Look for 'smart money'
|
|
April 29, 2000: 7:15 a.m. ET
Common pitfalls to avoid when seeking financing
By Jane Applegate
|
NEW YORK (CNNfn) - Byron Roth, President of Cruttenden Roth in Irvine, Calif., has watched his small investment-banking firm grow to $60 million in annual revenue and 225 employees. His job is helping entrepreneurs finance their dreams. Based on years of dealing with thousands of entrepreneurs, he said small-business owners make two major mistakes while hunting for financing:
1. They often give up too much equity too fast, instead of thinking long term.
2. They take money from anyone with a checkbook, rather than holding out for "smart money" from investors who know their industry and can help grow the business.
"When we put money into a deal, one of the most important things to me is, who else can I get to invest, and what do they bring to the party?" said Roth.
Finding investors who can help your business flourish by making high-level connections and serving on your board is critical to success.
"Some people say 'all money is as green as the rest,' but I don't agree with that," Roth said. For example, Roth helped finance a small apparel company that was lucky enough to attract a major investor in the industry.
The investor, who owns about 10 percent of the company's stock, also serves on its board, and his presence has helped attract other prestigious investors. It's a situation that's truly benefited both parties.
Think several steps ahead
Too many entrepreneurs make capricious financial decisions "in order to get to the next step, without thinking two or three steps beyond," Roth said.
For example, two partners in a popular 25-location restaurant chain wanted to raise some quick cash by selling Bay area and other U.S. rights to their concept. "I discouraged them because it seemed like they were selling their soul for too little money," Roth said.
He recommends that entrepreneurs consider giving up a bit more equity to investors who have the knowledge and contacts to help grow your business. "If you want to raise $2 million, an investor may require 20 percent of your company, but you might want instead to give up 25 percent to attract smarter money," he explained.
He said smart money investors usually are looking for a long-term relationship, and they may be turned off if your focus is on increasing sales at the expense of other goals.
Still, money does fuel growth. "When a company gets big, with smart money behind it, it's scary how quickly they can move and grow," he said.
Cruttenden Roth has offices in Irvine, Los Angeles, Seattle, San Francisco, and Denver.
(Excerpted from 201 Great Ideas for Your Small Business, Copyright 1998 by Jane Applegate. Published by arrangement with Bloomberg Press. Excerpts appear on Saturdays on CNNfn.com.)
|
|
|
|
|
|