A conversation we have with capital seekers early on in the process is, what is going to be the cost of the whole capital raising process? The answer to that, like the answer to a lot of questions, is, it depends, but there are some general guidelines to follow.
The first consideration is the business plan. Does the capital seeker's company have a business plan? Well, if not, they are obviously going to need one. So, they should consider what it is going to take to put one together. If they have the time and capability to write one themselves, great. But even at that, they should also plan on spending at least a month in putting it together. If they do not have that kind of time or need some help with part of it, and if they want to get advisors to bring in to help in writing the business plan, plan on spending $5,000 on the low end and, for a really complex business with a lot of content in the business plan, upwards of $30,000.
Another thing to think about is advisors. Does the capital seeker know enough to catch all the pitfalls of the capital-raising process? If not, advisors may be money well spent. Depending on the type of advisors you get and the amount of time that a capital seeker would use them, $7,500-$10,000 is a good place to start.
Marketing expenses, just think of all the color copies of the business plan, all the flying around to the different presentations and meetings, those costs easily get into the $10,000-$15,000 range.
Legal and Accounting costs. These are probably the costs that you cannot avoid unless the capital seeker happens to be an attorney, and their partner is a CPA. There are documents involved that are going to have to have legal review, and there are financial compilations involved that are going to have to be done by a CPA. I would think a minimum amount to budget there would be $5,000.
You know, how much all in? It is hard to say, but if you wanted to start with a nice round figure, I would think that $30,000 would be a good place to start and then take a real solid look at your business and add/subtract accordingly. If a capital seeker has problems in quantifying this cost or what it may really cost them, I would encourage them to contact us at the Capital Match Point. Because at the end of the day, we are ultimately in the business of maximizing their chance of getting funded.

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You know, another financial term that an entrepreneur may hear when they start the capital raising process and start to communicate with our investors that they may not typically hear is a term called EBITDA.And what is EBITDA?Well, EBITDA is really an acronym.It stands for "earnings before interest, taxes, depreciation, and amortization."The second question is usually why is it important?Well, what EBITDA does is it strips away a lot of the structural and non-cash expenses associated with the company.It really allows and investor to make and apples-to-apples comparison of two different companies.
The question usually comes up, well aren't interest, amortization, and depreciation all legitimate expenses? Yes, they are, and interest and taxes, those are cash expenses. But at the end of the day, those expenses are more structural than they are operational.So, what our investors try to do when they are trying to get a real sense of the company and the earnings potential is strip away all of those structural expenses and look at the real income generated by the operations.That will allow that to make some really apples-to-apples comparisons against another company they may be considering for investment.
A couple of watch-outs regarding EBITDA.It should not be used as an inference of cash flow.That is always a temptation, but it should not be used as an inference of cash flow, because EBITDA comes from the income statement.An income statement is very susceptible to interpretation of accounting principles and gap guidelines.I would caution anyone against using it as an inference of cash flow.Second thing about EBITDA is that it is also a good internal metric for management in that it shows management the performance of the company within their boundaries of influence.
If an entrepreneur has any questions about EBITDA, would like to really dig into EBITDA, understand it, and maybe do some EBITDA calculations for their own company, I would encourage them to give us a call. Because at the end of the day, we see this a lot, and we are here to help maximize our entrepreneurs opportunity to get funded.

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Once an entrepreneur gets in the throes of the whole capital raising process, one of the terms they hear is burn rate. A lot of times, we get the question, what is burn rate? Well, classically defined, burn rate is the rate at which a company will exhaust its capital base. Let's take an example. Let's say a company has a burn rate of a million dollars per month. That means that they will exhaust a $12-million capital base in a year. Burn rate is synonymous with negative cash flow, and this is important to investors for a couple reasons.
#1, an investor wants to know if the money that they are putting into the company, or potentially putting into the company, I should say, is enough to sustain the company until it can reach positive cash flow.
#2, that is going to give them some indications as to whether or not another round of fundraising is going to be necessary before the company is up and on its own.
Also, investors typically look at companies in light of their ability to reduce their burn rate when revenues do not meet projections. This is important for two reasons as well.
#1, a lack of cash just diverts management attention from the crucial business of running the business, the day to day operations.
#2, a lack of cash severely hamstrings growth necessary to reach positive cash flow and eventually exit. It also prevents the company from taking on new customers.
If an entrepreneur has any questions about burn rate, how to calculate it, and what it really means, I always recommend that they contact us or give us a call at the Capital Match Point. We have seen this a lot. It is a topic we deal with daily, and we would be glad to walk them through it. Because at the end of the day, we are in the business of maximizing our entrepreneur's opportunity to get funded.

