Raising venture funding and investing for equity has been called “the great financing game”. It’s a game whose rules of engagement, playing conditions and plan of attack – and usually the final score – are dictated by the money.
As an early investor of mine said to me as he withheld critical funding to force me off the Board of the company I founded, “It’s the Golden Rule, mate – he who has the gold makes the rules”.
If entrepreneurs and business leaders want to raise money, maximise their ownership position and get rich through the eventual sale of their company, they need to become proficient in the way equity investors play the game.
There are two teams of players in this game of high drama – entrepreneurs and business owners on the one side, all working diligently to build and grow a successful business.
On the other side are wealthy private individuals, professional investment managers of Venture Capital and Private Equity funds and senior executives of large corporates looking for a strategic investment opportunities – commonly known as Angels, VCs and Strategic Corporate Investors (SCIs).
Blowing whistles on field and waving the flags on the sidelines are the array of accountants, lawyers, investment bankers and other professional advisors who get involved at various stages of the game and whose personalities and experience are all over the documents surrounding an equity transaction.
As the majority of entrepreneurs is cash-strapped and has never experienced the capital raising process before, they face little alternative but to play the game on a field that’s been market-out by the investors and their side-kicks and henchmen.
Serious investors have honed and matured their investing skills through years of deal-making and the experiences gained from the accumulation of great wealth. Able to afford the best and brightest stars from the deep ranks of professional advisors, they are the ones with the experience, resources and networks.
Novice entrepreneurs are at a huge disadvantage the moment they start to play the game – like David was when he fronted the biblical giant, Goliath. In most equity deals, the underdog entrepreneur gets out-smarted, screwed over or simply crushed by the sheer power and size of the opponent.
However, like David, it is still possible for an entrepreneur to cast a slingshot and fell the bigger foe, using skill and mastery over brawn and size.
Savvy entrepreneurs can beat the money at their own game by getting smarter about the rules, understanding the investor psyche, studying match-winning tactics and rehearsing their moves before they ever venture into the fray.
As the old saying goes, “If you can’t beat them, join them”.