The Brutal Four

Business owners who take the trouble to answer a few questions – four exactly – will be far more prepared to attract investors. Imagine standing in front of the private equity manager: There he sits in front of you – tough money guy. He leans back in his chair, steeples his fingers and stares at you with steely eyes, like an eagle spotting a field mouse.

He’s thinking, “Gee whiz, she’s well prepared. She’s capable of taking my money and growing it into something worthwhile. I can see us working together really well for the next five years.” Wouldn’t that be excellent?

The truth is that investors are in the game of saying “no.” It is easier to reject. Any business owner asking for investment has five minutes. You have to look at the odds. Private equity is seeking five deals – five golden eggs – to nurse over the next five years. He is eyeing you and weighing up whether you are that golden egg. From his many years of pain in handing over money only to see some idiot lease a lavish office and fill it with furniture straight from Architectural Digest instead of investing in sales, Private Equity has toughened him up the hard way.

Warren Buffett says that investing comes down to four brutal questions. You would not sell your house without tidying it, yet many business owners make the mistake of showing their business without being “investor ready,” so get prepared for the Four Brutal Questions:

ARE YOU THE RIGHT ONE TO MAKE THIS HAPPEN?

“Back a quality individual before backing a sure fire idea” is private equity’s mantra because a weak management team with a terrific “A” Plan is like Lindsay Lohan with a great movie script.

Private equity seeks gutsy ambition – think World Cup soccer. Show how you get in the game, run full blast, and take the ball down the field. Everyone wants to score a goal but how do you move your team down the playing field better? Prepare your own scoring record. Do you have the last few years’ budget and plans? Can you use these to demonstrate that you set clear goals and achieved them? Several years of past plans are a clue to whether you do what you say you will, not like the French soccer team – all talk and fizzle.

WHAT IS THE OPPORTUNITY?

What is your business? More specifically, what does the company do to get money out of customers’ wallets? “Proof of Concept” means you have designed a light bulb, made it, turned it on, and sold it to a happy customer.

Market size, in particular, is where all the investors aim their questions because in the private equity world, investing is like the movie business – one Shrek franchise can pay for all the Barnyard Animals duds.

IS IT SUSTAINABLE?

Quite simply – will customers keep paying cash? Demonstrate that customers will reach out to your basket of goodies, pushing aside the competitor’s basket each and every time.

What will be your barriers to entry? How can you make it expensive for companies to copy-cat? For example, the record industry has held onto its stars by being able to organize mega-concerts where the big dough happens. Solid copyright, patent protection, and long-term client contracts all make entry of new companies into your industry that much more difficult.

CAN YOU SHOW ME THE MONEY?

To get the cheque books flipping open, you will have to prove the growth rate will be high enough to make investors place money with you and not with another business or put the money in the stock exchange on gold (not BP). Return on investment (ROI) depends on company size, and under $10 million in revenue will need to be over 50 per cent. You need to show this cynical investor that you will not abuse his money; that you will take it and multiply it with all the efficiency of an iron-knifed sous chef slicing, dicing, and whipping all those onions (revenues) into the wok the way you said you would.

As Leonardo da Vinci said, “Simplicity is the ultimate sophistication.” Each investor you are going to approach will judge why they should give you money. Your job is to make that process as simple as possible. Answer the Four Questions before they are even asked.

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