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It has been two days since the conclusion of the Southeast Private Equity Conference.   I’m in Hilton Head, enjoying the view of the pool, drinking my coffee and enjoying my euphoria over the success of the inaugural Southeast Private Equity Conference.   I’m taking a deep breath and taking time to submit this blog entry.   Drew Ermec of Catalyst Magazine attended and blogged live from SPEC (http://www.catalystmag.com/Blog/index.html ) From the pre-SPEC presenter workshop–”What’s your secret sauce?” to the electric energy in the air throughout the EXPO and the challenge of pitching in 9 minutes, Drew captured the experience of SPEC. 

We had over 150 entrepreneurs, investors, and others associated with early stage company growth in attendance for the day and  a half event.   There were great break out sessions.    Taylor Consulting, as a sponsor, was the moderator for the Valuation session with a panelist of VCs, Investors and other valuation experts.  Comments regarding the presentation and panel discussion for Valuation ranged from “Very Helpful” to “Good insights into what is needed and how to go about getting it and why”.   The Bootstrapping your Business session was geared toward companies getting going and growing while conserving their capital and had feedback like “Content was great. Format was superb.  I enjoyed the whole session and could take another hour.”   The attendees in that session accumulated a list of free resources to be shared with everyone.  

But of course the main purpose of the Southeast Private Equity Conference wasn’t education…that was the side benefit.   The main purpose was for these bright, aspiring, innovative, and impressive entrepreneurs to connect with capital….specifically investment capital.   And that they did.  With the economy in flux, the markets in turmoil, investors came from far and wide to attend this event.   Unfortunately, the representation from the local Atlanta investor community was less than expected because many of the NBAI members could not attend because of scheduling conflicts and other notable investors would not attend because of misplaced loyalty to some group or socialist concept that entrepreneurs should get services and capital for free.  They will never know what they missed—in meeting and helping great companies and in showing their support for an endeavor that would establish Atlanta as the heart of early stage capital markets for the Southeast.  Many local investors, fund managers and investment bankers did attend…Noro-Moseley, Fulcrum Ventures, Venture +Value, Jackson Securities, Key Bank, Focus Partners, EGL Holdings, Future Factory and scores of private investors.  In addition, investors from Florida, Tennessee, South Carolina and beyond attended SPEC and got to meet the entrepreneurial stars of tomorrow.   Feedback from the entrepreneurs included “well-organized event, top grade”; and “Very good conference and was run professionally.  Made several good investor contacts.”  Many companies reported having as many as 20 investors to follow up with.   Some made strategic connections with potential joint venture partners.   We’ll hear a lot of their direct reaction on the SPEC Talk Radio show today www.blogtalkradio.com/karen-rands .  

A highlight film was shot and many testimonials were video-graphed.    They will be made available as soon as possible.   For our first event, prepared for over a long time, but actually put together in just 10 weeks…it was a smashing success and we know the next one will be even betters with more investors, and sponsors and companies with even more exciting projects further along.   We gave away awards for most Innovative Company from the Showcase where the companies pitched their 9 minute investor presentation.   Winners were tied in the first session with P2P Cash and ServusXchange, and in the second session it was Maxum Games.  ServusXchange and Maxum Games were interviewed during the 4/25 SPEC Talk Radio show which can be replayed at www.kugarand.podomatic.com or at www.blogtalkradio.com/karen-randsP2P cash will be on a future show.    We let all the attendees vote on the Best of Show from the companies exhibiting in the EXPO.   Best Bio-med Product was Filtrx, a topical filter you where to prevent allergens from entering your body.   Best Consumer Products company was Red Clay People, offering beautiful hand made leather garments adorned with shells and stones.   Best Media company went to Atlanta Petz, a soon to be franchised across the region Pet magazine currently with 30,000 readers in Atlanta.  Best Technology went to Bia-Sun, an innovative approach to deliver digital media, news, coaching, education based on a schedule set by the user.

