Dr. Earl R. Smith II

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

When I first started this series of articles I had no idea that it would extend to seven. I also did not anticipate the level of interest in the topic. Many who read the opening article had not thought of the question ‘how does my company stack up against a professional definition of investment grade’. Others had thought about it but not in any systematic fashion. It is always gratifying to write about something that readers care deeply about. It is even more gratifying to engage them in discussions that result from that writing. Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

The objective of this series has been to describe the characteristics of a company that make it attractive to investors. The series began with the realization that many entrepreneurs simply do not have the ability to see their company through the eyes of the people they are hoping will fund it. The result from these disconnects are often tragic and seldom edifying. Companies that should be funded are not. Businesses that should have a chance to get off the ground and onto a path to profitability do not get that chance. Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

In this installment of the series I want to focus on exit strategies. The first and most important thing to realize is that the expectations and, indeed, objectives of investors are necessarily different from those of the management team. The investor’s time horizon extends, by definition, only so far as a liquidity event that will allow them to recover their capital and realize a substantial profit from having taken the risk of investment. The management team needs to take a much longer view. They should be interested in building the company, and their wealth, far beyond that point. Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

In the first three parts of this series I discussed major areas of focus for investors considering funding a company. Briefly, they were:

• Implementation – Are the founders implementing or just talking about implementing once they get the funding?
• The Value Proposition – How scalable is the business model, what are the margins and are they sustainable? Have the founders proven that they can monetize the value proposition?
• The Team – Is the team balanced, experienced and operating as a team? Are there weak members? Are they a team or a gaggle? What are the tracks in the snow that show that they can build and manage a company?

Generally these and many more questions have to be answered satisfactorily before a professional investor turns to the financial projections provided by the founders. Amateurs will start with them, but this is more an indication that they are amateurs than anything else. Financial projections need to be analyzed within the context of well developed and tested knowledge of the team that is providing them. Otherwise, you are looking at a series of spreadsheets that may or may not be realistic or reliable projections of an achievable future. Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

In the first article in this series I offered a general definition of ‘investment grade’ and discussed the first issue that most investors look at. They generally start by asking are the entrepreneurs implementers or discussers? Most investors have had bad experiences with founders who are ‘all hat and no cattle’. The second screen that most investors use is a close evaluation of the value proposition that the company is based on. They are interested in sustainable margins and scalability. Investors want to see that the value proposition has been market tested and has resulted in a growing list of referencable customers. This helps the investors answer a series of fundamental questions such as: Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

In the first part of this series, I outlined the general characteristics of an ‘investment grade’ opportunity. I also described how the process can so easily end up being a waste of time for both investors and entrepreneurs. Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

Entrepreneurs frequently enter the money chase much too early in the game. They often start as soon as they have a business plan finished; if not before. Most presentations that investors see fall into this category. The results are beneficial to the investors because they get regular insights into developments within a space they find interesting. Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

Venture funded companies exist in an uneasy truce between management and their investors. This is a healthy situation. The objectives of the investors are ordinarily different from those of the management team. Investors tend to see their participation in the company within the framework of an investment. They put up $X at the beginning of month one and expect to receive, at minimum, $Y within a fairly short time. For early-stage investors, a short time means anything from twenty-four to sixty months. They see themselves in a very risky business and attempt to mitigate that risk by spreading their investments over a portfolio of companies. Investors are in the business of extending their wealth. Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

Very few entrepreneurs take the time to really study their company from the perspective of an investor. Those that do are often initially frustrated by what they see as a heartless and antiseptic assessment of the object of their passion and dedication. But, if they fight through those self-justifying tendencies and come to understand the investors perspective, they can substantially improve their chances of fathoming the process and, perhaps, of getting funded. The investor’s world is quite different from the entrepreneurs in many ways. But there are also similarities. Read the rest of this entry »

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

I attend a fair number of ‘presentation events’ over the course of a year. Mostly they have the same format. A panel of investors has been brought together. Applications for submission have been received from a wide range of start-up companies seeking funding. The applications have been reviewed and a lucky few have been invited to present. The room is packed with investors feeling important and the center of attention, nervous teams going over their last minute check lists and envious audience members. As the program advances, it is clear that many of the presenting teams have not asked a very simple question. Should they be in the Money Chase at all? Read the rest of this entry »