Richard Kestenbaum is a partner at Triangle Capital LLC, a firm that raises money and does mergers and acquisitions for companies in accessories, apparel, retail and other consumer products businesses. For a partial list of transactions by industry, click here.
If you have a small accessories company, it can seem like other people can raise money to grow their businesses but you can’t. Why is that? What does it take to raise money for growth?
Richard Kestenbaum outlines 7 points.
1. Be a Major Playor:
One of the most important factors in being able to raise equity capital has to do with the size of your business. The accessories business is very risky. It has low barriers to entry (meaning: it’s easy to start an accessories company compared to most other kinds of businesses). It also has low barriers to exit (meaning: if you have a bad season or you run out of cash, your competitors will run right over you and the market will move forward without you). It’s relatively easy to start an accessories business and it’s relatively easy to go out of business.
It’s relatively easy to start an accessories business and it’s relatively easy to go out of business.
But if you’re a major player in your segment—even if your segment is a tiny slice of the industry—it’s harder for you to get displaced by a competitor or to go out of business. So being big in your sector or being a meaningful supplier to your customers is important to investors. They need to know that your business matters in the market. That will enhance the likelihood that you will survive.
When your business is small, you are very vulnerable. Usually small businesses are dependent on one person or just a few people. And changes in the market, such as the bankruptcy of a major retailer or other things you can’t control, can have a very severe effect on your business.
2. Buildout Attracts Backing:
Investors usually don’t want to see you do something you’ve never done before – that’s too risky for them and they would much rather see you do more of what you are already doing well. So if you sell shoes and you want to raise money to produce handbags, that will be a tough capital raise to accomplish. But if you sell a product and you need to raise equity in order to handle your ever-increasing orders and keep up with your inventory and receivables, you’ve got a much better chance for success.
Investors are much more likely to be comfortable backing you to do something that you‘ve already proven you can do than try something new. They want to see you build something out on an existing foundation rather than start from scratch.
3. Consider Your Track Record:
Your history as a company will be very important in determining whether you can raise money or not. Investors usually believe (wrongly) that what was true in the past will continue to be true in the future. So if you have good margins and growth, the two most important financial factors that convey the strength of a business, investors will flock to you. If your financial and sell-through performance has not been great in the past, you are unlikely to be able to raise money from outside sources.
4. Go to Friends and Family for Small Investments:
Generally, institutional investors don’t want to make investments that are less than $10 million and very rarely do they go below investments of $5 million. So if you need less capital than $5 million, you should probably be thinking about friends and family.
The amount of money you can raise is not a matter of your sales or margins, it’s a matter of how much you need to reach the next stage of your growth. If you’re an early-stage company, most likely an investment in your business will be thought about more as an investment in you personally rather than as an investment in your business.
[If] you need less capital than $5 million, you should probably be thinking about friends and family.
The people who will be most comfortable being your financial backers are going to be people who know you, not necessarily people who know about your business or industry. Of course, the best place to find people who trust you is in your own contact list. Investors that know you personally also know that you won’t want to jeopardize your relationship with them by putting them into a bad situation. They are counting on that to recoup their investment.
5. Assess Value Accurately & Honestly:
Very often, entrepreneurs overvalue their business. To figure out how much an investor will assume your business is worth before they invest in it, take a guess at the lowest possible value you can imagine it is worth. Then take ¼ of that number and you’re probably close to the right value.
It’s very expensive to sell an interest in your company and entrepreneurs often underestimate how much they will have to give up in order to raise capital. So make sure you’re not raising more than you need or you will pay a heavy price in what you give up.
6. Don’t Lose Control:
Even if you sell only a minority interest, having a partner is different from owning your business entirely by yourself or with your founding partners. You will need to get to know your prospective partners very well before you are ready to take a commitment from them. Take your time in that part of the process. Meet prospective investors off-site for a meal and talk to the principals of other companies they’ve invested in. Find out about their failures (everyone has them) and not just their successes.
7. Be Patient:
Above all, the process of raising money takes time. You have to be prepared to spend up to a year getting it done. So plan your capital needs with lots of lead time so you can avoid a cash squeeze. If you must raise cash immediately, the value of your company will drop precipitously because investors will sense desperation and take advantage.
If after reading this article you still think that on balance you want to raise money for your accessories business and you can pass all the hurdles, visit our website(www.TriangleCapitalLLC.com) or email me directly at RKestenbaum@TriangleCapitalLLC.com.