How to Raise Capital

How to Raise Capital

By Janet Leiser

Senior Editor

The scene: the Florida Venture Capital Forum, Dec. 9 in Ponte Vedra.

The players: Ray Weadock, Dave Corey and Steve Roden, three chief executive officers of fast-growing companies.

Their mission: Explain how to finance corporate growth.

The answer: All three agree that three ingredients are essential - a good product, a large market and a top-rated management team.

But each CEO runs his business differently.

Weadock, founder of Tampa-based Persystent Technology Co., meets with his directors every six weeks. That way the updates are shorter, less has to be said. Steve Roden of LearnSomething Inc. in Tallahassee only meets with his directors quarterly. He says prep time for the meetings is exhaustive, otherwise.

Dave Corey of Lakeland's Solicore Inc. says it's just important for the CEO to keep board members informed and aware of the company's progress.

In the past year, Corey has raised $15 million, Weadock has raised $7 million and Roden obtained $2 million in an F round for LearnSomething, a company he took over two years ago.

Following is an edited transcript of the discussion they had with Wayne Hunter, managing partner of Richmond, Va.-based Harbert Venture Partners, a venture capital fund, during the forum:

Name two or three key things that made your last fund-raising successful?

Weadock: The management team is really important. That may be the most important thing you can do starting off. You have to have intellectual property, but most important you have to solve a real need. There has to be a big market for your product.

You have to do your homework on the type of investors you want. You have to ensure the investor is looking to invest in the category you fit into. You have to find an investor who is at the right stage in the partnership. A lot of things that go on in a [venture capital] partnership have nothing to do with your company or your product. It could be the partner you're talking to just got the last two to three deals, and it doesn't matter whether you're the next Microsoft, that partnership is just not going to let that partner have the deal.

Find the right type of investor who can add value to your business.

Corey: Talk to a lot of people. Do your homework, leverage off the relationships you have. In my experience, it was going to people who had already backed me in the past that helped.

A lot of it is timing. We did research on who invested in our space. We talked to the people we thought were ideal, but they had three other deals they were in the middle of doing, and no matter how good our deal was they couldn't get our deal done.

One of things I think is incredibly important is knowing your business. It's a credibility issue. After you've done however many pitches, you can anticipate some of the questions that are going to come up. A lot of it is really making sure that you thought through and are really prepared when you go out.

When we were doing a C round, we had to make sure we had the confidence and support of our current investors. Obviously, one of the questions was what are your current investors going to do? The answer was they can't get enough. Potential investors are obviously going to talk to the current investors and ask them what they think. It's a very, very small community.

Roden: We just finished an F round, which is kind of amazing to me. In the E round, we had an upside down balance sheet with $2.8 million in debt and $400,000 in assets. We turned that around. We offered creditors 20 cents on the dollar, literally eliminated the vast majority of the debt.

Put that customer list up early and often. From the venture capital point of view, that was our edge. If you don't have something people are going to buy, then your story is pretty hard to make credible. You have to have a predictable revenue stream, multiyear contracts, etc. Those pieces start making the story happen.

A couple of guys asked questions early I wasn't ready for. We didn't let that happen twice. It was things like, 'OK, when this company is at $40 million, who will your clients be?' I hadn't thought that far out. But we ended up figuring that out. Went through the full life cycle of this business. We never got asked that question again, but I was ready for it.

A top management team is important to venture capitalists considering an investment. How did you set up the team?

Weadock: You have to find guys who have been there and done that before and are willing to come do it again. I built a management team of guys who have all been through this before. And that has a lot of credibility. Hire for your weaknesses so they can cover for what you can't do.

The product has to be repeatable. I understand in the A round or the B round, you're not predictable yet. But by the C round, you need to be predictable. You need to ensure you have a product that is a mature, enterprise-ready product. I had to bring in professional engineering to make sure the good work done by the guys who created the technology is repeatable.

You have to start in the very beginning making sure you have good legal counsel and that you do everything by the book. The bigger the venture capitalists, the bigger their limited partners are.

