by Ryan Blair
I tell everyone to start with their friends and family. This makes sense, of course—they know you, they know your work ethic, and they are probably already familiar with your business plan to some degree.
But you have to be careful. Money issues have strained and ruined countless relationships. If you turn to your relatives or close friends for financing, make sure that the effort you put into making their investment grow is greater than even they could have hoped for. Remember that if you fail to get them their return, it may cost more than just the dollar amount. Just because someone knows your work ethic doesn’t mean you can skip over that part of your presentation. Treat interested family and friends as you would any other potential investor. You will probably talk to them differently, of course, but make sure they have the same ironclad promise of your commitment to this project that you would give to a businessperson or a loan officer at a bank.
Tell them the truth. Whenever a company is starting up, there are going to be challenges. There are always going to be rocky patches, even for the most seasoned entrepreneurs. I’ve had people tell me countless times that my venture was going to fail. Over time, my response to the naysayers has been simple: “If it does fail, I’ll be ashamed, but I’ll never know it.” This always gets a few quizzical looks.
I tell them, “I’ll never know about the failure because you will be talking about it at my funeral—I’m going to succeed, or I’ll be dead from trying.”
Give this same kind of assurance to your relatives. Be sure that your friends have such a level of confidence in you that when they write that check, they know that it is going to be put to the best possible use.
This can be a very risky issue, so proceed with caution. Do not let the terms of your financial agreement become the focus of your relationship. Do not overdiscuss business at family gatherings unless people ask you about it. Do not pressure your friends to invest if they are not completely comfortable with the idea. And don’t ask for investments beyond what you know they can afford.
Some of your friends and family are going to think you’re crazy for taking these risks, so don’t be hurt if they choose not to invest in you. You’re going to need emotional support as you launch your business; don’t alienate the people who can provide that for you.
For those who do appreciate what you’re doing, though, and believe in your business plan, make sure that you pay them back promptly—and first. In other words, you get paid last. Your investors get paid first. Always. From the largest investor to the smallest, they get first dibs at the profits, and you get what is left. After all, you are being paid by the business to manage it.
Probably the number one reason why I am where I am today is because I paid back everybody who gave me money for my businesses. People can look at me and say, “For every dollar I gave him, he gave me five back,” or “I gave him a hundred thousand dollars in 2003, and he gave me two hundred thousand in 2004.” Big or small, it doesn’t matter. You have to look out for your investors first because without them, you have no business and no profits. The return you yield for your investors will pay you dividends forever.
That’s how you keep and build relationships when you’re asking for money from family, friends, or anyone else. When people see their money come back to them having accomplished something and grown, they see that you are trustworthy and reliable enough to invest in again. If you have a reputation for paying people back, eventually more reluctant investors will be persuaded by your track record and join as well. It’s what my mother always told me when I was small: You build relationships by putting others first. You ruin them by looking out only for yourself. Never forget that, especially with investors.
While there are a number of different ways to raise money—debt, common stock, preferred stock—when starting a new business, I usually recommend convertible debt to get started. The way this method works is that you provide your investors with a note stipulating that their investment amount can be either repaid with interest and a premium within a set amount of time (usually a year) or converted to equity in the company at a discount to value of the company at that time, at the discretion of the investor or the company, or by mutual discretion. This instrument can be constructed inexpensively, and it provides flexibility to both parties. I have used this method several times and have also invested in start-ups that initially offered convertible debt.
If your business proves successful, most investors will opt for a share of equity so they can continue to gain returns on their investment. However, the option of repaying the loan in full is an important option to keep on the table if you want to retain complete and total ownership of the company. Even more important, if you find that an investor has proved difficult to work with, you have the option of paying off the loan so that the “difficulty” goes away. From personal experience, I have found that when repaying the loan to end a relationship with investors who were unpleasant, unreasonable, or otherwise a pain in the ass, the interest and the premium were worth every cent.
Recently I made an angel investment of $100,000 in a new company where the terms of my loan were either 20 percent interest repaid within one year or an investment conversion to 30 percent equity in the company. Now, I have to admit that I wouldn’t mind holding such a large stake because the company seems to be a very promising one. However, for the sake of the entrepreneurs starting up the business, I hope that they are able to repay me and retain ownership of their work.
If this is your approach, you need to be generous, but not unreasonable, with your interest and equity offerings. The newer your company, the more generous you will have to be because you won’t have so much leverage. The deal I just mentioned is highly favorable for me, but I was also their first investor and they were willing to take a bigger risk to secure the large amount of capital they needed to launch their plan.
Common stock and preferred stock get much trickier. Common stock functions just like stock in a publicly owned company does. The gains from it are tied to the company’s market value or performance.