We look forward to the continued good news we receive from the sponsors and attendees about the business they completed as a result of participation in SPEC.  We hope to take SPEC to another market in the fall and then return to Atlanta next Spring.   Any community wanting to bring together investors and entrepreneurs to stimulate economic growth in their own back yard should contact us at management @sePrivateEquity.org.   We had tremendous community support from the local chambers, the State of GA Economic Development office, the SBDC, and other entrepreneurial organizations….all listed as Co-op Sponsors at www.sePrivateEquity.org.

This question comes up often and we see companies that never pull the trigger because they constantly feel that they aren’t ready for investors.   We also see companies jump the gun and blow their shot with investors because they don’t have their act together enough.  

First you must realize that a large portion of the money that is put into start up and early stage companies is done so because a relationship was formed.   A trust was forged between the investor and the entrepreneur.   It is true that as a company creates momentum and creates a buzz within the investor community, “strangers” will be investing because they know someone who has also invested or message is clear on how they will make money on the deal.  

So, even at the seed stage, a company should have an elevator pitch (see the other entry in this blog regarding elevator pitches and visit www.blogtalkradio.com/karen-randsand listen to the 3/21 broadcast), so they can plant the seed in the investor to either go ahead and take the chance on the starting of this company, or so they will stay in touch and invest in the future when the company is beginning to accomplish the milestones.  

Preparation comes in multiple forms:

1. Messaging:  Can you articulate the value proposition….to you target market and to the investor on how they will get a “pay raise” by choosing to put their money in your company.
2. Structure:   Do you know how much you are looking for and what part of the company you will give up for that?   Is it based on solid inputs to establish the value of the stock?
3. Offering: Whether taking $100,000 or $1,000,000, there are  documents that must be signed and you must establish a legal protocol for collecting the money.   That Protocol includes documents to validate the investor has enough wealth to make the investment, and legal documents that state the risks associated with the investment that are signed by the investor.   For smaller amounts they can be done with subscription agreements and stock holder agreements.   As the amount of money sought increases, so does the complexity and therefore would require a Private Placement Memorandum.  
4. Budgeting: it costs time and money to raise money.   You must plan accordingly.   It is very difficult to raise a lot of money and run your company.   You need to either hire someone to run the company or to run your investor campaign.   There are the costs associated with going to different conferences…. if you are still figuring out your messaging, stick to the networking expo (SPEC will have one www.sePrivateEquity.org ) that doesn’t cost  much.   Pay to present to a group of investors only after you have raised part of your round and you need to finish that round and you have ALL of your financial and investor docs completed. 

 At an expo, the goal is to plant a see with investor so they know you and you know them and you can follow up meetings and get the 2-hour listening ear.   When you present to a group of investors and you’ll pay anywhere from $2000 to $4000  for that opportunity, it is important to understand you are the entertainment for those investors.   So entertain and then “ask for the order”….which is a meeting to further discuss investment in your opportunity.  Best of luck

Asked on Linked in, here is the compilation of my answers and Justin Townsley’s answer.

Venture capital institutions are easy to find through a Google search. Many Venture Capital firms today are really interested in providing later stage growth financing than the early stage rounds that the name would suggest. If it’s early stage, you’ll find recommendations in order for the stage that most investment types come in: 1, 3F’s (family, friends, “fools”), 2. angels and high-net-worth private individuals who like to invest speculatively in such situations, 3. private equity investors (essentially very HNW angels), 4. private equity funds, 5. VC and/or mezzanine funds. Often times, by the time you’re in a position to attract VC/mezzanine funds, you ought to be able to secure debt through an alternative lender you will provide a line of credit or purchase order financing, and avoid further dilution. 

You can find VCs via many directories, but getting their attention is a whole other thing indeed.  The best thing for you to do is to get a one-page description of your opportunity and what stage it’s in, then circulate it for reaction among a short list of prospects. The one pager is a start, but the business plan must be impeccable and compelling or it will just be circular filed.   

