Dr. Earl R. Smith II

By Erica Drake, Managing Partner
Maverick Management Consultants, LLC

I’m a veteran entrepreneur. I’ve experienced the entire process of taking an idea from conception to funding with Angel investors many times now, (and I have the battle scares to prove it).  Over the past 15 years, with limited start-up funds, I’ve raised millions with Angel investors.  Now I advise and assist other entrepreneurs in their quest for capital.  My advice to you isn’t something I learned at Harvard or Wharton, but rather at the “school of hard knocks.”  What I offer to you are hard-core recommendations straight from the trenches.

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Finding funding is a process.  It takes what I call the “3 D’s” – desire, determination and discipline.  I use the analogy of “going to battle” for two reasons – first, because it is a battle, (sometimes fought solely in your head); and second, because if you get through this process and find the funding you need, you’ve only won the battle…not the war.  Your enemy isn’t your competition, the investment community or all the obstacles you’ll encounter, but failure…the failure to find the funding you need and the inevitable the death of your dream.

My goal is to prepare you for this battle by teaching you to think strategically from the very beginning, to break your ego so you’ll learn, and to dispel any thoughts you may have that this will be an easy process (in the hope of toughening you up to get you through to a euphoric victory).  When you finally find an Angle Investor interested in funding your dream, you’d better be ready.  Don’t be the entrepreneur who goes into battle with the practice of “ready, fire, aim” because you might not get a second shot.  If you unconditionally believe your business model is viable, and you’ve proven it to yourself time and time again through hard-core research and experience, then you must learn to out-think your adversities, be prepared, and never give up.

Preparing for Battle…

Mentally suit-up for battle – each and every day.  More then half of this battle to find funding will be won in your head and before the battle ever begins.  As an entrepreneur, you must be willing to do whatever it takes to get the job done.  First and foremost, you must unconditionally adapt the attitude of “failure is not an option.”   Visualize, in detail, on a daily basis your successful outcome.  With that said, you’re going to be playing many roles in this process (from General to Officer to Infantryman).

The beginning usually begins with having to bootstrap it together until funding becomes available. In my experience, that never comes never soon enough, but regardless, you must survive and persevere.  The initial goal is to creatively “think outside of the box” to find solutions to further the company from a purely start-up stage to a development stage company.  In general, investors shy away from pure start-ups.  They want to see some substance.  Every company is a start-up at a certain point, but how quickly you develop out of this stage normally determines how quickly funding comes in.  Remember, there’s always a solution- you just might not have thought of it yet.

Be ready for the tough times.  Finding an Angel Investor may take time.  Your personal finances and relationships may be strained during this funding process.  You’re most likely going to deplete all of your personal monetary reserves to continue this quest.  This will cause problems and times will get very lean.  So be prepared.  Don’t embark on this venture with a frail heart or without weighing the costs – there will be casualties in this battle.  Family and friends are going to think you’re crazy.  They most likely won’t share your passion; in fact, they’ll quickly grow tired of hearing you talk about “your crazy idea.”  They will become your first round of nay-sayers.  Develop your calluses quickly.  Expect it, accept it, and move on.  Pioneers never have it easy – adversity is part of the initiation to greatness.  Remember people like Walt Disney and Thomas Edison – it took a lot of “no’s” and failures to finally make their dreams into reality.

Do whatever it takes to eat and to live during this process.  This gestation period may involve some very unpleasant times, some lousy jobs, and comments you don’t particularly like from people you love and respect.  Nevertheless, always maintain in your head and heart, that you are the President of your dream.  Carry yourself as the leader of what you visualize your company will be when it is fully operational and successful.  This attitude will emanate through your personality and investors will see it.

In Sun Tzu’s book, The Art of War (a must read for any strategic mind), he has a set of rules for going to war.  My favorite of the rules (paraphrased) instructs the leader to “burn the bridges” – referring to burning the bridges behind the army as they advance – so as to cut off any thoughts of retreating.  You might have to burn some bridges as you advance.  The sacrifices may be great.  But, investors are looking for leaders which not only have great ideas, but more importantly, can be in the heat of battle, and still think strategically and logically to find a positive solution.  If you give yourself an out, you may take it in tough times.  If there’s no other alternative then to find a solution, you’d be surprised how creative your mind can be.  Again, I liken it to battle – it’s simple, when reduced to hand-to-hand combat. What will you do – run or fight?  Investors who are willing to give you substantial sums of money want to know the answer to this very question.

