Buying Money for Your Business

Peter Meyer

Here are three ways to procure money for your business.

Peter Meyer consults, speaks, and writes on management issues from Scotts Valley, California. A principal in The Meyer Group, Meyer is also a Contributing Editor for the Business & Economic Review. He can be reached at Peter@MeyerGrp.com.  Copyright 2004 by The Meyer Group, all rights reserved.

When you take money as an investment in your business, are you selling or buying? Traditionally, the way to get more money from others is to sell like crazy. When you want more funds in your business, however, you can take the other role and be the customer. And as the customer (i.e., the buyer), shouldn’t you get to choose the best supplier? If so, the question is not who will give you cash, but with whom you want to do business. The answer may not be obvious. Consider three groups of sellers, and what you will trade to get that funding.

These potential suppliers—private investors, corporations, and customers—each approach an investment in a business with different objectives and varying ideas of what they want. It makes sense to understand these differing expectations before you make your deal. What your investor anticipates might be perfect for him or her, but exactly wrong for your company and personal goals. You could secure the resources and hate the restrictions.

So, what can you trade for money? Return on investments, growth in share value, access to products and technologies (today’s or tomorrow’s), and control over product plans are key currencies for you.

Unlike venture capitalists, corporations may not expect or even want a quick return on cash.
 

When you approach venture capitalists, you will have to deal with their specific expectations. The venture capitalist community wants equity, and that usually means a dilution of your stake in the business. You are trading shares for opportunity.

Although each venture capitalist will have a different spin on this, start from the assumption that they expect a quick return on their money. It may be tempting to agree to whatever dates the firm suggests just to get the deal done. Don’t. A good venture capitalist will negotiate dates for performance. If you meet your targets, most venture capitalists will leave you alone to grow. However, unlike many corporations, a prudent venture capitalist will take quick action when you miss the commitment. You might not like that action.

Many venture capitalists don't have the same love of technology that you might. Scott Kriens, CEO of network star Juniper Networks, observed that the product is less important to venture capitalists than the team and the marketability of a product. “There are two pressures from a good venture capitalist,” says Kriens. “One is the team, the other is market size. These are the pivot points that any deal will hang on. Without the right team [even the best] idea will crater. Even if you do not have a great idea, if you have the right market proposition and a smart team, [they'll fix] the product.”

This does not mean that a venture capitalist will stay out of your day-to- day operations. Kriens notes: “If the business is going well, the venture capitalists tend to stay pretty passive. If not, they ask a lot of questions that a good management team would already be asking. [Venture capitalists] tend to get into a lot of the operating details.”

The discussion of expectations also includes issues as basic as the definition of “enough” growth. This will also be an expectation issue. Kevin Kerns of Apropos Technologies comments that with venture capitalists:

There are great demands for ramp and delivery, more than you would get typically inside a corporation. [With corporate investors], if you grow 30 percent a year and the parent grows 15 percent, you are a hero. With a venture capitalist, if you are not growing 150 percent, you are not cutting it. Venture capitalists compare their investment against other companies in the same marketplace. Parent companies compare you to other things the parent is doing.

No matter what rate of growth seems correct to you, it also needs to meet the expectations of your venture capitalist.

Customers don’t usually invest in your company or subsidize your costs to get money. They want access to something that you have.

Each will be a little different, but corporations share some common and important expectations. Unlike venture capitalists, corporations may not expect or even want a quick return on cash. Even when they do want that payout, larger companies are more likely than private investors to let the committed return slide a quarter or two. They often look for other advantages, such as access to a new technology or market. Sometimes they will invest in your business as a defensive maneuver to keep one of their competitors from getting that access or to chill a market.

For example, if you want to dominate a market more quickly, you can do so by letting a larger corporation acquire you. Consider Norstan Corporation's decision to sell one of its most profitable businesses to a larger company. The company's Previously Owned Equipment division was a major player in the market for used ROLM Computerized Branch Exchanges. Even so, Norstan only had 20 percent of the market. Norstan could grow the division without help, but the company chose to speed up that growth. Norstan sold its operations to the much larger ROLM.