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One piece of advice that I would give an entrepreneur, no matter what stage their company is in, is that cash is king.I know that it is cliché, but it is nevertheless true.Cash flow is, in a lot of ways, the company's key to survival.Experience has taught me a lot of things about cash management, but there are a few specific pieces of advice and insight that maybe I can offer.
The first thing I would do would be to set a cash plan.Just like a budget.Set a plan.The second thing I would do would be to set goals.For instance, a cash goal might be t say by "X" date, we are going to have three months operating cash on hand at all times as an emergency fund.The third thing I would do would be to set some rules about the use of cash.For instance, you might say that any cash or purchase disbursement not in the plan has to get prior approval.
Periodically, take projected economic conditions into account.Have they changed since the last time you updated your cash plan?Are they different?What does that mean for my customers and my ability to collect payment?
The next thing that I would recommend is obviously to watch your receivables.If you sell on credit, you have to have continual flow of receivables.That does not mean you have to go out and offend your customers, but you could tactfully but firmly collect the money that is due.
The third thing would be to take control of what cash items in your plan and move them around such that you could smooth the flow of cash in your company.Other items you can move up when you have a lot of money or move back to times where you have more money.Take that into account and construct your cash plan accordingly.
Last thing, revisit the plan often.Make sure it is updated and make sure it is evergreen, so that it is always a meaningful document to everyone within your company.If an entrepreneur is putting together a cash plan or is having cash flow issues and would like some insight into doing this, I always encourage them to give me a call.We get a chance to see a lot of companies, and, at the end of the day, it is our business to maximize our entrepreneur's opportunity to get funded.

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I work with a lot of entrepreneurs seeking capital and putting together their financials.The question that always comes up is, what do the financials really need to contain to stand up to the scrutiny of sophisticated investors? Aside from the obvious, which is they need to be believable and the assumptions need to be able to be backed up and defended, there are basically five points that I give an entrepreneur to use like a check list.
#1, have a complete set of financials.This includes historical, en pro-forma, balance sheet, income statement, and statement of cash flows. Always be advised to look forward at least three years, five year if you can, but at least three. For the first year, summarize your information on a monthly basis. For years following that, do it on a quarterly basis because looking that far out is not that good.
#3, include historical financials as far back as you have accurate information. I say this because we work with a lot of companies in the early stages of development, and there may not be historical financial information back very far. So, go back as far as you can but do not go back any further than you have accurate information. Because at the end of the day, accuracy trumps history.
#4, make sure that your business plan and what you say in your business plan in your market analysis and your competitive analysis, make sure those hang together. Because if an investor picks up a business plan that says one thing and then looks at a set of financial that says something else, it is not going to make sense to them, and they will start to ask a lot of questions, and, in turn, the credibility of the whole plan in general is going to be called into question.
#5, dot your I's and cross your T's. Make sure your balance sheet balances. Make sure your costs are properly categorized. Make sure that the investor can take your three financial statements and do a flow-through analysis, and it makes sense to them. Because, at the end of the day, our investors see a lot of business plans, and what you do not want to do is give them an excuse to pass on yours.
When putting together financial statements, I always recommend that is an entrepreneur has questions, to give us a call.