It is important to understand two key distinctions between private investors such as Angels and Venture Capital firms.   Private Investors or Accredited investors (angels) are investing their own money, they have many options and choices (taking a vacation around the world or investing in your business), they want to get a pay raise on their money if they are going to move it from someplace it is making money for them now and put into your business, they don’t often have negotiating power (nature of a PPM) so if they think the terms are off because the founder has set the valuation too high, they just walk, because to them, and this is the clincher, nothing bad happens if they don’t invest.   They believe they will have another opportunity on another great deal next month.

VCs on the other hand are money managers that have raised funds from Trusts, Super Angels, institutional funds etc.   They are paid a fee to manage that money by investing in companies which meet specific criteria with the expectation that it will produce a multiple on the money.   If they do not invest it on a regular schedule and by certain dates, then they have to return the money and they don’t want to do that.   Because they are managing $100m let’s say, they must make larger investments than what the typical angel invests because they can only effectively manage 20 or less companies within that fund.   Since the invested amount of money is larger, they have leverage to negotiate terms and drive the valuation down to get a greater % of the company relative to the investment at the angel round.   This is an ongoing challenge for companies to assess their current stage and the appropriate amount of money for their stage and industry, and most importantly, not chasing dollars that they won’t qualify for because of the mismatch  in industry, stage, and value.

We are excited to be a part of the coming Southeast Private Equity Conference (SPEC) (http://www.seprivateequity.org) in April.   There are many venture conferences that serve the companies that have Millions in revenue and are seeking large amounts of venture capital, but for many years there has been little support or focus on the early stage company that is attractive to angel investors and early stage venture funds.  Starlight Capital and Segal Partners host an event in New York City (http://events.starlightcapital.com/events_list.asp)  which works to bridge the capital divide, but there is a huge void in the Southeast.   SPEC not only offers the opportunity for early stage companies to connect with over 100 investors in a full day expo of networking and education, it also brings valuable and needed education to the investor community.    The Innovative Company Showcase will be an exciting opportunity for the venture capital and angel investor community to see a variety of qualified opportunities to consider for investment.  

 We think there are two other things that make this event special.  Instead of a hotel or a large conference center, it will be held in the historic 103 West in the Buckhead area of Atlanta, GA.   This venue lends itself to a cozy environment perfect for steady interaction between investors and entrepreneurs.     The other thing that will make SPEC special is that it isn’t restricted to a certain industry.   So many other conferences are just technology or life sciences.    SPEC is all about the good company, good opportunity getting a chance to connect with capital.   That is why their tag line is:  “Where Innovative Companies Connect with Capital, Investors & Resources.”

We hope the success of this event will lead to more SPECs in other markets so that Capital Divide can be bridged again, and again, and again….

PODCAST about SPEC and Bridging the Capital Divide:http://kugarand.podomatic.com/entry/2008-02-21T16_30_39-08_00

Press Releas about SPEC: http://www.prweb.com/pingpr.php/UGlnZy1JbnNlLVN1bW0tU3VtbS1aZXRhLVplcm8= 

One of the most tragic things I ever hear about is when young companies, who hold such strong beliefs in their own potential and want desperately to believe investors will also catch the vision they cast for their business, will get sucked into the web of deceit cast by a decoy investor.   Unfortunately, for deceitful people, the easiest thing to sell an aspiring entrepreneur is HOPE.

So here is a list of indicators that an investor may be a decoy:

1. The Decoy-Investor expresses interest, gets the documents, talks about their friends who also might like to invest, then turns around asks for a “retainer” or small fee to cover their time to talk with these investors.   No real investor or venture capital firm asks for money from the company they are intending to invest in.

NOTE:  Exception to this may be an “exec with a check” who WILL be investing and asks for additional shares to cover the time they will spend as an “executive” with the company working to build the company.  Then this is understood up front and should not be a surprise and should be a point of negotiation.   An “exec with a check” would not collect a salary (at least not initially), because their investment would just be recycled as their pay, therefore they would get additional shares for their time, experience and level of involvement.