ROLM's name and sales force allowed the business to take more than 50 percent of the market in a matter of months. ROLM was not looking for a quick financial return from this. The value to ROLM was quickly getting into the market. If the division had delayed profitability by two quarters, ROLM would have almost certainly forgiven the unit's managers.

A caution: the willingness to flex in financial goals can also work against you. If the political landscape inside your investor's corporation changes, you might find that someone suddenly changes your targets for you. As a corporate division you will always be susceptible to quick alterations that do not make sense to your business. Your expectation should be to invest time in selling and then reselling your priorities to the corporate management team.

Unlike venture capitalists, expect corporations to care a great deal about the product and the specific market you are entering. A product that tightly complements the corporation's mix is highly desirable. The product that does not relate in any way to the corporate investor's products may get starved by lack of resources. Products that compete with the corporation, no matter how good, are candidates for quick death.

A corporate investor will pay more to enter, hold, or chill markets that are strategically important. If your products can help the corporation enter those markets or improve its standing there, your value is higher. You will have an easier time getting the resources you need to grow. However, if your growth could be exceptional but you don't do much for the wider corporate agenda, expect less support.

While a good venture capitalist will stay out of your successful business, you can expect the opposite from a corporate investor. The more you grow successfully, the more diversions you can expect. People across the corporation will ask you to work on task forces that have nothing to do with your business. Managers will request your opinion on issues that have little relevance to your skills. Others will assign projects to you because you can get things done—whether or not you have the time. Plan ways to fend off these demands to stay focused and maintain sustainable growth.

As Kerns notes, corporate investors will usually compare you against their own growth. If the corporate investors grow their business at 15 percent per year, you may find that they don't see a need to help your business achieve 120 percent growth in the same period. You may need to sell them on triple-digit growth repeatedly.

Taking money from a customer when you deliver a product is common. What about taking it as an investment? Can you accept investments from more than one customer?

One of the strategies that built StrataCom as a market leader was the decision to let customers invest in the company. Dick Moley, the founding CEO, chose to approach key customers and offer them the chance to invest early. Several said yes. They even agreed to do so alongside their own competitors. They had good reasons to do so. The customers traded cash for early access to technology and a chance to influence the direction of the product. In this case, the owner keeps an undiluted stake in the company.

Customers don’t usually invest in your company or subsidize your costs to get money. They want access to something that you have. Cisco Systems has bought into multiple companies, often not to make a return or to own them, but to get closer to them. The return to Cisco is either intellectual capital or faster access to a product.

However, you may not be able to keep control of your product in such a deal. Are you willing to give up the right to set some priorities for that product? To give up control of the development agenda? The customer may intend that investment to gain access to one or both. This is the exact opposite of the venture capitalist play, where the team is more important than the product. The customer may want your product more than they want you. Make sure you can live with that before you take that investment.

Where a venture capitalist is likely to be very focused on rapid growth and a corporate investor in stable growth, the customer may not be concerned with growth at all. Increased revenue may be a disadvantage. If the customer’s perception is that growth will damage your ability to make the product work, or limit your service to that customer, your investor may want you to hold back. Instead, the customer may want you to focus on enhancing the product.

On the other hand, if the cost of the product is important, your customer may gain an advantage if you sell to many companies. Growth in that case is not a way to expand your business. It is a way to spread your fixed costs and drop your unit price.

If you want to bring a product to market quickly and are not as focused on the growth of your own business, getting customer investments is a great way to buy money at a low cost. You get to avoid dilution and still run your own business.

Any growing company will need resources, but scrambling to get them can make you crazy. Instead, take control and look for the best investor—one who brings the right combination of skills, market, and resources to you. You can take charge of the process, and you should. Will you need money tomorrow? Plan ahead and choose the right suppliers today. o