David Isett and Richard Wood energetically and entertainingly described the process of raising capital through an investment banker. David is the CEO of Concordia Coffee Systems. Richard is a co-founder of First Hill Partners, a middle market investment bank. Based on their experience in working together to raise about 10 million dollars for Concordia, they offered general guidance to those interested in using an investment banker to raise capital.
Concordia Coffee manufactures coffee makers that make café quality beverages at the touch of a button. These machines can make over 1,000 drink combinations. The emphasis is on quality. If you drink one of these beverages and come away saying, “it’s pretty good for a machine,” David sees that as failure. The goal is a high quality coffee drink, period.
Why did Concordia raise equity? The world-wide market for this kind of coffee machine is booming. Coffee is the most consumed beverage other than water. Fifty percent of coffee beverages are sold to go. Concordia’s machines are the anti-barista, in that they produce high quality beverages instantly, as opposed to the 2 to 3 minutes that it takes a barista to produce a beverage. The company knew that it had stellar growth ahead and wanted to realize that growth.
Why did Concordia chose to raise capital through an investment banker? David has raised capital many times in the past. This is the first time he has used an investment banker and now he says he will never raise capital any other way again. Seattle is not a good market for a manufacturing company, such as Concordia, to raise capital. The focus in Seattle is on technology – everyone wants the next Google. Concordia needed somebody that represented the company, not the various needs of the investors
David’s criteria for choosing an investment banker:
1. Can they get you the money?
2. Want a licensed securities broker/dealer.
3. Experience in your space and size.
4. Wanted principals, no juniors.
5. Hunger – want banker hungry for success.
6. Chemistry – have to be able to get along with the banker.
7. Fees – it costs a lot of money, but it’s worth every penny.
First Hill Partners is a regionally focused, middle market investment bank. This is First Hill Partners’ second year in business. The partners wanted to work in the community and with entrepreneurs. They don’t have any juniors. They believe in long term relationships. They want to build equal access to funding for growth companies. They can help an organization by telling it what things will build value in the organization. Richard and his partner believe in a hands on approach and can only do so many deals a year as a result. First Hill offers merger and acquisition, capital raising and advisory board services.
Richard outlined the capital raising process:
1. Get Ready. 2 to 4 weeks.
2. Talk to Investors. 5 to 7 weeks.
3. Closing. 4 to 8 weeks.
The deal is not done after the first meeting. It’s important to stay top of mind and to get requested information to potential investors quickly. Momentum is important. The process includes talking to many investors and being willing to look outside of the community. It’s also important to think about the fit with the investors. Are the investors going to stay involved long term? The objectives of the investor and the company must match. Don’t take the money without understanding the investors’ goals.
According to Richard, closing is your enemy. The company seeking the funding wants this part of the process to be as short as possible. The potential investor wants this process to be as long as possible and will drag out due diligence. The company really needs to push this and not let the potential investor drag it out.
The company seeking funding really needs to understand the process between signing the term sheet and closing. The company must understand precisely what events need to occur to close the deal.
The company also must understand the implications of the security that the investor is taking. This can be a huge deal and result in the founders not getting much at the exit, while the investors do well on their investment. Richard emphasized that getting a clean deal is more important than the valuation.
David said that the single most important thing for him in this process was to be honest about what he didn’t know.
The Top 10 Lessons offered by David and Richard:
1. Pick the right banker/ pick the right client.
2. Be prepared, really prepared. Do this, no matter how painful it is. Do not let potential investors find anything on due diligence. Grill the investor team and practice. Hard core coaching is a must. David said that it’s not fun, but going through this process made the company a better company. Do not let 8 hours go by without answering a question from a potential investor. One hour is preferable. Time is your enemy in this process.
3. Allow enough time. Don’t start raising money when you don’t have any. Start raising money before you need it. A company does not have any bargaining power when it needs the money to meet payroll in two weeks.
4. Get enough money the first time.
5. It’s all about having options and choices in the end.
6. Allow no surprises if at all possible. (Don’t miss your numbers!)
7. Fund raising is a team sport: banker, company, current investors, lawyer, auditors. The prospective investor will talk to all of these people. The current investors must support raising more capital – after all, their shares will be diluted. The current investors might need to make an additional investment in the company before outside investors will agree to invest.
8. Shut up! More information is not always helpful.
9. Let your bankers do their job. They are better at this than you are and you must trust them.
10. Don’t let the business go to hell while you are out raising money. Raising money takes about 80% of the CEO’s time, over a 4 to 6 month period. It is essential to keep the company from losing ground during this time.
Thanks to David and Richard for their informative and entertaining presentation!