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By virtue of what we set at the Capital Match Point, we get the opportunity to work with entrepreneurs seeking capital at the very early stages of that process . And one of the first things we do, almost as a vetting process, is to make sure that the business seeking capital has a coherent set of financial statements because, let's face it, at the end of the day, that is a prerequisite for getting funded.
Let us take a minute to talk about one of the important components of those statements, the statement of cash flows. The statements of cash flows is a summary of the receipts of cash for a company during a given period of time less the disbursements of cash that that company has during a given period of time. It gives our investors some real insight, especially for early-stager start-up companies, as to the level of cash coming into the company and the company's ability to support itself in the early stages of growth.
The statement of cash flows is broken into three areas: the cash generated or consumed by operations, the cash generated or consumed by investing activities, and the cash generated or consumed by financing activities. Let us take the cash generated or consumed by operating activities portion. What this does is this takes the net income number that your company generates and converts that to a cash number. For instance, if your company sells on credit, it sold a product to a customer on 30 days terms. While you recorded that as revenue on the income statement, you did not actually receive or probably did not receive that cash into the company during the period for which you are compiling the statement of cash flows. So, you would take that away. Also on the income statement, there are non-cash charges such as amortization or depreciation. Because those do not represent actual cash flows out of the company, you add those back to the income statement and make other adjustments like this to arrive at a cash generated or consumed by operating activities figure for your company.
Then you have the cash used for investing. This is like if you use cash to buy something like equipment or if you use cash to take an equity position in a subsidiary or something like that. This would be the case of cash used for investing activities. On the other hand, if you sold some equipment or sold some securities in a subsidiary, this would be an example of cash generated by investing activities.
Then you have cash consumed or generated by financing activities. This might be payment of dividends. That would be a dispersant of cash for financing activities. Buying back some stock would be a dispersant of cash for financing activities. Sale of some treasury stock would be a receipt of cash for financing activities. So, the way the investors are going to use this is to get a complete picture of the cash you have coming into or going out of the company. They are going to see how much operations you are generating, they are going to see how much cash you are really using to invest, and they are going to see how much cash you are using to finance your company.
What I always tell an entrepreneur is if they have some questions regarding the statements of cash flow, is to give us a call because, ultimately, what we want to do is make sure they have accurate financials so that they can maximize their opportunity of getting funded.

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At the top of our investors' mind is ROI, or Return On Investment. ROI is a compound annual rate expressed as a percentage, and it measures the return an investor gets on the capital that they inject into an entrepreneur's business. The way an investor goes about determining the price for a company or the amount of equity that they're going to ask for in exchange for funding a company is by starting with what they require for an ROI. Then they'll take all kinds of growth, profitability, and valuation assumptions into consideration to determine that price. Generally speaking, it's hard to say what an investor expects in terms of ROI. But Clint Richardson, in his book Growth Company 4.0, says that good rules of thumb are greater than 35% for seed or start-up companies, 20% to 50% for first stage companies, and 15% to 30% for second stage or mezzanine companies.
Another thing to remember about ROI is that it is time sensitive in that the longer the investor has their money in a company, the lower the ROI becomes. Let's take an example. Three times an investment earned over a period of three years is a 44% return on investment. Whereas take that same three-time return and spread that out to five years, the return on investment goes down to 25%. So, if our investors think that they're going to have their money sitting in a company longer, they will raise their price for investment.
And for entrepreneurs that are thinking about ROI that aren't comfortable with the calculation, I recommend that they call us at the Capital Match Point. Because what we would like to do is walk you through how to determine an appropriate ROI for your company, because what we want to do at the end of the day is make sure that our investors have the most information possible for when they begin the negotiation process.

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When we get calls from entrepreneurs that have received offers for funding, the first question that we usually get is, "How did our investor arrive at this price?" Which is the the amount of stock that the entrepreneur is going to have to give up or equity on the company that the entrepreneur's going to have to give up in exchange for the capital infusion. To be honest, being short of a mind reader, that question is almost impossible to answer. But one opportunity that we do get at the Capital Match Point is the opportunity to speak with our investors frequently, and this topic comes up a lot. And what we have found is that, when evaluating companies for investment, our investors usually think about things like, how attainable are the goals and milestones of the business plan? One of things that's important to remember, a sophisticated investor is a sophisticated analyst, and if they see something in the financials that don't hang together with the business plan, or they see things that look unrealistic, they're going to adjust accordingly.

Another question is, when will the company be prepared for exit or sale? It's important to keep in mind that the longer an investor has their capital invested in an entrepreneur's company, that's going to affect the return on investment that that investor earns.

