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Exhibit 2.3 Traits of a Successful Fund-Raiser
Source: International Capital Resources

Enthusiasm, courage, patience, persuasiveness, and tenacity are also
among the traits of a successful fund-raiser. Enthusiasm reflects the entre-
preneur™s drive to see his or her vision become a reality. Enthusiasm will en-
able the entrepreneur to hang in over the long haul, through hours, days,
weeks, and years of work to build a sustainable company. It is this enthusi-
asm that will generate an investor™s zeal for being associated with the ven-
ture. Nor is courage any less imperative, since asking people for money is
hardly the favorite pastime of even the most gregarious and bold among us.
Courage means stepping up and being willing to take the necessary risks to
grow a start-up. Only the most confident entrepreneur with passion and in-
testinal fortitude receives the monetary vote of the angel investor.
Also indispensable are the patience to endure setbacks and the ability to
The Solution: The Private Placement

remain persuasive. Persuading a person that an enterprise is worthwhile and
will generate a fair rate of return demands tenacity, the dogged deter-
mination to see the funding process through. Invariably there will be set-
backs that entrepreneurs must endure; however, these roadblocks and
detours cannot deter or dissuade entrepreneurs from pressing forward in ex-
ecuting their vision. Investors fund entrepreneurs who will prevail despite
temporary derailments.
Another trait of the successful fund-raiser involves adopting a “no-
is-for-now” attitude, particularly regarding selling their offerings. In other
words, deal with rejection in a positive light. Refuse to take “no” for an an-
swer. Deflect it. After all, “no” often means “No, I™m not interested now” or
“No, I™m not interested in the deal as it is presently structured.” Probe. Make
suggestions: “What if I were to involve another investor? Might you be in-
terested then?” Or, “If I were to restructure the venture, would you be more
inclined to invest?” Plumb your present target for the names of investors
likely to think about the deal. Above all, remember not to take “no” person-
ally. Take “no” to mean “No, not at this time.” Take it to mean that you
have not yet furnished the investor with enough reasons for saying “yes.”
Above all, do not let a “no” alienate you to the extent that you alienate your
potential investor.
We mentioned that a person seeking funding for a venture must radiate
confidence. No one can expect an investor to believe in a venture in which
the entrepreneur has no confidence. A lot of the confidence that the entre-
preneur displays in the venture can be demonstrated by the percentage of
personal net worth the entrepreneur is willing to stake in the venture.
Therefore, the entrepreneur needs to commit more than “sweat equity”; that
is, forego a salary, perhaps until the investors receive their money. In this
way, the entrepreneur demonstrates financial commitment, a commitment
vital to the success of the venture, and crucial to installing in the mind of the
investor that the entrepreneur truly believes in the venture.
Finally, there is the matter of building trust, without which no venture is
likely to get launched, much less sail smoothly. Just as you build an investor
database one name at a time, you build financing one relationship at a time.
People become involved only in relationships that improve their self-image.
Thirteen-year-old George Washington listed among his 110 “Rules of
Civility”: “Associate yourself with men of good quality if you esteem your
own reputation.” Whether young George was capable of such mature think-
ing at so early an age or simply copying Roman maxims in his notebook, the
point remains the same: People are not likely to get involved in relationships
that may lower their self-esteem.
Build trust with others by being honest and by responding candidly to all
issues. Things can get sticky; make them less so by confronting possible

problems at the start. If you have had a problem with alcohol or other drugs,
do not wait until the other party™s private investigator uncovers the informa-
tion. Confess”as personal and painful as it may be. A confession can turn a
negative into a positive. Be able to look someone in the eye and explain your
situation as no one else can.


