When pursuing an investment for one of my fashion brands, Gary and I met with a gentleman who represented a group of investors.
The man was recommended by a friend in the financial world who knew of several companies the man had successfully completed securing investments for over that past year. We were happy to know that the man was on a roll, and had credibility as far as raising money.
As we began our presentation to his group of investors, we instantly felt uneasiness, as it appeared as if we were speaking a different language. Every face had a confused look, and no part of the presentation seemed to be well received. This was extremely out of the norm, as our presentations were normally one of our greatest strengths.
As I completed the presentation , there were many questions (as always) from the group. After an hour or so of questions, I began to notice one recurring theme. It seemed that none of the questions were aimed at our company or business niche, but were on business in general. They could have asked the same exact questions to the owners of a peanut farm and they would have had just as much validity!
After doing a bit of research afterward (key word: afterward), we learned that, though all of the investments the group had made were all in the same or similar industries, not one of those industries were even remotely close to ours! While they all had a comfort level in biotech companies and other companies of the sort, they hadn’t the foggiest idea of how to evaluate a fashion brand. Furthermore, as is almost always the case, the only information they had gathered on the state of the fashion industry was what they read in the papers which was, of course, all negative.
This was an early lesson I learned (though later than I would have liked) that having money is only one of many requirements when choosing the right investor….
As you can imagine, our efforts came to no benefit, as the investors couldn’t relate due to their inexperience in our industry. Turns out, despite the fact they had only invested in one specific area previous to our meeting, they wanted to try to get involved in new areas. The problem is, however, when this is the case, you do not want to be the laboratory rat.
From my experience, I have noticed that most times, people and businesses that try to venture outside their area of expertise get burned. This is especially the case with people and/or companies that have money, as they seem to think that for some reason the fact that they have money suddenly qualifies them to be gurus and experts on everything and, if you are a reader of this blog you know what I think of people who call themselves experts…
In cases like this one, it is nearly impossible to be successful acquiring the capital. Though it is always helpful to prepare relevant articles on the strength and growth of the industry, if your investors are not informed on the industry coming in, you will be fighting a losing battle that will only waste your time…and theirs.
Sticking To What You Know
If you are an avid follower of the business world, you invariably have seen a pattern that companies who have already achieved success in a particular market tend to buy or merge with other companies who are either in their market or compliment what they are doing. Whether investing in a competitor or a start-up, invariably, they don’t stray from the roots of their success. Software companies buy other software companies; telecommunications companies buy other telecommunications companies, etc.
An example of investing in a company that is not in the same exact niche but mutually beneficial would be Facebook acquiring Instagram. Though Instagram is a bit of a different niche on the surface, it offered something that Facebook was lacking, namely the ability to make Facebook much more photo-friendly. Rather than trying to out-do Instagram and spend gobs of money and valuable resources to create their own photo filters and other cool assets that Instagram had and they didn’t, it was a much smarter move to acquire them. It’s a great application of two great principals of business:
1) If you can’t beat ‘em join ‘em
2) No need to re-invent the wheel.
The cool thing about having capital reserves is that it makes decisions much easier as more money creates more options… like buying out (or into) your competition!
Even VC’s Are Getting Focused!
You will notice that investing in products or services that you have expertise in is even the case for VC’s these days. I have noticed that VC’s are less bankers and more strategic partners these days. If you look at a lot of the VC’s out there, most of them have teams of people who have experience in the very niche they invest in.
In most cases, they will only invest in a company if the company agrees for the VC to have their team get involved, work with and advise the company, far beyond the duty of providing them with cash. They even post their criteria for investment to weed things out a bit. You will often hear the term, This is Not My Wheelhouse if it is not for them. Some examples a VC may put out publicly to make their criteria for investment as clear as possible are:
- VC, early- stage only – Investment $500k-2M
- VC investing in technology, customer (consumer) loyalty, & travel/hospitality
- VC looking for companies with current revenue of $5M minimum or higher only.
I attempted to win these investors over many times afterward as I knew they had the money to take my company take great lengths, however, like I mentioned before, money is only one of many variables necessary in making a good deal come to fruition.
If you are looking for an investor, it is always best to find people who are either doing what you are doing but on a much larger scale that can add you to their wheelhouse, or people (and companies) who are in a similar industry that provide added value to what you are doing other than money… Otherwise, you may be dealing with a jackass.
In next week’s post we will talk about the value of strategic partnerships, and the many things that they bring to the table other than just money alone.
What is your experience as it relates to raising capital?
Have you found or do you think that money is the only thing you need? If you do, has this post changed that thinking in any way (good,bad or indifferent)?
Have a great Day!