Another question might be is, what will the market appetite be at the time of exit? This again gets back to pretty serious implications on investor's ROI.

Another question they ask a lot is, how much does management have invested in the company? This speaks directly to the credibility of the business and the execution of the business plan that's set forth in front of them.

And another consideration that they all talk about a lot is, how is the investment being structured? And this is a function of risk, and it involves combinations of equity and debt, and, of course, an investor will ask for less stock in exchange for less risk.

If an entrepreneur has received an offer for investment, and they're trying to sort it all out and ask some questions, what I recommend is that they give us a call at the Capital Match Point. Because at the end of the day, we want to be sure that our clients are prepared with as much information as possible when they begin the negotiating process.

er question might be is, what will the market appetite be at the time of exit? This again gets back to pretty serious implications on investor's ROI.

Another question they ask a lot is, how much does management have invested in the company? This speaks directly to the credibility of the business and the execution of the business plan that's set forth in front of them.

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I got a call from an entrepreneur the other day that was having trouble determining the value of their company. Specifically, the problem was that this entrepreneur's company participated in a market space that there's not a lot of publicly traded companies and, quite honestly, just not a lot of history out there. So, they were having problems finding enough information to perform some of the typical valuation analyses such as price to earnings or price to sales. What I recommend in this case is that you lean more heavily on the discounted-cash-flows method. Ideally, you'd like to have to have as many methods as possible and come back to a value, but sometimes you just can't, and you have to lean more heavily on the others.
What the discounted-cash-flow method does is it takes the cash flows that your company's expected to generate over a period and, by the way, this information should be contained in your business plan, discounts them back to the present, and you're usually looking at five years out, minimum of three, sum them all up, and arrive at a value of your company. This method is mathematically a little more difficult than the price-to-earnings or price-to-sales ratio methods. So, if you're having some problems or need some help, give us a call at the Capital Match Point. What we ultimately want to do is make sure that our entrepreneurs are as prepared as possible for when the time for negotiation comes.

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You know, by virtue of my position at the Capital Match Point, I have the opportunity to talk to entrepreneurs on almost a daily basis. Entrepreneurs that are seeking capital and in various stages of finding it. And one topic that our conversation almost always gravitates towards is what is your company worth? And after we talk for a few minutes. the answer usually comes back as something vague or maybe just simply, "I don't know." And one thing that I can't stress enough is that you, the entrepreneur, regardless of what the investor is doing because they're going to form their own opinion of what your company's worth, but you, the entrepreneur who's seeking funding have a very fact based, analytical opinion of what your company's worth.
Now, valuation and middling is as much art as it is science, and everybody has their own way of doing it. This investor will think that something's important, and this investor will think something else is important. So, what I generally recommend is that you take at least three methods of valuation and look for convergence around a number. And chances are, if you get convergence around a number, you're on the right track. Now, whether you like that number or not, I don't know. But it means that you are on the right track. And again, there are a lot of different methods of doing valuation, but three that I would recommend, because they are widely used and all of our investors will understand them, is the price-to-earnings ratio, the price-to-sales ratio, and the discounted valuated price of the cash flows.
Now, the price-to-earnings ratio will require you to go out and do some research on publicly traded companies in your market space. Find out what kind of price-to-earnings ratio they're trading at compared to your company and what you think the appetite the market will have at your time of exit and make your valuation accordingly.
Price to sales is done very similarly, except that, instead of earning-- the price of your stocks to earnings, use the ratio of the price of your stock to sales. This method is used a lot in mature industries that don't yet have a clear path to profit but in industries that do have revenue. It's almost a surrogate way that the market uses to assign value to a company.
In the discounted cash flow method, what you need to do is make some projections about your company's cash flow out into the future. Five years if you can; three years minimum. Discount those cash flows back to the present, sum it together, and arrive at a value of your company.
Again, your opinion and the investor's opinion are going to be different. That's ok. But you need to be armed with something to negotiate with. Or, if you'd like some help in establishing a value of your company, get in touch with us at the Capital Match Point. We're here to help, and we're here to maximize our client's chances of getting funded.

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