2.  A Decoy-Investor runs a fund and promises to put in more money than is needed or requested on the condition that the company raise 10% or 20% of the total they will put in, up front.   The package often is set up with a program that the amount raised from the individual investors will be held in escrow for 90-120 days and will be paid back with interest with the larger investment.   This is a red flag because the condition of the Decoy Investment fund isn’t based off of milestones or progress made by the company in executing their business model, but rather in the fledgling company’s ability to raise funds that will be held in escrow-ed and be accessible by the Decoy-Investment fund.

NOTE:  An exception to this is when a company is in their early stage of raising capital and the fund (or super angel) wants to ensure they have the capability to raise money or the fund has a standard program to be “second” in an investment rather than the lead on the investment.   Also, this does not apply when a company is raising a “bridge” round to an institutional investment or a small cap IPO, because those bridge rounds typically will accrue interest AND converts into the same term and conditions of the institutional round.  The kind of program described in #2 is a common scheme used when the “funds” are from an unconfirmed source and is used to in effect “launder” money or because there are little recognized terms in the MOU that gives them control over exit strategies and other capital raises so that in effect they hold the company hostage when they get ready to make their large infusion and starve the company to get predatory terms or rights to the IP at a severe discount.

3.   The Decoy-Investor wants to talk or meet your other investors so they can get comfortable.   This isn’t always a red flag because it is common for some investors to want to be sure about the reasons or the knowledge level of the other investors.   But it becomes a red flag when the Decoy-Investor then tries to structure side deals with those investors under auspices of common interests or being a big roller AND asks the investor to keep it confidential from the entrepreneur.   Once an investor IS an investor, it is great for them to form bonds and positive relationships with fellow investors, as long as it DOES NOT impact your ability to raise funds from that incoming investor and WILL NOT damage the entrepreneur’s relationship with the existing investor.

4.  The Decoy-Investor represents a large off shore investor and they book a hotel room (room with beds) or conduct meetings in the lobby and have a series of companies going through to be “selected”.   They don’t have any traceable history on the web, with a website, with offices that can be verified, etc.   They don’t have a formal application process or don’t want to send you documents electronically to be completed.   They require a “small due diligence” fee that is actually $20,000 to $40,000 or more and is not based on any real work output like visiting your facility, preparing a binder that can be used with other investors, conducting real valuation work on the IP etc.   The documents they have you sign have nebulous language about investment being subject to “due diligence”.  Then the icing on the cake is that the “closing” will be in the Philippines, Brussels or some far away place.   A real fund has investor representatives on staff  that is paid by the fund to conduct due diligence.   They may occasionally ask for reimbursement of travel expenses prior to closing or say they will pay certain outsourced services, like valuation firm work, from the closing funds, but they rarely ask for “due diligence fees” up front.   If they do, they aren’t an investor, they are an intermediary and you need to make sure any compensation doesn’t violate your unregistered offering status with the SEC, and be sure you are paying for real work, not just the opportunity for them to rep you.

I welcome comments from entrepreneurs or others that have seen Decoy-Investor deals like this or other ways that an “investor” becomes a decoy.    Our goal with this Blog is to help entrepreneurs get smarter about raising capital and to be more efficient in the process of raising capital by not wasting time on Decoy-Investors or on ineffective strategies to raise capital.

Every entrepreneur has heard they need to have an “elevator pitch”.   So what is that?   What does that really mean?   Most entrepreneurs want to drone on for 30 minutes talking about their business opportunities almost in the hopes that a VC or group of investors will say…..”OK, OK…I give.   I’ll invest if you will just shut up!”.  

News Flash….that is not how it works.   I’ll talk about the perfect investor pitch another time….for now, let’s talk about the elevator pitch.

