CFO Studio Magazine with David Huber

4th QUARTER 2012 WWW.CFOSTUDIO.COM 17 return may not be the only consideration for every investor. If you have a potential investor who lost a child to a fatal disease, the fact that your company offers the hope of a cure for that disease might be key. Similarly, a new field treatment for soldiers wounded in combat might help you land a Department of Defense grant. When courting investors, review things that reduce the investment risk, such as: • Your management team’s previous success in similar enterprises. • Your team’s focus on minimizing the company’s “burn rate” and spend- ing only to drive value growth while preserving resources (e.g., reducing overhead by operating as a virtual company). • Unique technology your company offers; regulatory barriers or other obstacles that will hinder the success of or eliminate competitors. • Established market demand for your company’s offerings. • Multiple exit opportunities for investors. Attracting leaders in your industry to your board as key early investors will greatly help you bring others into the fold. These high-profile investors provide a “ Good Housekeeping seal of approval” and give others the comfort of knowing that there’s “adult supervision” on your board. Finding These Investors Network, network, network, and not just with Financial Executives International (FEI) and the Financial Executives Networking Group (FENG). You’ll need to get out of your FEI and FENG finance-focused comfort zone and get involved with organizations in your industry, government- sponsored groups that support early-stage compa- nies, and other centers of influence (for example, lawyers, accounting firms, consulting firms, etc.) with connections to high-net-worth individuals and investment firms. Beggars can’t be choosers. Nevertheless, you’ll want to know whether potential investors bring anything to the table besides money. For example, are they opinion leaders? Do they have reputations for being able to identify good investments at an early stage? Do they have great track records? As your firm and story develop, pre- senting your company at an investment conference or an industry association meeting may help you attract larger investors or strategic partners that may wish to buy into the economic promise of your product. A big pharmaceutical company or a tech giant, for instance, might want to partner with you if you’ve developed something of inter- est in their field. And don’t neglect to cultivate key vendors who may benefit significantly from your firm’s success. For example, contract research organizations may deeply discount their services in exchange for an equity stake in a pre-revenue company. Finally, get to know the investment bankers who specialize in your indus- try and focus on early-stage companies. The best ones will understand your vision, present you with good ideas and honest feedback, and help you raise capital. The ones you want to avoid will focus on “doing a deal” regardless of whether it’s in your best long-term interest. What About Borrowing? If you’ve successfully raised equity and are not rapidly burning through your investable cash, you now have an asset that banks can lend against. But you will pay to borrow your own funds. If your firm’s intellectual property has progressed to the point where a secured lender (e.g., hedge fund) may be willing to lend against that asset, carefully consider the terms of the loan: What if Murphy’s Law holds and timetables slip? Generally you’ll find yourself using equity or equity-like products to capitalize a pre-revenue company even though they are more expensive than debt instruments. That’s how it is when your company is young and has yet to make its mark in the marketplace. C Which CFOs have appeared in on-camera interviews on CFO Studio ? Find out at www.cfostudio.com ? “ WILL YOU HAVE THE LIQUIDITY NEEDED FROM ANTICIPATED MILESTONE PAYMENTS WHEN THE LOAN COMES DUE? ” Learn more about the author www.CFOstudio.com/BertMarchio Going Public W hen you’re faced with the choice of going public or not, you must judge whether the ac- cess to the public capital markets and shareholder liquidity you gain will justify the cost of operating as a public company. These include: • More extensive and expensive independent financial audits. • Increased cost of Directors and Officers insurance. • Public company/Sarbanes-Oxley reporting and disclosure requirements. • Expanded demands on investor relations. Some firms attempt to lessen the burden of going public by merging with an existing public company holding a significant amount of cash. Approach “reverse mergers” cautiously. Before you proceed, ask yourself the following questions: • Do the products of the two companies complement each other? • Will your “story” still apply to the company created by the merger or will you have a merger of convenience that produces a company with two disparate parts — and two separate stories? • Will you have a duplicate management structure? If so, who stays? Who goes? A public offering can be a time of great celebration for a company — but only if you handle it the right way. Your success depends on when and how you make the move.