The 3 ROI's to publicise when raising money and the power of PR for investor relations.

On this podcast I deal with the communications best practice for raising funds. Raising money is often a key part of the growth strategy of a company and it requires a special practice of communications called investor relations. I've raised money for my own ventures and worked on an IPO for a cosmetics company, and have also supported entrepreneurs as they draft investor memos,  present and work to entice people to fund their dreams.

I reference the insights of Kevin Whelan, as he discusses how to be investable on the Wealthtalk podcast episode 74.  I talk about Return of Investment, (Kevin's first point), Return on Investment, and how PR plays a key role in providing the 3rd ROI, Reassurance on Individuals. I share the key elements that need to be included in an investment memo and the need to profile the potential investor which is appropriate for your business.

SPEAK|Pr is for business owners to unlock the value in their organization for free with effective communication and is hosted by international Pr agency owner and entrepreneur Jim James.

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Transcript

Jim James: 0:18

I've been talking with a number of companies recently about raising money, and so I thought I would talk about investor relations, what needs to go into an investment memo, the role of public relations in investor relations, and how you can enhance your opportunities for raising money by having media coverage. Investor relations work or raising money for your company, whether it's a startup, series A or series B, or even pre-IPO, takes a different kind of work to general public relations. What's my experience in this? Well, I've got a few different cases where I've been involved. In one case in Singapore, I was acting for a cosmetics company that went for an IPO. I worked with the CEO on the messaging and the development of the pink paper as they call it, with the investment bankers and the lawyers in Singapore, and also on the investment analyst calls with the CEO as he went around talking to the fund managers to convince them of the merits of backing and underwriting his float, as well as talking to the business media and the finance media in Southeast Asia, America, Europe, and Australia, as he was raising money from all of these different markets. I've also worked on raising money for my own business in Singapore called goevents.com, and I raised half a million US dollars on a valuation of $9.8 million back in 2011. I actually raised that money on the strength of a PowerPoint presentation. I've worked between those big and small deals on a large number of investment documents with companies and helped them get noticed in and amongst the finance community. I want to share that experience on how to go about it just in case you're thinking about raising money. There are a number of different items that we need to think about if we're doing a fundraising document. The first is that we must think about the kind of investor that we're looking for, because they're all looking for slightly different sectors and verticals. It sounds pretty obvious, but just like any other company, an investment company will have a portfolio based on a particular area of specialisation. They do this because obviously, different specialisations require different amounts of knowledge and competence on the investment manager side. Certainly for retail products, different retail products will appeal to different investors, for example, for mining, for gas, for technology, or for clean tech. The first thing to do is to look at which potential investors we're looking for, and they could be categorised as angel investors. These are people who have got money that are investing on their own account, and therefore they bring money, expertise, and networks. Those are then complemented by some venture capital companies, and then by some larger funds, like 3i was in the previous UK administration money or Temasek Holdings is in Singapore government money. Different-sized funds have different motivations, but what they are all looking for is ROI or return on investment. Kevin Whelan of the WealthBuilders, on their recent podcast, talks about the different kinds of returns on investment that are important for potential investors, and I will share those with you. First of all, when it comes to the return on investment, if people put money in, they want to make sure that they are going to get it back. The earlier the stage of the investment, the bigger the risk, and therefore, my experience is that the investors are looking for a greater return, because they're probably going to invest in, say, 10 companies that are early-stage, and the statistics say that a large number of those companies, eight or nine, may fail in the first year. In the messaging that we're putting together in our documentation, explain how the return on investment will happen or at least how you will mitigate the risk if in case the investment may not come back. The second factor to consider is the possible upside in the investment. When I went to Sandy Hill Road, which is where the famous VCs live in San Francisco, to raise money for my internet business, I went as part of a Singapore-sponsored tech ventures program, and I met with some Sandy Hill investors who were looking at getting a minimum of 10 and the possibility of long-term investment or an exit of greater magnitude when the company was sold. If there were less than 10, they said it's not worth their while. Another ROI Kevin Whelan talks about is the return on the relationship. How is the relationship with the investors, especially the angel investors? How are they going to make sure that they've got a relationship with you that they can trust? But also, are you going to introduce them to more deals? It can be quite an incestuous business, really. All the VCs and all the entrepreneurs know one another and deals get shopped around, so how are they going to get a return on knowing you and your company? There should be reassurance on the individuals involved. Giving advice and reassurance that the people involved, the investors, the management team, and anyone involved in the success of the business, is trustworthy, in my experience, was key. In any documentation that I put together for my clients or for myself, I would put in details about the individuals that are involved and their commitment to the business in terms of their investment. In terms of the document itself, what do want to say? First of all, we need to identify why we're doing this business, what is the problem that we're solving and, most importantly, what is the competitive advantage of the product or the service that we're offering. It's not enough to say there's a market opportunity. It's not enough to say that you've got a problem-solving product or service, because other people can come in, and often the second mover, not the first, is the company that survives. If we look at the internet, Yahoo was the first search engine, but it's Google that dominated. So, how do you have a source of competitive advantage? Is it a trademark? Is it an IP to the formula? Is it code that no one else can repeat? The sustainable