reason why venture investors often favor high tech companies over more traditional manufacturing business lines. Tech companies tend to be highly profitable and eventually trade at high PE multiples. Investors have become conditioned to think they have a better chance of getting a nice reward at the finish.

So, how does your business look? Have you uncovered new talking points for your upcoming investor presentations? I hope so.

If you are not happy with the early results, don't despair. Think about strategies to improve your company's profitability and longer-term investment outlook. You can do it!

Take Command Action Step

Visit http://finance.yahoo.com/ for free access to industry profitability and trading information. Review specific company data too. The more you know about how companies are valued, the more equipped you will be to defend your own company's valuation to potential funding sources.

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org