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The old adage that it takes money to make money has always rung true. And with the lingering effects of the financial crisis and credit crunch remaining, access to capital — particularly bank loans — has never been more difficult to obtain. While private equity is an option, entrepreneurs often fail at the process or proper planning and therefore are denied the capital their businesses require.
Robert L. Greene, principal at SYNCOM Venture Partners (No. 8 on the BE PRIVATE EQUITY list with $410 million in capital under management) says the firm receives nearly 400 deal proposals annually. The firm provides equity to companies that are primarily in early, mid and growth stages of their capital growth cycles in the media and communications space. Past financing deals included Radio One and Black Entertainment Television.
When going over an investment proposal, Greene says the SYNCOM team pays close attention to the following:
- It must be a business that’s in a high-growth sector.
- There’s a unique and defensible aspect to that business. Venture capitalists (VCs) want a good idea that has unique aspects to it that prevent other people from easily emulating it.
- The entrepreneur must possess some domain expertise that gives VCs the ability to determine the likelihood of success. They look for an entrepreneur’s ability to have assembled capital, assembled and led a management team, developed and executed against a strategy and ultimately exit the venture successfully.
Greene offered the following advice to entrepreneurs looking to tap this avenue to capital.
Understand that venture capitals are investors. “We’re actually very disciplined about how we invest our capital and we want to invest in companies that efficiently use that capital to achieve growth,” Greene says. “So if it takes $15-$20 million in order for you to start growing, then that’s a more difficult value proposition than $2-3 million incrementally invested over time.”
Plan for your capital needs before you run out of cash. Greene advises companies to give themselves twice as much time as they think it’ll actually take to raise the money to do so. “If you come to us with a 90-day requirement, chances are it’s not going to be fundable because it’s going take us at least that amount of time to understand the business, get comfortable with the entrepreneur, and plan to mitigate the risk associated with it,” he says. “Oftentimes entrepreneurs will come to us after they’ve exhausted resources when in fact, their resources coupled with ours should go into the deal concurrently.”
Realize that dilution isn’t necessarily a bad thing. Entrepreneurs often fear dilution of their equity ownership in a deal and therefore hinder their business’ opportunities to obtain capital to grow, according to Greene. “At some point, you come down to the fact that if the company is going to be successful, you have to bring third party resources in,” he says.
Don’t pull your money out. Entrepreneurs often believe that when they raise venture capital they can automatically take some of their money off the table, Green asserts. “That’s a difficult value proposition because venture capital is not buyout capital and it’s also not public market capital,” he says. “So the notion of my capital going in as a VC and your capital coming out as an entrepreneur fundamentally misaligns our interest.”
Understand the nature of a VC deal. “It’s not just capital and securities being exchanged,” Greene says. “It’s the notion of all the resources being able to be assembled at a point in time when growth can be achieved.”