Los Angeles Times
Columns
Wednesday, January 13, 1999

FINANCING AND INSURANCE
Finding Capital Takes a Plan--and Hard Work
By JUAN HOVEY

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What do investors want? How can the business owner with a good idea and a solid plan find the backing he or she needs?
Investors, like bankers, spend most of their time trying to find work for their capital. Also like bankers, investors hold a great deal of capital in their hands, and they see far more bad deals than good.
That doesn't mean that investors find their work frustrating. It only means that most of the business owners who come to them aren't ready to do business. And that's good news for well-prepared business owners.
The corollary, of course, is that it lies entirely within the power of the business owner with a good idea to get ready.
How? First you must learn what investors want. Next you must put together a solid plan and identify a handful of likely investors who might back it. Then you make the proper approach and negotiate a deal. Last but not least, you carry out your end of the deal by working very hard.
In the best of circumstances it's a tall order. But those who do the homework can find outside backing for any solid venture in California. Indeed, there is so much capital looking for work in this economy that it's a mystery why business owners don't get their hands on much of it. And it's another mystery why so many hope that their dreams alone will get them where they want to go.
Only humdrum work stands between the business owner with a good idea and the investors who might help to turn that idea into reality, according to Kenneth C. Aldrich, a Pacific Palisades venture capitalist who raises money from private investors for small and mid-sized businesses.
"If you come to me with a wonderful new widget and tell me that the whole world will buy it, I know I may be looking at a great inventor but not at a solid business person," Aldrich says.
"But if you tell me where the market for your new widget is, and how the widget will fit into the market, and how you plan to get to that market with it, then I know I'm talking to somebody who's serious."
Lenders and investors don't want the same things, Aldrich says, and you approach them differently. Lenders want their money to earn interest, so the business owner must manage cash flow, profitability, inventory, accounts receivable and the like in order to get bank financing.
Investors don't want income, Aldrich says. They want capital gains. Hence the business owner who seeks equity backing must know not just how to manage cash flow and the like, but how to create capital out of a good idea or two.
To that end, he adds, the business plan is often more important than the product itself.
"People who are on the ball tell me in a sentence or two what their widgets do," Aldrich says. "They spend much more time telling me who the primary customers for their widgets are and how and when they plan to get in front of them.
"The people who just have a great widget have only part of the puzzle. They haven't thought far enough ahead to know where they're going with it.
"If I like their widget, I might buy it. But I won't back their business."
The virtue of writing a business plan is that it requires you to make sense of your idea, Aldrich says. It makes you think through who will do what and when to make your product, get it to market, sell it, and manage the whole process.
"I can't tell you how many business plans I see that do only one thing, and that is to project all the money the widget will make," Aldrich says.
"A good plan is a road map to success, not a description of somebody's dream. It tells me what the business is, who the people are who will run it, and what steps they will take to make the business a success. It also tells me why I should invest and how and when I'm going to get my money out."
Similarly, the plan should detail not just how much money the venture requires but when it will need it--setting out, for example, when the business owner must build a plant and buy equipment, hire employees, bring in raw materials and so on.
How a business owner approaches an outside investor is as important as the plan itself, Aldrich adds. Good plans rarely arrive in the mail, he says. Instead they come with the help of people known to the investor who can vouch for the seriousness of the business owner.
It takes effort to find a sponsor, just as it does to write the plan, Aldrich says. The business owner must become a networker, and the payoff is that he or she gets the attention of the investor.
"I want to see someone who has thought things through in detail, because I know that if I back the idea, I'm going to spend a lot of time with the people who run the business," Aldrich says.
"I have to be comfortable with them, and they have to be comfortable with me. And I'm convinced that if you go about trying to get backing for your idea in the right way, there are very few barriers to anybody who wants to succeed."
* * *
Next Week: How two Calabasas partners succeeded in obtaining seed capital for their venture in on-line banking.
Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.

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