Before embarking on the path to raising capital, the entrepreneur asks three
important questions: Is the deal financeable? Am I personally financeable? Is
the risk in the deal financeable?
To assess the risk of your financeability, our research has identified six
areas that investors focus on in their assessment of an investment (Exhibit
2.4). In our experience, if three or more of these risks arise, a red flag halts
the investor.
The first of these is management risk: Will the management team stick
together? We™ve termed this risk “team risk.” Do the members of the man-
agement team get along with one another? In giving birth to the company,
will the team be able to work through the highs and lows of the entrepre-
neurial experience?
The second risk involves market change and the team™s ability to accept
the impact. This risk relates to business strategy and how well the manage-
ment team has thought through its business strategy and done its homework
relative to what™s happening in the market and, moreover, the implications
this could have for the plan they have outlined in its documentation.
The third area of the risk in your deal focuses on whether growth still
lies ahead. Is a visionary leading the early stages in the development of the
product or the market, or is someone riding in the tail wind of the lead rac-
ing car? Do we really have someone putting the technology together, some-
one with the courage to be a leader?
Fourth in assessing the risk in your deal stresses the sensitivity of the en-

EXHIBIT 2.4 Is Your Risk Financeable?

1. Will management stick together? (Team Risk)
2. Could market change and impact acceptance? (Business Strategy Risk)
3. Is there still growth ahead? (Product/Technology Risk)
4. Anything brewing in market that could affect your company? (Market Risk)
5. Will manufacturing/R&D work as planned? (Operations Risk)
6. Financial performance of venture to date (Financial Risk)

Source: International Capital Resources
The Solution: The Private Placement

trepreneur™s ear to the vibrations of the marketplace. What out there might
affect the company? Sometimes entrepreneurs get so close to their own tech-
nology, so close to the features of their own deal, so close to developing the
business plan, to putting the management team together, to raising the
money, that they overlook the pulse of the market. Entrepreneurs must not
ignore market information. They do so at their own peril. Entrepreneurs can
ill afford a business plan that lacks a sense of the market within the past 6 to
12 months”a time period after which market circumstances practically
guarantee a shift in technology.
Operations risk has to do with the extent to which the manufacturing plan
can be worked out, and whether the research and development by the com-
pany lead to investor confidence. Will the prototype and product that issue
from the manufacturing process meet the time frames and cost projections?
Last comes the critical financial risk, a risk that takes different forms:
How much money has been invested into the company to date? Has the
company raised any money, or will the company need to approach investors
beyond family and friends? How much financing needs to occur before there
emerges proof of the concept? (This assessment relates to capital intensity
discussed earlier.) Another assessment risk concerns the company™s ability to
generate revenues and/or profits within a reasonable period of time, typi-
cally 12 to 18 months. And what was the financial performance of compa-
nies that the principals of the management team have been involved with
previously? All of this, as well as the actual financial stability of the man-
agers themselves, will be considered as part of the financial performance of
today™s venture.
Companies seeking funding must remember that sophisticated investors
will take all these types of risk into consideration not only in considering
whether to invest, but also in their developing the deal terms and conditions
of agreement under which they would be willing to invest.


Each week in the United States, $5 billion in new equity and secured trans-
actions are offered. Only $1 billion a week are subscribed to by individual
and organizational investors, effective June 2004. In effect, companies mak-
ing equity offerings in the public market have only a 20 percent chance of
raising the capital they require”and only after significant financial, time,
and emotional commitment. With this level of success, why go through the
challenge posed by the equity financing process”public or private?
Since private placement investments are primarily equity, it is best to
know equity™s advantages and disadvantages (Exhibit 2.5).

