Dr. Earl R. Smith II

By Erica Drake, Managing Partner
Maverick Management Consultants, LLC

Going to Battle …

Build and Lead your Army into Battle. Investors invest in people and their ability to make a company work.  In my experiences, there are two categories of people who will want to be part of your management team: The first category is what I call “the prima donnas.” They have the impressive resumes and pedigree, and at some time in their life have earned their stripes.  They may be the founder of your intellectual property, such as a doctor, engineer, or scientist.  Typically, these veterans of past wars sit back in safety and watch the battle unfold, with no risk to their lives.  When victory seems inevitable, they’ll be the first ones to arrive at the escrow closing, dressed in their uniforms and willing to step in and claim victory. Their resumes are strong, but may lack entrepreneurial experience.  Many have grown up with the cushy-comforts of the corporate world, or, if they have been an entrepreneur, it’s been a long time since they’ve been in the trenches.

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The second category is what I call “the Warrior”.  Rough around the edges, often lacking some skill sets, but these soldiers have natural intelligence and gumption.  They’re willing to go directly to the front lines with you and fight hand-to-hand combat without question.  Their passion is great, (somewhat naïve), but they’re willing to take on any adversity.  Unfortunately, these warriors don’t show well on paper or in the board room.  They often lack training and discipline, but when tough times arrive, the truth is, they’d die for you if you ask them to.

The reality of building a strong management team is you need both of these categories on your team.  In a perfect world, you’d find the rare few which share both characteristics (hopefully you’re one of them).  But when that’s not possible, think very strategically when assembling this team. Build a balanced between the two categories in your team, with experience in all of the key areas of business (Sales and Marketing, Operations, Finance, etc.).  You may have to fill in for weaknesses at the beginning until you have the funding to hire the right person for the job.

In your business plan, obviously you need to showcase the impressive resumes from people that have substantial experience in your respective industry.  That may included cutting deals with prima donnas that aren’t going to lift a finger until you get the financing done.  Accept it and understand it.  Consider it one of the costs of finding funding.  You will be able to make the business decision to compensate those who really do the leg work at a later time (put it into the Management Bonuses section in your financials).  Get your management team under employment contracts that are contingent upon closing funding.  Their compensation has to be below industry standards until the company is profitable (but also within reason.)  Investors understand people need to live.  But what they are looking for is a management team willing to put “skin in the game” and share the risk.  When the company is successful, everyone should benefit.  This can be handled through success bonuses, equity, stock, options, and the likes.

Use your team in the process of finding funding.  Ask them for their contacts and get them prospecting.  You are ultimately responsible for closing the funding, but use your team’s respective skill sets and assets to help you through this process.  Don’t be afraid to start delegating responsibilities from the very beginning, even when you can’t yet pay your team.  Brainstorm with your team.  Let them help you to arrive at solutions to problematic situations.  If you’ve assembled a great team, you’ll find out in this funding period.

Always remember, you are the leader.  Act like a leader from the very beginning.  Speak to your team with conviction and an unconditional faith that you will get the money necessary, it’s simply a matter of time.  Fight right along side your men, and you will earn their respect and devotion.  Your team will grow to be like family.  They’ll become some of the few people in the world which truly understand you and your passion.  However, there will be trying times, real tough times, and you need to know who you can trust unconditionally.  It’s sad to say, “Always watch your back.”  But, when greed, power, and egos are mixed together with tough times, there may be dissention among your ranks.  Be careful to watch for saboteurs, traitors, and even coup d’états.  It’s an unfortunate reality, but it does happen (and, I can show you my personal battle scars as proof).  Trusting your team is imperative, but trust must be earned.  You can share your frustrations with your team, but guard the details of your information and never show weakness or uncertainty.  Always maintain, no matter what, “Failure is not an option.”

Assess and Assemble your Arsenal, and Align your Allies. How do you start a company when you have limited funds to work with?  You get creative!  Assessing your assets, assembling your weapons and knowing your allies, is an art when going into battle.  Identify what you have available to you and your management team.  What can you do, and where can you go to further the process from being a pure start-up to a development stage company? When personal funding is not an option, you’re going to have to start cutting strategic alliances, joint ventures or pre-negotiating vender contracts. This creative thinking is invaluable.  Cut a deal with a marketing company to start developing your brand/vision.  Anything you can do to further along the company, the more likely it is to find an Angel investor.