Preferred stock is a very complicated instrument. A preferred stock subscription agreement can cost tens of thousands of dollars to create and, if not done correctly, can cost you your company. If an investor will only invest in preferred stock, you should hire a great attorney. As I mentioned in chapter 5, “Seize the Day,” this lesson was one of my most expensive early on in my career. I didn’t know enough about the rights I had agreed to in my preferred stock agreement. And when the company eventually sold, it cost me millions.
In fact, when we were getting ready to start ViSalus, we first raised about $200,000 in debt and then $1.5 million in preferred stock. We were then able to use some of the proceeds from the preferred stock to pay off the debt. Of course, it took a lot more fund-raising later to get the company where it is today. This was an approach we took only because time and hard experience had helped me to understand how to structure the transaction to meet the needs of all parties.
But how do you land that first big deal? Banks and investors are continuously getting applications and proposals for loans. As we discussed in the last chapter, you have to be able to make yourself and your business plan stand out by offering something unique, superior, or edgy—this is called having points of differentiation.
When it comes to raising capital, though, there is one more aspect that really trumps them all: you have to offer value. I’m not talking about profit potential here, though obviously that is part of the equation. What really makes the first good impression, what helps you to get your foot in the door, is that you demonstrate to the investors the lengths to which you will go to get them a valuable return on their money. And for most people who are in the position to invest, time is their most limited—and, therefore, most valuable—resource.
I learned this lesson early on when I took a gamble and asked to arrange a meeting with one of the founders of Sun Microsystems. I made a five-hour drive from Los Angeles to San Luis Obispo for a very sh
ort meeting with him because I wanted his advice. I didn’t even pitch to him at that first meeting. I just asked for his advice in launching, growing, and sustaining my new start-up business. But later I knew I could pick up the phone or send him an e-mail to ask, “Could you take a look at this business plan?” because I had first demonstrated to him that I understood how valuable his time was.
Putting forth effort like that is your first step toward demonstrating that you are willing to earn any investment someone might decide to offer you. The advantage of securing one or two larger investors through efforts like this is that those investors can often open the doors to a number of other investors. After all, the goal of any investment is to make a profit, and any investor is going to want your business to grow and succeed. The more investors who are able to offer up capital and expertise, the more rapidly the business can expand its offerings and thus, by extension, its client base, which leads to increased sales and profits.
Therefore, by securing a few “anchor investors” early on, your business will not only have credibility with other venture capitalists, but its networking opportunities are also likely to expand exponentially.
But how can you assure those anchor investors that you are willing to earn their capital? One of the most effective ways is to offer them equity in your company in exchange for their time. This not only shows the investors that you’re willing to sacrifice for your company, but it also gives them even more motivation to assist you in making the company profitable because it directly affects their own returns.
When SkyPipeline was still in its early days, Fred Warren agreed to help me raise $1 million to expand it. At the time, my company was doing about $30,000 in sales per month, but we negotiated a deal where he would contribute about one-half of the $1 million I needed, and in the meantime, he would introduce me to a number of other potential investors. Not only did my business grow, but I also benefited from fantastic mentorship from someone who had been in business for years and wanted to make sure that his money, as well as the money of his friends, was being put to good use.
Fred taught me how to be a CEO, but just as important, he introduced me to the Goergen family, who were and still are some of my most valuable contacts. Your reputation with investors is something you will carry with you throughout your career, so guard it well.
Chances are that you will not need nearly so substantial a sum to start your business as I did. But if you are able to make a few key connections and establish credibility with local business leaders, angel investors, or venture capitalists in your area, you may be able to open doors to larger investments as well as smaller ones.
VENTURE CAPITALISTS: SWIMMING WITH THE SHARKS
I need to offer two warnings to keep in the forefront of your mind when the large investments and/or profits start to roll in. Venture capital relationships are arrangements that are successful only if you are very knowledgeable in how to structure the transaction, if you are smart in choosing whom you work with, and if you are able to keep it all in focus. Surround yourself with the right people who have the right values, philosophies, and intentions with their investments. Whenever money is involved, there is a definite sense of obligation, and you do not want to find yourself in any partnerships with anyone of questionable character, which may not only cause problems in terms of your own alliances and commitments, but it also can hurt your reputation with other, more credible investors.
Additionally, you have to make sure that you keep yourself grounded in terms of how you think about money. It’s very tempting, once the profits start rolling in, to think that your days of sacrificing are over. When I sold SkyPipeline as part of a merger, it ended up being a $25 million deal. The newspapers wrote about how I had made so much money as a young kid in my twenties. I had every Wall Street banker calling me. My mom and my friends were all so proud. I thought I had arrived. But I didn’t get $25 million in cash. I had been heavily diluted for additional financing rounds, and the actual amount of cash, although significant, would not allow me to retire happily on an island somewhere.
