By David H. Jones, President, CEO and Co-Founder of Peak 10, Inc.

David Jones, president, CEO, Peak 10

Surviving these economic times has been challenging and has created shifts and changes along with “refocusing” on core operating principles, scale of operations, business retention and financial leverage.  Remapping is taking place. By that I mean that access to efficient business solutions impacting the speed of change in systems and information technology has led to new business ideas.

This reality does not overshadow the fact that access to the right balance of capital in the form of venture capital, private equity or line of credit requires careful consideration as our financial markets continue to seek predictability.

Postitive potential for raising capital

I was recently asked if I had thoughts about what entrepreneurs might need to consider today in the effort to raise capital. First off, I do not think the fundamentals today are much different than they have been in the past.

The ability to attract capital for a business idea or plan, whether from friends and family, angels, venture funds, private equity or debt, boils down to a combination of factors and that certainly includes the economic environment.

I believe the potential for accessing capital today is positive. However, to attract it with favorable terms depends on several tightly interrelated factors.

1. Strength of the plan and the leadership.

Whether starting a company or attempting to expand, the financial requirements and what the money is used for, will determine how attractive the opportunity is to a capital investor. The track record of the leadership of the enterprise adds very significant weight to that attraction, but also a clear message of the vision and purpose of the business solution along with what and how the business achieves that purpose is obviously critical.

A showing of commitment from the leadership team (with their own investment) and positive progress since inception establish a basis that will be attractive to a potential investor and are fundamental to raising outside capital.

2. Purpose of the investment.

When raising money for physical assets such as infrastructure to support a business case, you may need to look to a different potential investor group than raising capital to execute on an “idea” to develop a software solution or an ecommerce business plan for example. There may be a presumption that a physical asset has some recoverable (or collateral) value, and “brick and mortar” often has more attraction today than capital for a “soft” product deployment.

On the other side of that statement, there are numerous examples of new interfaces that provide access to unique information via a variety of platforms (public and private cloud, social media databases, etc.) and thus new products or services that require little investment in physical infrastructure.

The point here is to make sure you are in the right investor interest market, and avoid a shotgun approach. Get advice or references for the venture group or capital sources that understand the line of business you are focused upon.

3. Taking the money

With all else equal, take the money if you have done due diligence on the venture group or private equity group and there proves to be a match of philosophies.  “Taking the money” is one of the most difficult decisions you will make. The favorability of the terms will be determined by the perceived risk the investor has in your team, your execution plan and how dire the situation is in terms of “need.”

If the need is to fund an idea, it is quite a different scenario than funding a plan that has been launched where the investment is “growth capital” to accelerate execution of the plan.

Ultimately when you have reached this point, you are at the intersection of a decision about your belief in your strategy and your ability to execute and grow, and your belief that with the new investor your odds of success and time to market are noticeably better than you would otherwise expect to achieve.

Giving up ownership

Giving up part of your ownership can only be offset by your belief and commitment that this is the best move for your enterprise and ultimately because of that, the best move for you as the founder or key executive and for your team.

One last point here, since you have made a decision to consider raising capital if you have not approached this need with your early investors, you have an obligation to inform them of the potential impacts of the change.

By virtue of the determination you have made to seek outside capital, it is presumed that you have earlier discussed this need with your investors and that group is not in a position to address the magnitude of the capital need. At the same time you must determine from the new investor if there is flexibility to offer follow-on investment to current investors.

4. Your partnership.

Once you are in a partnership with an investment group, make sure you communicate regularly the good and the bad news. No surprises.  Nothing jeopardizes the relationship with your significant investors than poor communications and engagement. Typically a venture or private equity group’s role is not in operating the business, but one of strategic advisor and sounding board.  Nevertheless, do not forget that this new investor is your partner and shares an important equity stake along with you.

Engage the investor in board committee responsibilities that foster one-on-one interaction away from the board room. Face it: your business will likely require morphing, changing and adapting to reach the performance goals you have set. The economy and technology innovation alone will change and challenge your operating environment. Your co-investors may have some of the best “eyes” into these changes since yours are focused on your sales, operations and culture that fosters customer loyalty and growth.

5. Managing the results.

Prepare a “best case” business plan but present a realistic, achievable plan to raise capital. A venture or private equity firm will have a ‘haircut’ case that will be the basis for their investment. Know the inflection points in your plan and ensure that your team understands them.

Also understand the goals of your investor; they may not have the same long term aspirations as your plan contemplates. Investment funds have a life term; determine where your investment fits into the life of the fund. If you do not know the investor’s return goal(s) you will have a difficult time understanding their strategic decisions.

There is nothing wrong with an investor exiting, as long as the exit is positive. If they are cutting their losses by exiting their investment, and that comes as shock to you, it is obvious that either you were not aligned to start with, you are not realistic about the success of your venture, or you are in love with an idea that is not sustainable. However, in most cases the latter is rectified on the front end of the process.

I believe that we are seeing a renewal of entrepreneurial activity and growth as we emerge from the stress of the economic slowdown that has changed our business environment over the past 18-20 months.  For those of you who have successfully raised capital for your business, you may have a few more tips that are relevant, but I have found that the ones above hold true over time and must work in concert with one another.

Peak 10 is a managed services company with world-class data centers. It delivers scalable, economical and reliable solutions for hosting and managing complex information technology infrastructure. The company owns and operates data centers in ten key markets that include Cincinnati, Ohio; Atlanta, Ga.; Raleigh and Charlotte, N.C.; Tampa, Jacksonville and Fort Lauderdale, Fla.; Nashville, Tenn.; Louisville, Ky.; and Richmond, Va.