Don’t let your ego prevent you from learning. Many entrepreneurs may have the skills to run their respective business, but they lack the skill set to find the funding.  Unfortunately, their egos prevent them from learning or asking for help when they truly need it.  The job of finding an investor can’t be delegated to someone else.  Angels don’t invest in hired guns.  They invest in passion – and that lives in the entrepreneur.  With that said, if the entrepreneur doesn’t know how to communicate with investors from the front lines, they must learn.    Although I have an excellent formal education, maybe in spite of it, the most practical knowledge I ever learned (bar none), was that I could teach myself anything if I was willing to admit my ignorance, and I had the desire to learn.  It’s much easier to ask for help, then to go through life ignorant. Communicating your desire to learn something is not a weakness.  Most people welcome the opportunity to teach someone who has a genuine desire to learn.  So, if you don’t know how to prospect for investors, ask for help. If you don’t understand the investment language (i.e. what a convertible debenture or dilution is)…then ask and learn. Too often I deal with entrepreneurs who are afraid to admit that they don’t understand. When all is said and done, you as the entrepreneur must learn the strategies and language of working with investors sooner or later to manage your business – and sooner is much preferred.

Find a Mentor.  I recommend to all entrepreneurs to find a mentor (be it a hired experienced professional, or a personal friend).  I was blessed to have two key mentors who changed my life.  They taught me what I desperately needed to know, not only about how to find funding, but also how to deal with the investors after I accepted the funding.  My primary mentor was my very intelligent uncle, (who’s truly an entrepreneur trapped in a high-powered corporate attorney’s body).  I could admit to him my total ignorance.  At the time I began my entrepreneurial career, all I had to offer was sheer passion, unrelenting desire and a great business idea in an industry I knew well.  My uncle patiently taught me the language of investors, how corporate structuring works, and most importantly, how to think strategically in advance of negotiating and to always set up win-win situation.  By understanding my options with corporate structuring, debt, equity and the likes, I had a strategic advantage going into all my negotiations, (be it with investors, management team members, strategic alliances, etc.).  My second mentor was the head of a very large investment banking company.  He taught me to think from the investor’s side of the battle field.  Knowledge is power.  If you know what the investor is looking for in advance, you can tailor your presentation to meet their needs.

Making the Battle Plan – Be prepared. You never get a second chance to make a first impression. Having a battle plan is not just about writing a business plan (or Executive Summary).  It’s about being prepared for any circumstances.  A battle plan outlines a number of elements: the first being how the company will be built and run.  Remember, you’re selling two things to a prospective investor: the business model (described in detail in the business plan) and your ability to make that plan a reality.  So, if you have a bad business plan, you’re already setting yourself up for failure.

The second feature of your battle plan identifies your investor target market.  Your best chance of finding funding is to be cold-calling in warm markets.  Therefore, identify key prospects and know where to find these prospects.

And lastly, your battle plan will identify your corporate structuring, financing rounds, type of funding desired (be it debt, equity, or a combination) and proposed exit strategy.  What is the desired equity split (not only with investors, but management team members, strategic alliances, etc.) at the time of funding, and then at the point of the exit strategy (taking into consideration dilution)?  Who will be on your Board of Directors (BOD) and who will control the BOD?  All of these questions need to be addressed in your corporate operating agreement.  Investors will ask these questions. If you don’t know the answers, you could blow the funding.

Often when I ask entrepreneurs about details which I see left out of their Executive Summary or Business Plan, they respond, “Well, I’ve thought of all that – it’s just in my head.” That answer won’t cut it with prospective investor.  Take every idea and desired outcome living in your head and put it down on paper.   You may not be a Hemingway, write anyway. The process will make you contemplate and develop an answer to every detail and division of the company.  Secondly, you’ll learn the selling points of your company (from competitive advantages to the financial rewards).  Another key element of your plan should be a detailed action timeline. This timeline will help you when designing the financial models, disbursement of funding, and closing of the investors in a timely manner.  And lastly, you need to be able to convince and to communicate all of this to the prospective investor. Remember, the investors may or may not know anything about your industry/venture.  They don’t know how and when you are going to build the infrastructure, lead the team, manage the finances and most of all make them money.  Your job is to describe and to communicate all of these details of your company to them in a clear and organized set of documents.