So even though it looked as though I had made a massive windfall, it was a much smaller number than everyone thought—but I kept the story going. I loved that people thought I was a wildly successful multimillionaire, and I started spending as if I were. Whether it is good or bad, society measures you by the watch you wear, the shoes you have on, and the car you drive, and early in my career I invested heavily in that.
Part of maintaining your drive is to try to project confidence at all times, no matter what.
You need to be willing to go out on a limb, set goals, and let your investors see the level of belief you have in your product as well as your ability to sell it. Do not confuse confidence with bravado or self-importance, though. No one wants to be a business partner with someone who is cocky. True confidence is found in the things you don’t say and the look in your eyes.
For example, quite often I find myself faced with entrepreneurs who treat my invitation to make their sales pitch as a ploy to steal their ideas. I’ve had owners of brand-new businesses that have not even launched insist that I sign a nondisclosure agreement before they will agree to speak with me. I don’t even know who they are or what their product does, and they are asking me to sign a legal document? And if I balk at signing anything before I at least meet with them, the response I usually get from these entrepreneurs is basically one that accuses me of premeditated theft. If the new product has a patent, as many of them do, the investor will often act as if this is a trump card that gives him or her total legitimacy and commands my respect. In this kind of situation, the request for capital is usually a rather high amount—and again, all for a product that I don’t know anything about.
I get dozens of letters from people who basically say, “I have the best idea in the world, and I need you to fund it, but I can’t tell you what it is because you might steal it.” Not only is that insulting to me personally, but it also demonstrates that the person does not have a grasp of the interpersonal skills needed to raise money, let alone to interact with customers. If he or she has not taken the time to figure out what my motivations, needs, and business practices are, how is this person going to treat a client? I always have to fight the urge to e-mail back, “If your product is so great that I should invest in it sight unseen, then you don’t need me because it should be selling itself.”
I want to include a quick list of dos and don’ts for pitching to an investor—because as obvious as some of these items may seem, they all address very common mistakes or missteps that can cost you the deal:• Do turn off your cell phone before the presentation, and do not wear an earpiece.
• Do dress professionally—that means a business suit or a shirt and tie. Casual wear is never appropriate in this kind of setting. There is nothing casual about success.
• Do be sure to ask for the investment at the end of your presentation.
• Do rehearse your presentation a minimum of ten times.
• Don’t allow your presentation to run over thirty minutes, and be sure to allow at least fifteen extra minutes for a question-andanswer session at the end.
• Do end the talk by reciting the specific actions that were requested of you.
• Do go back and reread chapter 12, “Million-Dollar Mistakes,” before you ask an investor for his or her money.
• Do follow up on everything to which you committed.
• Don’t interrupt your prospective investor when he or she is talking.
• Do make sure to answer the investor’s question clearly and concisely, and ask him or her after you speak, “Did that answer your question?”
• Don’t try to answer questions if you don’t know the answer. Say instead, “I don’t know, but I will follow up with you on that question.”
• Do make sure your investment presentation is printed in color and bound professionally.
• Don’t ever respond with negative emotion to a criticism or lack of i
nterest from a potential investor.
You’re swimming with sharks; it requires a delicate balance of persuasiveness but not pressure, extreme sacrifice but not self-destruction, and great confidence and genuine humility. Raising capital is probably going to be the most difficult part of establishing your business. You must be willing to work yourself to the very brink to secure each investment and then continue to work yourself to the brink to make sure you get a return. And if you forget everything else I’ve written in this chapters, ask for the order and close the investor.
17
GROWING, HIRING, AND FIRING
One night a few months ago I had an after-hours party at my penthouse. The music was loud, and there were about a hundred people—models, celebrities, and old friends—all celebrating the decadence of our times. As I’ve mentioned, I like to entertain, so I was indulging in one of my favorite rituals with the guests: leading them around on a tour, explaining each piece of art. I turned the corner and suddenly I saw a nightmare from the past: one of the most evil criminals from my old neighborhood, an OG from my gang, was standing in my living room. It had been fifteen years since I had last seen him, and he had the same look on his face, the look of a man with nothing to lose.
My first thought was, “I’m getting robbed. Or killed.” My next thought was, “Where’s my security?” But I knew they were no match. If this guy was there on a mission, no security, armed or not, would stop him. Philip weighs about 280 pounds—he’s a massive guy. Last I’d heard he was serving time in prison for stabbing someone in the liver. He’s a complete psycho. This was not the type of person I wanted hanging around my life today. I had no choice but to ask him what he was doing there. The first thing he said was, “Your homeys are all proud of you.”