Friday, June 24, 2011

10 Steps to Raising Institutional Capital

David Martin, DragonFly Capital

Over the next several weeks, we will review ten steps entrepreneurs can take to increase their potential at raising institutional capital.  Each week we will focus on one of the ten consecutive steps.
Step One: Build a fundable business
The first, and perhaps most obvious step toward securing institutional capital, is to build a fundable business. A fundable business is one with the following characteristics:

1. It is scalable – Simply put, your business must be able to grow rapidly and efficiently. That means revenues can grow quickly while operating margins (operating income as a percentage of revenue) continues to expand for as long as possible. Higher relative scalability can be a competitive advantage for your business, and will be a chief consideration of any institutional investor evaluating your business.
       1. Highly scalable – Software businesses.
       2. Not so scalable – Labor intensive businesses, such as consulting.

2. It is difficult to replicate – You must be able to identify and clearly articulate any facets of your business or industry that make it difficult for others to compete with you.  Ideally, the industry in which you compete will possess several barriers to entry, but not so many that your business struggles to break in. Intellectual property or exclusive agreements, for example, are controllable, company-specific barriers that can keep competition at bay while helping your business look more attractive to institutional investors.
       1. Difficult to replicate – Pharmaceutical businesses.
       2. Not so difficult to replicate – E-Commerce website for product X  

3. Its revenue model is simple, and ideally driven by recurring revenue – A clear and concise explanation of how your business makes money will go a long way with institutional investors, who appreciate simplicity.  Whenever possible, consider providing on-going services that capture recurring revenue streams, which will bolster your model and are generally only present in highly scalable businesses (see above). 
       1. Simple, recurring model – for products, the razor/razor blade, for services, anything            subscription based.
       2. Complex, non-recurring model – Project based businesses.

Next week: How to demonstrate traction to investors.

David Martin
Dragonfly Capital
The Packard Building
1310 South Tryon Street, Suite 109
Charlotte, NC 28203
Office: 704.335.2192

No comments:

Post a Comment