EXHIBIT 2.5 Advantages/Disadvantages of Equity

Advantages Disadvantages
• Capital • Dilutes ownership
• Permanent capital that increases • More expensive than debt when
company™s net worth, borrowing successful
capacity, and overall financial strength
• Enhance credibility • No means of reversing the transaction
• No scheduled repayment • Give up control/flexibility
• No personal liability • Difficulty finding investors
• Help
• Accountability

Source: International Capital Resources

In studies we have performed periodically since 1994, on average 61
percent of entrepreneurs who have contacted us about their search for capi-
tal report using the private placement with informal venture investors as
their primary targeted funding source. They chose the private placement of
equity resoundingly over further soliciting family, friends, business contacts,
the small business investment companies (SBICs), joint ventures, corporate
investors, and professional venture capital firms.
First, the advantages. Benefits accrue to the private equity alternative.
The private placement is a source of permanent capital without the expen-
sive burden on early-stage cash flows normally associated with debt servic-
ing. This creates cash flow generating capability. Permanent capital increases
the company™s net worth, creating financial flexibility. The company can
then take advantage of overall financial strength and increased borrowing
capacity to use credit sources for funding other opportunities. The creative
deal structuring possible with the private placement permits access to capital
at earlier stages in development than would be the case in more traditional
financing situations. Having raised capital from astute investors through the
private placement, the company benefits from enhanced credibility in the
eyes of the business community, especially other unused capital resources.
And foremost among the advantages is the added value brought by the in-
vestors who bring more than capital to the deal. As we will explain, in most
cases active angel investors have broader agendas than just ROI. They look
for deeper involvement”other types of return beyond the financial. Many
entrepreneurs have for most of their careers been “Lone Rangers,” answer-
ing to no one but their own visions and personal ethics; but from this new
The Solution: The Private Placement

level of accountability emerges a new experience of responsibility and pro-
fessionalism, brought on by having investors, a board of directors, or advi-
sory board, and having to report to investors who closely monitor their
investment. Entrepreneurs learn how to accept help and guidance from those
who have been successful in what they have sought to accomplish.
At the same time, however, equity carries its burden of disadvantages.
Private equity is expensive, requiring an internal rate of return of at least 30
percent to be attractive. There is a range of front-end and back-end fees, and
various expenses associated with successful equity fund-raising companies.
It also provides potential for significant dilution of current shareholders. In a
word, equity diminishes ownership. Unanticipated rounds of financing or
down rounds at lower valuation can strain relationships with early investors
in the deal or lead to litigation with early shareholders. And just as investors
bring added value to the company, they often want governance”perhaps a
seat on the board or an important managerial post. This situation brings to
the surface for the entrepreneur the underlying emotional issue of control of
the company. Furthermore, an equity transaction can stretch itself out. We
are now seeing $1 million rounds taking six months to one year to complete.
With an equity investment, investors will require a clearly articulated three-
to five-year strategy. This creates a burden of planning and documentation
development that can create stress for the entrepreneur already wearing mul-
tiple hats.
Equity will become more expensive than debt if the company is suc-
cessful. In effect, then, an equity investment offers no means of transaction
reversal; that is, you marry your investment partner”unless he or she
wants to divorce you. As one investor warned, “For all intents and pur-
poses, many private investments are permanent investments!” Finally, to re-
iterate what may be the greatest barrier to persons embarking on a
successful private placement: Private investors, prizing their privacy, are ex-
tremely difficult to locate.
So problems with the private equity alternative do exist. But before
reaching this stage of the venture, there comes the disadvantage preceding all
the others: the difficulty of finding high-net-worth angel investors, the indi-
viduals involved in private placement investment.


The difficulty in locating the high-net-worth angel investor generates a criti-
cal question: How is the high-net-worth private or business angel investor
different from bankers, professional money managers, venture capitalists,

and institutional investors? The difference is that the private investor does
not have to invest. For this reason, the private investor has a different take
on things. So the procedures used to sew up a Small Business Administration
loan, to secure subordinated debt financing from an institution, or to ap-
proach conventional venture capitalists are not appropriate for accessing the
private investor.
Therefore, the conventional wisdom and underlying assumptions that
drive the search for funds need to be reexamined. ICR finds that many peo-
ple approach private investors using the same models and same behavior
used to obtain a loan or stir the interest of venture capitalists. But the princi-
ples that guide success in finding money among these other markets simply


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