Whether you hire someone to assist you in writing your business plan or you write it yourself, spend the time to do it right.  Don’t let someone talk you into the template-type business plan.  If your plan is not thorough, it’s useless (junk in – junk out).  The mental masturbation process, call it day-dreaming or brainstorming, that you go through while writing this business plan is imperative to coming up with the great ideas.  Think in details.  Start visually by drawing everything out in diagrams and then put them into outlines and timelines.  Write down all of your ideas – everything that comes into your head goes down onto paper.  From the idea you had sitting in traffic, to when you’re standing in the shower – write them all down.  Then categorize these ideas into departments (i.e. operations, sales, marketing, vendors, infrastructure, finance, pricing, competition, etc.).  When you have all the ideas organized, if you don’t feel comfortable writing the business plan, hire someone to convert your ideas into a professional plan.  And then lastly, please have the plan proof read, then have it proof read again.  Don’t be sloppy with something this important in your life.  Professionally print it, bind it and make it look worthy of the funding you’re requesting.

Know your numbers. Investors want to know the numbers. The details of the business and how it will save the world aren’t as sexy as the P & L Summary.  Understand that you don’t have to be a CFO or CPA to build financial projections.  Most entrepreneurs procrastinate on building their financial models because they’re not skilled in doing so.  CPA’s and even CFO’s are not always the best at this task, simply because financial models are projections based upon assumptions.  They’re not black and white numbers, there’s room for gray here.  Understanding how your financial projections were built and how to manipulate your spread sheets is critical in finding funding.  Investors may ask you to manipulate the spread sheets to show the company with different funding scenarios (i.e. staged funding, faster or slower growth, acquisitions, etc).  If your spread sheets are set up correctly (linked together and locked), this can be done quite easily.  Find someone who is great at spreadsheets to teach you how to use them.  This is imperative information you need to know.

When you’re in a meeting, Investor prospects will throw-out questions like: “What’s your break-even point, monthly burn rate, and EBITDA year one?”  You need to be able to rattle these answers off without thought.  Understanding these financial terms is imperative.  As for which reports to have in your financial projections, I suggest (at a minimum) of having: an S, G & A; a P & L (Profit and Loss/also known as an Income Statement); a Cash Flow Statement; a Use of Proceeds; a Balance Sheet; and, a Year 1-5 Financial Summary.  Be sure to clearly explain how you arrived at all of assumptions used in these financial projections.  Investors will ask you to explain them and often give proof that they can be obtained as projected.

Now, understand that when you do find an Angel investor willing to fund your company, most likely they will require milestones for success (sometimes call “proof of concept” or parameters).  These parameters will be derived from the financials projections.  So give yourself some room for error.  Financial projections which grow too quickly draw red flags with investors.  It’s almost always going to take longer and more money than you first project.  Most likely the investors will do their own modeling based upon the assumption you’ve given them as part of their due diligence.

Next: Going into Battle

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Ms. Drake has been an executive, entrepreneur and business advisor for over 25 years. Her leadership roles have included executive positions with cruise lines, tour operators, travel consortiums, luxury hotels, and as an executive business consultant in numerous different industries.   Ms. Drake has been a maverick in her career with her innovative ideas and personal passion.   As founder and President of three different companies, she has refined her expertise in creative solutions to raising capital, deal structuring, contract negotiations, and sales and marketing.  She has successful raised millions with Angel investors, and she spearheaded many funding negotiations around the world for multi-million dollar projects.  She is well respected by fellow executives and has extensive knowledge of corporate structuring, sales and marketing, investment banking and strategic negotiations.  Currently, Ms. Drake is the Managing Partner of Maverick Management Consultants, where she assists and advises corporations of all sizes with the tasks of raising capital for their companies (from $500K bridge loans to $200MM acquisitions).  Ms. Drake’s entrepreneurial experience has taught her how to the see the macro-vision of the company’s direction, while developing the micro-elements that make it successful.

Ms. Drake’s titles have included Sales Manager, Director of Sales, Regional Sales Manager, National Director of Sales and Marketing, Vice President, and President and CEO. She is a graduate of the University of Paris – Sorbonne and George Mason University, where she earned a Bachelor of Arts degree in French.

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

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