Clay Olivier is the CEO at Volusion, Inc., where he guides and oversees the direction of the organization with a strategic vision and motivation for helping business owners succeed online.
New York, are you ready?
We’re building Momentum: an all killer, no filler event this November.
There are thousands of decisions to make when running a business – from branding to accounting and everything in-between, each choice can impact your bottom line. And while many of these decisions can be made with simple intuition and common sense, others require serious thought and even some sleepless nights.
During my decade-long tenure at Volusion, Inc., one of the more complex decisions I’ve encountered was judging when to accept outside investment. Fortunately, the company stands in the favorable position of rapid growth and profitability, meaning interested investors are proactively contacting us to talk.
Finally, after years of politely saying “no” to numerous parties, we hit a turning point as an organization when we decided to move into the enterprise space with our new platform, Mozu. With ambitious goals ahead of us, we had reached the tipping point where we could no longer go it alone – the time had come to look for outside funding.
From this experience, I’ve gained important insights to guide the process: when is the time to take outside funding, and what’s the best way to go about it?
When is the right time to explore outside funding?
For many business owners and management teams, “now” can easily seem like the right time to secure funding, and why not? It’s a validating opportunity that can take your business to new heights.
An important notion to keep in mind, however, is that good things come to those who wait. There’s something to be said for delayed gratification, so don’t feel compelled to accept the first (or second or third) offer that comes your way.
Instead, honestly analyze the company’s business plan and finances to determine whether the business needs to secure outside funding in order to achieve its objectives, and if so, how much. Remember, a company will relinquish some control and a share of the economic upside once it accepts outside funding.
Of course, it would be ideal to retain the autonomy as long as possible to establish you and your management teams’ business vision, but some businesses absolutely require outside capital in order to scale.
But, for many businesses, including ours, there does come a tipping point when it’s advantageous to accept outside funding. Although we were able to self-fund for over a decade, we knew it necessary to augment our business with additional capital to launch our new platform.
This process included several rounds of financial forecasting to understand the cost of achieving where we wanted the business and brand to be, and whether we could pay for that cost ourselves.
What are the main considerations when exploring third-party investments?
Once we made the decision to explore outside funding, the rush of details arrived. In order to maximize your company’s leverage, it’s important to create a process that will result in multiple offers.
Again, we were in the fortunate position to have several offers on the table, but even if we only had one or two, there are several components of funding arrangements that need to be sorted out, from a standpoint of both logistics and intuition.
Here are four main questions to keep in mind during the vetting process:
1. Should we finance with debt or equity?
This is the ultimate question to consider when weighing funding options. For us, because we chose to finance with debt, we gave up almost no equity in the company, and therefore almost no dilution of stock options.
Of course, debt financing requires scheduled repayments, plus interest, so you must be able to repay out of future cash flows.
If you choose to issue stock, valuation and the amount you’re raising determines how much equity the investors will receive, and you will give up, for their investment.
Investors might ask for 20 to 30 percent of your company, and perhaps even an 8 to 10 percent dividend on top of that. This will have a significant impact on the amount business owners could realize on the sale or other liquidity event for the company.
2. How much control are you willing to sacrifice?
In addition, beyond financial control, many investors will require some input into the operation of your business and even the right to approve certain significant transactions and events.
In particular, some investors may insist on the right to block future investments in, or the sale of, your company. They may also require you to provide detailed reports and explanations before and after making decisions to drive your business forward.
This can be a drain on your time and prevent you from acting quickly on market opportunities.
3. Is this someone you really want to partner with?
Just like a friendship or marriage, it’s important for business partners to mutually understand and appreciate each other. I remember spending hours trying to explain how our business operates to one investor, an instant red flag that it wasn’t the right fit.
Furthermore, you want to determine whether this partner will support you during periods of growing pains, or if they’re just there to reap the benefits of your work.
In other words, will they step in and help you achieve what their money is intended to achieve, or just sit back and go along for the ride?
4. What are the full, exact terms of the agreement?
I cannot stress enough the importance of fully understanding the terms of an investment agreement from top to bottom. Even when the details seem straightforward, there are often multiple contingencies and addendums that must be fully investigated and understood.
For example, in many agreements, specific performance milestones must be achieved to keep your funding as initially offered.
Because of the complexity of these transactions, and their impact on your business going forward, you should find assistance from experienced professionals to help you understand the intricacies of the details. In our case, in addition to our inside council, we also hired an expert to help us get the best deal and protect our interests.
Take your time
Selecting an investor and finalizing the terms of the financing can be a tedious process, but your utmost attention to detail and finding the right fit are key to securing the right partnership.
At the end of the day, the tipping point for accepting outside investment differs with each case. Moving forward with this type of arrangement is a giant step for your company, and shouldn’t be taken lightly.
It’s understandably tempting to bite at any offer that comes your way, but if your management team can execute against your business plan and you can delay a financing until you hit a true tipping point, then you can maximize the value in your business.