If you ever anticipate selling your company to a public company, you need to start today by doing things that are compliant for the future. You need to make sure your team has a clean background. You have to do an extraordinary amount of due diligence. Make sure your accounting records are clean and you don't have any questionable customer documentation out there. That's really important, especially after you go into the B round.

You may not have to raise a future round of capital, but if you do, what do you consider important to be successful?

Corey: If you're anticipating a next round, you have to know what your value creators are. If you don't have what I call NASCAR customers, you have to play to your strengths.

You want to hire A players. And I would err on the side of hiring someone who's more qualified than you think you need. Surround yourself with people who are better than you. And it's a really tough thing to do because A players typically hire B players and some A players. If you find you didn't meet expectations going on to another round, then you have to figure out why and chart projections for the next two years.

Roden: I was fortunate to have one of the large guys do a formal audit of my management team. I asked him to write it up, and it was really quite good. Their comment was, 'These guys can definitely run a $50 million to $100 million company.' I used that as a battle-ax with everyone else I talked to because it gave me an outside opinion of the quality of the management team.

I do agree you try to hire a smarter management team than you are, but particularly it's to your weaknesses.

If there were two things you could do differently in the fund-raising process, what would they be?

Weadock: The mistake that most entrepreneurs make is they wait until they really need money. Let me tell you when you need money in the worst way, that's when you're least likely to get it. You need to plan ahead and be empathetic with the investors. Everybody likes their favorite radio station, WIFM, 'What's In It For Me.' Every one wants to know what's in it for them. You've got to find investors who can get along with your prior investors. That's another key element. You need to make sure there's a common goal between all your investors and you and your investors.

Roden: I am continuing to communicate with the investors who did not buy into us. I think that's important. We send a quarterly newsletter that tells about our new clients, our new relationships, what's working and what's not working.

Any advice for entrepreneurs on how you manage the relationships with your investors?

Weadock: In the first round, they wanted to have communication every day. That's a little too much. In the second round, they were talking about doing a board meeting once a quarter. I said that's too long. There's a lot that happens in 90 days in my company. The business is growing fast. We have a board meeting every six weeks. It does take a lot of preparation. Make sure there are no surprises for these guys.

Corey: Make sure you are setting expectations as to what's going to happen and when. Communicate regularly. Tell them what you're going to do, don't ask for permission. You are running the company. Really determine what you want to get out of the relationship with the VC.

I've found that the last investors we brought in significantly outperformed from a value-added aspect. The good business partner/venture capitalist will help you, nudge you a little bit without making you feel like you haven't thought about it. They'll suggest ideas and partnerships and introduce you to people, if you want that and you need it. If you want someone who is silent, make sure you're going to get that.

Roden: We have a board that's made up of professional investors, as well as some legacy investors. They have different styles. I believe you should lobby them in advance in getting different issues to the board. Communicate clearly. No one should come and get any huge surprises. That's 101 in our world.

Send out monthly financials. I don't want to do board meetings more than quarterly because of the prep time. We're negotiating a line of credit and I've asked some of my investors for help. They're fantastic at introducing us to banks that are now eager to participate. I see that as a clear advantage.

The Companies

Persystent Technology Inc., Tampa, was started about five years by Ray Weadock, a former Silicon Valley entrepreneur who helped develop such companies as VisiCorp, Conner Peripherals and Quantum Corp. Persystent's secret sauce is software that repairs a computer each time it's booted up. Weadock says businesses worldwide spend about $600 billion annually for computer repairs. He expects his software to transform the computer industry.

Solicore Inc., Lakeland, was founded in 2001. The thin film battery company provides the only solid-state battery for credit cards, power cards, financial transaction cards, radio identification cards and medical devices. Dave Corey, who has led organizations through successful initial public offerings, was brought in as CEO when the company received its second round of venture capital.

LearnSomething Inc., Tallahassee, is a 13-year-old technology business that provides proprietary software programs that ensure a pharmacy or grocery store chain is following the law in the distribution and sale of drugs or food. Clients include Wal-Mart, Costco and CVS. The company was foundering when Steve Roden came on board in December 2003 to convert it from a family business.