Your primary asset is the people you know, and the people your management team knows.  I’m not just talking about finding prospective investors, but also what knowledge can these contacts teach you, the assets they have (other than money), and the services you can barter.  Make an exhaustible list of everyone (friends, relatives, acquaintances, members of your church or club, industry contacts, etc.).  Compile this contact list and analysis how each person or company can possibly help to further your company.  Do they have office space you can share?  Are there any attorneys you can barter future business with to help you get started now?  Is there someone to be your mentor and to teach you the investment language and strategies?  Is there a finance person to help you with your financial projects?  How about enlisting young college students which can help you to write your business plan, or to teach you how to use spread sheet, or to hook up your network, or to design your website?  Don’t leave anyone off this list.

Know your competition inside out.  You can learn so much from your competition.  Analyze the company, their operations, the key movers and shakers, their pricing and profit margins, anything you can find out about them.  Your goal is to emulate their strengths, exploit their weaknesses, and evolve your company’s battle plan based upon this knowledge.  In one of my favorite movies, “Patton,” George C. Scott, who plays Patton, says my favorite line:  “Rommel, you predictable son-of-a-bitch, I read your book.”  (Referring to a battle where Patton countered and won a major tank battle with Rommel, because Rommel had executed his battle plan exactly as he had written in his book).  Don’t fear competitors.  Learn from them in a strategic way.  Remember, competition is a good thing.  It shows there’s a market for your product or service.  You just need to be better and smarter.

Create your corporate brand and begin putting the infrastructure in place for your company.   First of all, cut a deal with a local marketing company that you know.  Analyze your financial projections and the amount of money you’re going to be spending on marketing and use this figure in your negotiations with this company.  You need to have your overall brand somewhat designed.  Start with your logo, business cards, and a web site, and then expand to producing a brochure or presentation on the company.  Look professional.  Portray your company as an already operational company.  Secondly, develop your office.  It can be a home office to start, or you can share an office with someone else.  Regardless, this office has to become the temporary headquarters of your new business empire – and organize it as such.

What other options can help you get off the starting blocks?  How about negotiating in advance with your vendors?  Consider negotiating a strategic alliance, or cutting a joint venture with a company in a similar market (think win-win situations).  Now think really outside of the box, what if you approached your competition’s indirect competition?  Heaven forbid…a tactical move and you’re not even funded yet.  You can outsmart the competition, even from a vulnerable point, if you out-think your adversities.  If your company has true value in the industry you’ll find out when you start these negotiations.  Pull out your timeline and financials from your business plan and analyze each section.  Identify where you spend money, or which companies you’ll be doing business with in the future (directly or indirectly).   Look at every vendor, consultant, or parallel industry.  You will see options to work with.

Once you have this list of contacts identified, how do you negotiation with them, and what will you offer them if you have no funding yet?  Barter with future business contracts, equity, long-term debt, and passion.  You may find that your passion earns you a free ride, and they offer up their knowledge or service as a gesture of good will.  Equity and debt are your second most important assets.  Initially entrepreneurs are very frugal with giving out equity, because they feel they’ll run out.  When I hear this, I realize that they don’t understand how dilution or corporate structuring works.  Investors will always dilute down the management team or any joint venture or strategic alliance when they come in with money (unless it’s pure debt).  There are various corporate structuring tactics which can be employed to solve these problems if you have a good corporate attorney and a great strategy.  But, regardless, don’t be afraid to give out equity to someone or company that has a true value to your company.  You want others to share in your quest for raising money and ultimately a successful business.  When others have skin in the game, they’ll share your burdens.

Perception is nine-tenths of reality.  People only know what you tell them or allow for them to see.  Portray yourself as a development stage company, and you will be.  Think very strategically on how you can manipulate different situations.  You may have to negotiate deals, implying that you’re “in the process of closing funding” (be truthful, but very vague).  This “bluffing” is an art, and there are risks involved with it. Don’t lie, but be fuzzy with timeframes and details.  Speak about your “investors” like they’re sitting right next to you (when in fact you might not have even identified them yet).  For example, go to your vendors and pre-negotiate your contracts.  They don’t know you don’t yet have the funding yet to begin operations.  It’s a tricky game.  Imply that funding is just around the corner, is the truth – it’s just the timeframe and actual name of the investors are unknown at this point. You’re going to have to take some calculated risks.  These are tough business decisions.  How people or company’s perceive you is dependant on how you present yourself and your company.  Remember – think strategically and always set up win-win situations and everyone will benefit in the end when you’re funded.