The Elevator Pitch is supposed to be a 30 second sound bite.   It is the sizzle.  So when an entrepreneur is at a cocktail party or in an elevator, they can give a nugget about their opportunity so if the person they are talking to is an investor, they will respond in any of the following ways:

“Wow, that is really interesting, I’d like to learn more.   I may be able to help you with capital and resources.  Here’s my card, call my office and set up an appointment.”  OR
“Hey, I was just reading about that stuf…you’ve figured it out.   Are you looking for money to grow your business? Why don’t you meet me and some of my friends for lunch on Tuesday so we can learn more.” OR
“Hmmm….   Got a few minutes?  Let’s get a refresh and step over here to this table where it is a little quieter and we can talk more.”
“Very interesting.   Are you raising money?  I’m part of the Network of Business Angels and Investors….NBAI.  (www.nbai.net)  We hold regular events where companies pitch to our investor group.   I’d like to nominate you to the screening committee.   Here’s my card, send me your executive summary so I can pass it along.”

What you don’t want to hear…..

“Oh I forgot something…let me get off at the next floor so I can wait for another elevator.”
“Oh, sorry…  I see someone I haven’t seen in years I need to go talk to….right now!”
“Oh, look….they just refreshed the fried chicken gizzard tray….love these things….talk to you later.”

Here is an example of the perfect type of elevator pitch I found on YouTube.  
http://www.youtube.com/watch?v=qfYhukL5D9o

Even if you don’t have the handy device, you can get it from the way the entrepreneur is polite, with confidence, and gets to the point as to what the problem is and how they solve it.  The investor does the math in his / her head to say this could be something big.   He thinks to himself, “Wow….this could be big.  We’ll work through the management and go to market issues when we meet.  Right now…I just get it and want to learn more.”   Mission Accomplished.

The elevator pitch is the best way to get momentum going to raise money when you are early stage.   Every alumni event, football tailgate, chamber networking meeting, rotary club, elevator….   pitch the elevator pitch, perfect it and start setting appointments with your future investors.

 Sean The Bear lays it out in this humorous video http://www.youtube.com/watch?v=Tq0tan49rmc  4 easy steps to get invited into the board room instead of tossed out the back door!

 UPDATE:   Podcast for this topic with insights from famed interviewer of the stars and the powerful, Gayl Murphy can be found at www.blogtalkradio.com/karen-rands the 3/21/08 episode.

Karen Rands of Kugarand Holdings LLC. shares her insights about Angel Investing in this interesting podcast interview. Karen has raised millions of dollars for entrepreneurs! When Karen speaks, people listen to what she has to say about raising money! Launch Funding Network and The Network for Business Angels and Investors are successfully bringing entrepreneurs and investors together!

Listen and find out what it takes to raise the money that your company needs. Do you have what it takes to close the deal?

Check out Karen’s podcast page: www.kugarand.podOmatic.com

Listen, Learn, Enjoy and Share!

I get this question quite often.   When we screen companies to present at the private equity investor forums we put on for the Network of Business Angels and Investors (NBAI.net), they complete a comprehensive application form and submit all the documents that they will provide to investors.    Business plans communicate different information than a private placement memorandum.  

Business Plan:  A well run business with real potential to scale and grow will have a business plan that is their blue-print for building the business.   They have an internal document that has the details about organization plans, production, distribution, compensation, and marketing strategies.    We call this an operating plan.   Investors want to know one of these is in place because it shows the company has a mature attitude regarding planing and preparing for growth.  They likely will not read it in its entirety, but they will spot check areas as part of the due diligence process.    Then there is the business plan a company uses to get money.   The ‘Investor Ready” business plan differs from “bank ready” business plan.   These business plan version summarize the operating plan in providing a high level over view of each section, not an executive summary, but about 16-20 pages, and the financial forecasts.  The Investor Ready Business Plan is a marketing document.   It is “selling” you company as an investment opportunity.  It can be “confidential” without the same controls necessary for distribution of  a PPM.