competitive advantage, of course, leads into the multiple on the exit. The next things to look at are the margin and the revenue. A friend of mine who's an investment banker in Singapore said you really only are interested in two things, the margin and the leverage. How much margin can be made? And how many times can that margin be made? Because that, ultimately, is going to drive the profits. What is going to be the cost of production? What is going to be the sale price? How easily can you defend that margin? How many people are going to buy that? What is the scale of the issue or the market that you're addressing? Another thing to look at from the investor's point of view is how your product fits into their portfolio, because one aspect of what they're looking for is the the absolute return on your business, but another can be that they've got a portfolio of companies and your product or service can somehow add value to their other businesses. For instance, I had a search engine, and the company I sold some of my equity to had some other digital platforms. The idea was to connect the content together to create a greater offering to consumers. When creating the investment memo, we've got the introduction, we've got the market opportunity, then we need to talk about how much money we're raising. The old rule of thumb is to think about how much you need and double it, because it's easy to get through it. How much money is being raised and crucially, what for? My experience has been that putting a general round number like $1 million or $2 million is not that convincing. What the investors want to see is a line by line, almost an accountant's view, of what the money is going to be spent for, because if they're going to be spending their money, they'll want to know what it's going to be used for and how it's going to increase the valuation of the business. The next part is when the money is going to be needed, because it's possible to get money in tranches. What I did was I got a first drawdown of a quarter of a million, and then six months later, I got another quarter of a million. You can do this because if you take all the money up front in one valuation, you're diluting your equity maybe more than you need to, so it's possible to have some milestones in the business plan. And if you reach those milestones, the valuation on the business can increase, and then funds can come in to the business but at a higher price. So, it's definitely worth thinking about the timing of what you're going to do with the time and the money to increase the value in the business. Another aspect is the market validation. Which other companies like yours, but that cannot take your business, validate the business that you're saying you can build? Other companies in other sectors or other geographies could validate that what you're proposing is a good business idea. If you can find companies that are in sectors or segments that are complimentary and not competitive, this can lay the groundwork for the exit strategy. Many business plans that I've seen don't include the business strategy. People talk about raising money and what they want to spend it on, but they don't think about the exit. As one speaker once talked about the analogy of going into a large room, you should always look where the fire exits are. If there's only one way in and out of a room, it's not a good room to be in. It's not safe. You need to be thinking about where the fire exits for your business and for the investors are to get in and out of the business. Because if the business doesn't go well, or if the business is going well but not everybody you've got invested turns out to be the right investor, you need to have the exits already marked so that everybody knows what the procedures would be for getting people out of the building or out of the business. This is where the media relations and PR coverage really come into its own, because the value of articles that are written by third party editors is to give credibility to the story. It's a testimonial that the business idea that you've got or that you as an individual entrepreneur have got some credibility. I was working with a number of founders over the years, and it was their prior experience and their prior media coverage that would tip the balance, because the investor is looking at this person unknown, maybe just coming into the deal, but if they read an article, or listen to a podcast, or see somebody on television, there's validation that's taken place by that third party media that creates a level of reassurance for the investor. Being seen in the media, I would suggest, can be a key part of your investor relations and your investor relations preparation strategy. Try and get into some media, big or small, because it creates some context for you and your business. Investor relations, once you've raised the money, doesn't finish there and then, because you want to keep those investors happy. What I did with my investors is I wrote a weekly summary of the business. We had different categories: sales, marketing, technology development, people, and others. Having a weekly investor memo saves you time, and it reassures the investors of what's going on. I did this because after about a month, I got tired of answering general emails and inquiries from the investors. It's understandable if they're getting nervous, or in many cases, they don't even understand quite what the business is. Creating a weekly investor memo somehow reassured my investors, and I was able to create a management log for the business, which showed other potential investors how I was treating the money for my investors. If you think about it, earnings calls, which take place within listed companies are just the same thing. They're a scheduled setpiece communication with investors and analysts, so that those people can take away the news and the views of the CEO, the CFO, and whoever else is involved, and give reassurance to the asset managers, to the fund managers, to the pension managers, and so on. That same work can be done for a small company as it's being done for a big company, and really well worth its weight in gold. Fundraising is often not done just once but repeatedly, so it's important to keep the existing investors happy, because if they're not happy, when you try and raise more money, if they don't want to invest a second time as a tagalong rights, then getting money from other investors can be even harder, because they'll want to know why your current investors are not interested to continue investing in your business. From a relationship perspective, investor relations can actually become one of the most important roles that you play as the CEO or founder of a business, because without that mission critical vote by your current investors, no matter how big or small, it can cause a real bottleneck and a road block for raising future funds. Here is my simple take on investor relations work coming off the back of having had now three conversations in one week with entrepreneurs who are looking at raising money and talking to me about their own positioning as a company, the documentation that they're going to need, and the publicity that would come as a result of having the public relations work done.