Feb 012010

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Dr. Earl R. Smith II


When I first started this series of articles I had no idea that it would extend to seven. I also did not anticipate the level of interest in the topic. Many who read the opening article had not thought of the question ‘how does my company stack up against a professional definition of investment grade’. Others had thought about it but not in any systematic fashion. It is always gratifying to write about something that readers care deeply about. It is even more gratifying to engage them in discussions that result from that writing.

Once you grasp the ideas behind ‘investment grade’ the question logically occurs; “how can I improve the investment grade of my company?” Of course, there are no short answers to such a question.

Making the Grade

The foregoing articles do not presume to provide an exhaustive list of metrics but they should give you some idea of the standards that you have to meet in order to be considered ‘investment grade’. There is little that you can do to polish the apple if your company does not meet these requirements. You need to keep moving forward until it does. Entering the money chase before you have an investment grade company can be a kamikaze raid on a vacant lot. The effort will take up lots of your time; find you giving away any competitive edges and ending up with nothing to show for the campaign. It is a hard thing to analyze your company in a dispassionate cold, bright light. You have to force yourself to do exactly that. Here are some suggestions that will help you along.

  • Red-Teaming: When you prepare a presentation for funding you run the considerable risk of becoming so close to the trees that you grow less and less capable of assessing the forest. A professional, independent review of your funding request, well before you present it to the first investor, could make the difference between being funded or wasting a lot of time; yours and the investor’s. The best way (in fact, the only reliable way) to make sure your presentation is well focused and provides what an investor requires is to have it reviewed by an objective panel that sees it through the eyes of a potential investor. A red-team looks at the presentation exactly that way. They evaluate the request for funding, projected use of proceeds, business plan, value proposition and management team as if they are being asked to invest in the company; looking for weaknesses and strengths and checking to make sure threshold questions are addressed in a way which will lead to the next level of discussions. The composition of the red-team is critical. Avoid industry insiders. Pick people who have been in the investor role. The responsibility of the team is to test your company against the standards of ‘investment grade’. Have an independent adviser, who is experienced in red-teaming proposals, organize the team. The first time you see the red-team should be on the day of the presentation; just like it will be when you actually present to potential investors.
  • Patience and Prudence: This chapter began with an observation that most entrepreneurs start the money chase much too early and it is appropriate that we revisit that issue towards its end. Timing is everything in business. Too early and you are not ready to meet the challenges; too late and you are past your prime. But the money chase is one of those races where maturity and demonstrated capability trump youth and energy; or as the old country song goes, ‘old age and treachery always overcomes youth and skill’. Entrepreneurs should learn what it means to be investment grade. They should learn it from the perspective of the investor; not from their own as the CEO of a company in need of funding. It is not the need that should drive the money chase; it is the effort to become investment grade. That means that patience and prudence are essential to the process. A founder should have the patience to develop the company so that it qualifies for serious consideration by investors. They should be prudent in reigning in the tendencies to try to get funded as a way to solve all their problems.Most of the challenges of early-stage businesses are not solved through funding; in fact, funding can make many of them far worse. The challenge of getting every value possible out of each dollar is best learned in a climate of scarcity. Developing a team that can work together effectively is best done when there is pressure on the team to be creative under pressure. These are components of a solid foundation and should be well in place before the superstructure is build with investor dollars.

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