Private Placement Memorandum:   This is a  legal document that is provided to potential investors and serves to protect both the investor and the company.   It is used for unregistered offering.   Without one, companies can be sued for refund of the invested capital by their investors if they don’t produce the results expected.   The PPM establishes the risk of the investment and the process for liquidation of any assets should the company fail.   It is highly confidential and should only be given to an investor that has stated an interest in investing, not just “this sounds good”.   The PPM usually is 60 or more pages, which is 2/3rds legal and regulatory information.  It is not an entertaining read.  Therefore, investors only read it when they are pretty certain they will be investing. 

So a company that is seeking angel investor money (from new investors not known directly by the company) needs to have 5 documents:

1.  One page executive summary that provides a snapshot of the company’s investment oppt.   This is the most public piece of information and should be designed so anybody can read it.

2.  Investor Ready Business Plan.   This is the marketing document that is going to move the company along with the investor and garner interest.   They may receive it after talking to you or a representative or after seeing a presentation.  They may also receive it cold from one of their trusted sources, and therefore the document must be a compelling read and answer the fundamental questions an Investor wants to know:   how do they get a pay raise and what is their mitigation of risk.   You should have someone, impartial and not connected or familiar with your business to review it before sending it out to a lot of investors.   We often see business plans that jump from point A to point C and assume the reader knows point B, only because someone who knows the business well has reviewed it and connected the dots in their head.   The business plan will end up in the circular file if it has this type of gap in it and other typical errors we see as companies go through our investor screening process.

3.  Investor Pitch:   the 8-10 minute presentation used during investor forums and when you get the initial face to face with a potential investors.    Typically this is about 12-15 charts at the most, with some charts for back up and questions.

4.   Private Placement Memorandum or Offering Memorandum.  Depending on the amount being raised and the type of raise (504, 505, 506) a full PPM may not be necessary.   Always check with an attorney.    You should have some document that communicates the structure and terms of the offering and the risks associated with that offering.

5.   Operating Plan.   This is the blueprint to build your business.   It is necessary for two reasons.  First, investors may want to view it to make sure you have the right strategies for growing the business and using the funds they will give to you.   Second, and more importantly, you cannot expect to grow your business with any sort of structured steady growth without a business plan.   It communicates to your team what they are expected to do and it helps you chart your progress and anticipate shifts in strategy that will be needed to stay ahead of the competition and continue to improve your efficiencies.

Here is a podcast that I did a while ago that goes through some of this information in greater details.   

http://www.digi-pagesradio.com/entrepreneur_show_1.htm

You can also get more information from 3rd party experts on strategy, planning and growing your business at this media website: http://www.kyrmedia.com/books.htm

In addition, she is giving an offer for a free eBook!

Check out Karen’s podcast page: www.kugarand.podOmatic.com

A recent article in Catalyst Magazine, written by Don Sadler: Heaven Sent…Should you consider angel investors?

Obtaining financing is one of the biggest challenges for new and startup companies. One possible solution is a unique kind of funding from what are known as “angel” investors.

Angel financing is similar to venture capital, but with some key differences, says Karen Rands, managing director of the Atlanta-based Network of Business Angels and Investors (NBAI) and author of the Learn To Be An Angel Investorebook series…. (www.learntobeanangelinvestor.com  to learn more and get a free ebook)

To read the rest of the article:  http://www.catalystmag.com/Articles/2007/Angel_Investing.html

 The article continues:

Michael Valverde is the CEO of Chain Reaction E-Commerce, a leading supplier of commercial open source e-commerce software in Atlanta that has received about $500,000 in angel financing via NBAI thus far. “We thought about going the venture capital route at first, but soon realized that an angel round made more sense for our initial round of funding,” he says. “Angel funding has a much shorter life-cycle than VC and requires less due diligence and fewer legal requirements.

“Atlanta is a ripe place to do business right now, and there’s a tremendous amount of angel money out there,” Valverde continues. “But getting angel financing takes persistence and patience – it doesn’t happen overnight.”

To read the rest of the article:  http://www.catalystmag.com/Articles/2007/Angel_Investing.html