Private Placement Memoranda     ^     PIPEs     ^     Strategic Alliances

How to Find the Right Investor

How to Write the "Black Book"

How to Target Investors

The VALMAX Corporation can play a critical role in helping you prepare for your Private Placement or Strategic Alliance.  If you can maximize your valuation, the result is less dilution, more control, more choices over incoming suitors, and quicker deal closure.  Here  William Knoke, Managing Director of VALMAX, unveils his observations for raising venture capital and private placements.  Whether you are seeking $3 million or $300 million, the target investors will change, but the core process is the same...

Knoke:  You’ve come to the right place, particularly if you’re a high tech company.  But it’s not just how much money you get, but whose money, and how much of the company you have to give up.

Knoke:  Finding the right investors is key.  You want investors who have deep pockets, are sympathetic when you fall short of projections and can introduce key contacts as you grow.  For most companies, the best investors are strategic partners.

Knoke:  A strategic partner has a vested interest in your success that goes beyond a cold cash return on his investment.  Generally these take two forms:  The corporate partner and the venture capitalists.

The corporate partner is typically in a related industry, but not a direct competitor.  Perhaps you have a technology or ideas that complement theirs.  If you succeed, they succeed.  They can give you lots of help beyond money.  Best of all, they are often more concerned with broad strategic issues than return on investment, which may leave more on the table for you.

Knoke:  Like corporate partners, “VCs” have deep pockets, and offer guidance to help you grow.  Whereas the corporate partner generally wants to develop your product, the VC wants to develop your company.  Either way, you’ll get lots of quality help, and the possibility to go public later.

Knoke:  Times have changed.  If you look at all the IPOs coming out on the market today, the founders are almost always there, and the VCs have a minority stake.  Today talent is valued higher than capital.

Knoke:  Credibility.  Having the right partner puts a “Good Housekeeping Seal of Approval” on your company.  Customers and suppliers notice, and your IPO will be that much easier.

Knoke:  We don’t have to decide right now.  There are other sources of venture capital too including everything from PIPEs to Angel investors.  The best fit will naturally fall out when we work on your Black Book.

Knoke:  A “Black Book” goes beyond a business plan.  It explains the business and its potential, and spells out the terms of the deal.  No two Black Books are alike.  In dealing with strategic partners, it has to pass muster from several viewpoints.  As a marketing document, it must be concisely written, interesting, and with thematic focus.  As a business document, it must be logically consistent so that marketing, production, organizational and financial policies hang together in a focused strategy.  As a legal document, it must contain full disclosures and an appropriate financial structure.  As a financial document, the numbers have to work out for the investor.  It’s a Rubric’s Cube that has to yield full color from whatever angle you look at it.

Knoke:  We certainly will use that as a starting point, but it’s seldom the endpoint.  Usually, business plans are lacking in specifics on deal structure, for instance.  And even in those rare cases when the strategy is well thought through, the genius is so obscured by jargon or acronyms that only another rocket scientist can gauge its merit.  The strategy has to be bullet proof, and articulated with razor sharp clarity to an audience often from another industry.  Our goal is to get the highest possible valuation.

Knoke:  A high valuation means that you give up less of the company for the same $5 million investment.  That gives you a bigger piece of pie, and keeps you in control longer.

Knoke:  There are 99 ways, but one key way is to eliminate “anomalies.”  An anomaly is any aspect of a deal that causes a potential investor to raise a brow.  It can be deal presentation (misspellings, sloppy thinking, contradictory financials).  Most often, it is deal substance (capital structure, patent protection, management).  We need to identify them, and reduce their impact.  Every business plan has them, and most are pretty easy to offset.  [More ideas are found under "Maximizing Valuation".]

Knoke:  If you can’t eliminate an anomaly, find a way to turn a disadvantage into an advantage.  For example, many start-up companies have great technology, but score a zero in sales and marketing.  Generally, we deal with that by acknowledging the problem, and adding that some of the proceeds will be used to get a marketing person, and look here in Appendix C for three hot-shot resumes of people we’ve been talking to.  I’ve never seen a problem that did not have a solution.

Knoke:  I have seldom been in a meeting with a high tech entrepreneur where I wasn’t told afterwards that I was the first person to quickly zero in on the two or three variables that were relevant to their success.  I’ve gotten some good tools at Stanford University (where I earned a BA in Economics cum laude) and Harvard Business School (where I have an MBA).

But my real education came from being an entrepreneur myself, having been a key officer in a high-tech company that the Wall Street Journal listed as one of the top ten performers in the U.S.  I’ve also known what it’s like to be undercapitalized and have to struggle to meet payroll.  I’ve been in your shoes.

As an investment banker, I’ve also worked a number of “Wall Street” deals, and in many industries.  I particularly enjoy high technology because at the cutting edge, the unknown answers are more complex, and the potential for creative solutions is limitless.

Entrepreneur:  But can you write?

Knoke:  My book Bold New World:  The Essential Road Map to the 21^st Century became an international bestseller, now in ten languages.  Other investment bankers have told me our Black Books are among the best in the industry.

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Finding the Investor

Entrepreneur:  How do you target the investors?

Knoke:   By the time we finish the Black Book, we also have a crystal clear idea of the investor profile.  How much money do we want?  How important is control?  Who can help us grow the best?  Who will give us the highest valuation?  We usually pass on this list to your investment banker for additional value added.

Entrepreneur:  What happens when the VC or corporation expresses interest?

Knoke:  Usually, there are multiple meetings.  They want to meet your management team and understand the special magic of your ideas.  This is where a well-written Black Book pays off.  Any deal has to pass several hurdles:  product, technology, marketplace, finance and strategic fit.  If somebody gets through a well-crafted Black Book, they are coming to see you for the right reasons.  We can quickly focus on specific hot-button issues toward closing a deal.

Entrepreneur:  What do you do once we are funded?

Knoke:  We hope to maintain a relationship with you to help with your IPO, and to transact your first merger or acquisition.