Know your Elevator Spiel. At all times you will prospecting for potential investors.  Carry yourself with confidence and you will emanate a presence that commands attention.  Cold-calling complete strangers is part of the prospecting process.  There’s no magical place where Angle investors inhabit.  They could be anywhere, but it’s up to you to find them – be it at a friend’s dinner party, a local watering hole, on an airplane, or on a short elevator ride.   Every person knows ten people.  Those ten people know ten others.  It’s networking at its very best.

Strategically start opportunities to talk with complete strangers; I call it “opening the door for yourself.”  The goal and art of this skill is to get a complete stranger to “ask you” about your company.  This is done by stimulating conversations with strangers by utilizing leading statements.  My personal favorite is to start by paying a complement to the person.  It opens the door for conversation.  Somehow I then manipulate the conversation to a point where I can say something like: “well, I have a big meeting with potential investors tomorrow…”  At this point, the stranger has no idea what I do or anything about me, but their interest is sparked by my statement and it produces a question back… “What do you do?”   This is when I hit them with the elevator spiel…

This “elevator spiel” is a two to three sentence quick description of your company and goal. You have to memorize and rehearse these few sentences, so they roll off your tongue fluidly.  They must be quick, decisive and delivered with a strong level of confidence.  If done correctly, your elevator spiel should evoke more questions, allowing you to expand upon the information.  It’ll take you time to perfect this art, but you should have unlimited opportunities to practice it.  Don’t ever negate the power of networking.  It is through this networking process that you may find your Angel investor.

Be organized.  Investors are impressed by organized entrepreneurs.  It is the small things that often make the largest impressions.  Prospecting for funding is no different than any other sales cycle.  You must develop a “Prospect Pipeline.”  Use a spread sheet or contact manager to keep track of each and every prospect which you meet.  Put the prospects into stages (i.e. Stage 1 = just met, send Executive Summary, follow-up in two days).  I like to divide my sales pipelines into 5 stages (1=just met, 5=closed funding).  Use whatever works for you, just be organized about it.  In preparing for battle, you should have already polished all of the items you will be sending out to prospects.  Now it’s time to use them.  Take action and be organized and timely about all actions you take.

Assemble your due diligence packet, and have it ready for review.  This will include copies of all Agreements, Subscription Agreements, the company’s incorporation papers, and your Corporate Operating Agreement.  You’ll also need to have an NDA (Non-disclosure Agreement) to send prospects.  If you don’t have one, go on line and find one and edit it.  Seeing as I’m a Darwinist, I believe wholeheartedly in survival of the fittest (and most organized).  As a sales executive, I understand that for every ten prospects I talk to, only two are going to have any real potential.  It’s a process and a numbers game – so be diligent.

Prospect, Prospect, Prospect. There are many ways to prospect for potential investors, be it through personal networking or online networking.  The bottom line is you never know where you may find your Angel. Try to cold call in warm markets. Brainstorm for synergy and win-win situations. Think strategically and never be afraid to ask!

Expect in your prospecting period, that there will be many bad prospects – “wolves in sheep clothing.”  You’ll also often have to deal with the gate keepers to the actual money – Investment Bankers, Fund Managers, or even attorneys overseeing trusts.  Most people in the investment community are well educated, extremely experienced, licensed business professionals, who understand what it takes to make a successful investment decision.  However, there are the “others” – imposters, who are nothing more than low-level bookies, loan-sharks or thieves, disguised in five-hundred dollar suits with fancy websites and the promises of instant funding.  It’s often difficult to disseminate the real from the imposters.  You may chase many prospects down dead-end streets.  Others will lead you on wild goose chases that will frustrate the hell out of you.  Just persist, and don’t forget that your prospect pipeline is a funnel – it may take hundreds of leads, many painful and time-consuming battle scars for you to finally find your one Angel investor.  This is the battle field…there’s land minds, booby-traps, and the enemy everywhere.  Regardless, you have to persevere.  Don’t disregard any leads – you may be surprised by the form your Angel comes in.

