Page 216 - Finance for Non-Financial Managers

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Attracting Outside Investors
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• An organization with a reasonable management team in
place and ready to carry out the plan, perhaps some
interested prospective buyers, and maybe even a few cus-
tomers to help prove market potential
• As many of the things on the venture capitalists’ list (in
the next section) as possible.
The first professional investor to take a chance on a compa-
ny will typically be able to obtain a substantial percentage of
ownership in the company in return for an investment. The
early-stage investor commands a strong ownership position
because he or she is taking a chance very early in the game,
when the risk of loss is correspondingly higher than later, when
some parts of the idea have been proven.
These first-round professional investors will often take an
active role in helping the company grow. This first outside
investor will serve on the board of directors and/or advisory
board. He or she may help the founder attract key executives to
the management team or, if the need is acute and the company
is not ready for high-level employees just yet, strategic man-
agement consultants. The investor will typically provide guid-
ance; many are seasoned executives or entrepreneurs.
For some companies, these early-stage investors will pro-
vide all the outside capital needed to reach profitability. A start-
up company that does not require huge infusions of cash for
research and development may be able to build sales momen-
tum early on and use much of its investors’ money to establish
market position and put a sales organization in place. This will
hasten the climb to profits and self-sufficiency and enable the
investors to earn a good return on their money in a short time.
This is not the normal situation, however, as start-up com-
panies will typically take three to five years or more before their
investors can convert their investment into cash again. The
more typical start-up company that requires investor capital will
need several infusions or rounds of capital before it is self-suffi-
cient in terms of cash flow. Early-round money may be needed