Here’s a question I was asked this morning:
My company operates in a highly competitive environment in a
specialized category. To gain more power in this category, we are
looking to raise more money. If you could create a list of Top 10
Things that represent value for investors, what would those be?
I’d like to answer with a top 10 list, but hey, when you think of it, there are two things that represent value for investors:
- Money now.
- Much, much more money later.
Investors write a check now because they believe that money invested will multiply. They want as much return as they think they can get, on as little investment as they think they can get away with. And don’t blame them for it; that’s their job. That’s what investment means.
Those people who write checks for startups and entrepreneurs have options. They can buy houses, cars, jets, stocks, bonds or gold bars.
You’d think that’s obvious. But I deal with this all the time, and I’m amazed at how many people confuse having a good, healthy business with making money for investors. Lots of good, healthy businesses never make money for investors. One of the worst things that can happen to investors’ money is getting trapped into a holding in a healthy, happy company that’s never going to generate any liquidity for investors.
But of course you want me to stop pontificating and list some things that will make investors believe they’re going to make much, much more money later. So here’s the rest of the top 10 list, which, by the way, ends up with nine items in total, because I’m not going to slavishly think up a tenth:
- Credible exit strategy.
- Sales growth. Proven, actual growth in the very recent past. Actual realized 50 percent per year growth for the past two years is 10 or 20 or 200 times more interesting than a sales forecast showing growth to come in the future.
- Potential sales growth. Future sales growth. Like they say, “It could happen.” Why future if not present and recent past? Investors will ask. Sometimes you can come up with a reason, something you’ve done, a new product, new technology, a relationship just won.
- Believable potential appreciation. Things that will make your company’s valuation grow. Of course that’s almost redundant, because sales growth drives valuation. But if you have a lot of Internet traffic, a special position, new technology or some other angle, that’s useful. Why will your company be worth more later? Is there a secret sauce? Is it defensible?
- Profitability. Funny how profitability isn’t as important as growth, but it isn’t. Growth builds valuation.
- Management team. People with a track record and, in the best of cases, people who have some traction with other investors, who can build your business’ valuation.
- Battle scars. The “the sadder but wiser ” factor. Last week I heard David Johnson, a venture capital fund formation expert, say: “Past failure is not a problem. It’s good to know what that feels like.”
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
