Last month, I attended the Florida Venture Forum’s Capital Conference, a gathering of venture capitalists, entrepreneurs seeking capital, and professional advisors to entrepreneurial companies. Overwhelmingly, the focus was on tech companies because of their ability to scale quickly. Here is a hodge-podge of remarks by a panel of investors seeking investment-worthy companies.
Some key factors they look at:
- Looking for rate of sales growth of 100% year over year (YOY)
- Is the firm scaling economically; i.e., does it have a low client acquisition cost
- Does it have good marketing analysis of its clients and their buying behavior
- Is the use of proceeds going towards growing the sales force
One panelist said the cardinal sin to attracting investors’ money is missing numbers (i.e., projected results). This gets to the quality of your financial management, knowing your numbers, being realistic in your projections and executing your business plan well.
Currently financial buyers are, at times, outbidding strategic buyers because there’s $1 trillion dollars of dry powder (money on the sidelines) waiting to be invested (demand is high for great companies) and that money wants a return. Private equity (PE) firms are acting like strategic buyers and paying a premium for target companies they can fold into a platform of companies they have bought, using their platform to grow sales and profits.
As an aside, a financial buyer is a buyer seeking a return on investment, not intending to manage the target’s day-to-day affairs. One example of a financial buyer is a private equity firm, which raises money from investors and purchases companies with the funds, earning themselves and their investors a return on investment.
A strategic buyer is most likely a company in the same industry as the target company. Strategic buyers purchase companies to add product lines, geographical reach, technology, talent and eliminate competitors, to name a few reasons. And they often pay more than financial buyers because they can eliminate redundant overhead (such as accounting, sales and management personnel, office and warehouse space, etc.) after their purchase, thereby increasing the profitability of their new acquisition. Also, many strategic buyers are public companies and pay stock for the companies they buy, allowing them to frequently pay more than financial buyers.
This next point was about negotiating a contract with an investment banker. One panelist said, “Exclusivity is earned, not bought,” which was to say that an investment banker who receives an exclusive agreement to represent you is one who has a demonstrated track record and reputation for deal speed, deal value and deal certainty, not just the one who promises the highest valuation to you.
As for SAAS (software-as-a-service) companies, the panelist said they must have $3 – $5 million of recurring revenue to attract interest from investors. Some hot SAAS companies have been valued at multiples of 10 – 20 times revenues.
As for hot companies the panelists are watching, some names mentioned were Open Peak, Uber and Bitcoin. Some technologies they’re watching are predictive analytics, Google Glass and payment solutions.
Finally, the air was filled with talk about the following attributes that investors find attractive:
- Rapid scalability
- High barrier to entry
- High lifetime value of a customer (value of future sales to them)
- Low customer acquisition cost (traditional advertising, digital advertising, etc)
- Recurring revenue business model
- High renewal rate (e.g., for a subscription business model, like SAAS)
- Long-term contracts
- Short sales cycle
- Investors willing to fund a sales ramp up plan, after proof-of-concept has been done
The above attributes translate, investors hope, into lower risk and higher returns on investment. For entrepreneurs, it’s never quite as easy as “build it and they will come” but these attributes are worth keeping in mind if you’re seeking investors’ capital.