I once received funding from an Angel investor that I found through the most unlikely person.  This man was an acquaintance of one of my “wolves in sheep clothing” prospects.  He was disheveled (to say the least), and spoke only what could be described as “Ebonics.”  My first impression was to immediately disregard his interest in helping me, especially given the circumstances in how I met him.  But his persistence won out, and I kept an open-mind.  With nothing but my Executive Summary and sheer determination, this uneducated man cold-called an investment banker he found listed the telephone book.  I’ll never know how he actually got to the man.  But as it turns out, this investment banker knew my industry well and my Executive Summary sparked his interest.  In the end, this unlikely fellow found me my Angle investor.  You never know where you’ll find your Angel.  But, never stop prospecting.  The line I used as an entrepreneur was simple: “my name is Erica Drake and I need $2 million, do you have $2 million?”   You’d be surprised how many people said yes…

Meeting with the Investors and Structure your deal strategically. When you’ve finally arrived at the front lines, to win this battle you must understand the power struggle which exists between investors and entrepreneurs.  I’ve had investors say to me, “We play by the golden rule – he who has the gold rules!”  Expect this arrogant attitude from them.  They often will try to intimidate you, or to push you to accept less money with quicker exit strategies.  They may even ask to control the day-to-day business decisions.  Let them ask, it doesn’t mean you have to say “yes.”  Manage this power struggle by initially allowing their egos to think they have the ultimate power.  By letting them underestimate you, you actually gain a strategic advantage.  You in the end will control the final decision, but only after you have them completely sold on the investment opportunity.

In the actual meeting, bring your best warrior and your key prima donna.  There can be no power struggle shown by your management team. You must take the total lead in the presentation.  Be organized and role play out how you will present the company in your sales pitch.  You will need to tell your story – a five to ten minute brief history of yourself, your background as it relates to this project, and why you have the experience to run this company.  Don’t be afraid to show your war scars.  Wear them with pride, so long as you can explain how they were acquired in battle, and what you learned from that battle.  Investors don’t want to go into war with an inexperienced general or one that lies to them.  In the end, an investor is investing in your ability to make this company work.  Sell your passion, conviction, and intelligence.  Let your personality come out, and be comfortable with who you are and your role the leader.

Get into the heads of your investor prospects.  Remember, inherently, investor must invest money to do their jobs (otherwise they just are called “savers”).  In colloquial terms, an investor is a professional gambler, whose job is to weight-out the calculated risks against return on investment (ROI) for themselves or their clients. Inevitably your relationship with your investors will be somewhat tense.  Take the lead by suggesting that milestones (parameters) be set up to gauge your success.  By suggesting this option, you can also ensure that you design these parameters, in such as way, that you are confident that you will achieve them (unconditionally).  By initiating this suggestion, you show the investors your level of confidence.  By defining the parameters of “success” in advance, you may save the day.  Also, if the investor requires milestones to be reached to trigger further funding, be sure this funding is already escrowed. Too often the entrepreneur reaches their goals, yet the Angel investor no longer has liquid capital to invest.

To tell an entrepreneur that a prospective Angel investor may not be ideal is like telling a starving man that the food doesn’t taste very good. As a fellow entrepreneur, the passion and desire to find funding – any funding often out weights a logical business decision. If you must take funding from a less than desirable source, be sure to structure your deal using specific milestones, a strong corporate operating agreement and a pre-determined exit strategy or funding round.

When you’ve finally sold the investor, they will most likely be the ones to suggest the deal structuring to you.  They may discuss it, or they may simply send you an LOI (Letter of Intent).  By this point, they’ve already pre-qualified you by asking if you’re looking for debt, equity, or a combination (such as a convertible debenture, which is simply debt that turns into equity).  You’ll have to agree upon valuations, milestones, funding disbursements and exit strategies.  The investors will push you, but stand strong.  Now you can show your true strengths.  Remember, the number one reason companies fail, is undercapitalization.  Once you have them partially invested, you actually control the game – you’re stuck with them, but they’re also stuck with you.  A strong corporate attorney, who fully understands corporate structuring, can write into the operating agreement key things to protect your level of power.  But, when all is said in done, don’t be greedy, be grateful that you’ve finally found your Angel…and you’ve won the 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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