One Size Fits All Fits No One

The typical fund-raising offering by a small business is a simple price tag placed on equity ownership in the business. This action may doom the campaign at the outset as it makes the offering a ‘one size fits all’. In fact, some businesses intentionally design their offer to offend no one out of fear they will not attract any investment. This results in a bland, uninteresting offering that will compare unfavorably with other offerings that have greater appeal or less concern about telling the reality of their opportunity.

?In setting the price, the small business has (or should have) considered the following factors:

• Potential to increase in value
• Probability of achieving an increase in value (also stated as probability of failure or risks)
• Percentage of ownership
• Structure of ownership (voting or non-voting, preferred or non-preferred, etc.)
• A planned exit for the investor
• Projected rate of return achieved on the date of exit

?In setting the price, you are forcing an investor candidate to accept:

• Your assumptions of the future
• The status of their ownership
• Term of investment
• Rate of return

?A refusal by the investor candidate to accept any of the conditions of the price causes the candidate to walk away to look for a different investor.

?Every condition limits the actual number of investor candidates that may make an investment. A candidate who thinks the market in which the business operates will not grow substantially or is posed for a downturn may disagree with the assumptions of the future. A candidate who wants voting rights will not invest where they receive non-voting stock. A candidate seeking a one-year investment will not invest in a business planning an exit three years down the road. A candidate seeking an ROI of 20% per year will not invest in an offer that projects 15% per year. In combination, the conditions imposed by the stock price may leave no investor candidates.

?The number of small businesses that actually ‘test the waters’ by interviewing and surveying investor candidates in advance of setting a price is very small. Those that don’t determine what is a saleable price or terms of an offering package are going into their capital campaigns blind. They may raise little or no money, falling short of their capital needs.

?Ordinarily, it might be recommended that a business check out what all the other businesses are doing in pricing their offers to get a better sense for what is working and what is not working, but since the vast majority are engaging in the same ‘take it or leave it’ approach to pitching investor candidates this will not reveal the needed information.

?It is also fair to acknowledge that asking investor candidates what they would like to see in an offer may also provide little or no useful information. Many investor candidates have not set their own investment selection criteria. Others state investment outcomes that are rarely achieved. Still others will lie about their ability to invest. Collecting good intelligence on what is a saleable stock offering is difficult.

?Stock offerings should be tailored to those investor candidates who are most likely to invest. By understanding and identifying these investor candidates, the crafting of an offer becomes a straightforward activity. Time expended in determining which investor candidates are most likely to invest will improve the probability of a successful capital campaign, reduce time and cost in pitching the offering and may reduce the cost of money (the amount of equity given up for the price in terms of a share of future profits).

?The challenges of identifying investor candidates and crafting offers will be covered in my upcoming Motivated Money Half-Day Workshop on September 13th from 8 am to Noon MDT. For more information, go to:

https://dakincapital.com/Training/

Karl Dakin

Dakin Capital LLC

[email protected]