Last year I attended the Arkansas Venture Forum. It was an outstanding event that brought together investors and entrepreneurs from around Arkansas. But most importantly – it provided me with some insight into the mind and motivations of local investors. I thought I would recap one of the presentations here. Catching the eye of an investor may be about “who you know.” But,  the decision to invest is little more science and a little less Voodoo than it appears. To begin, we will need some buckets. Each of the buckets below represent types of Capital.  While you can slice and dice each of these,  for the purposes of our discussion we will keep it at the 50,000 foot level. The Buckets Are:

• Equity – If your venture is successful this is the MOST expensive form of capital. Made widely popular by Wired Magazine’s chronicles of the Adventures of Silicone Valley, this form of capital is most often associated with the Concept, Research, Development & early commercialization stage of a venture.
• Mezz. Debt – By this point your little company is Near Breakeven… congratulations! But, you still need a little extra $$ to land that big client or fund your super bowl commercial... time to raise some mezz. debt!
• Debt – Welcome to the world of big business… you have impressed your creditors by creating a profitable company and need a few million to develop your next killer product line. Call your local banker and let him know where to put his depositor's money!

Now to fill the buckets with cash you need to know - “Where does one get the $$” and “What do they want.” First things first - Where one looks for capital:

• Equity – If you are early stage with a killer slide deck, great idea and hopefully something to Demo, you want to hit up Angels, VC’s, & Government Agencies for cash. Still working on the demo? Try to find an Angel. A good angel will mentor as well as provide early capital and connections. The connections get you to the next round with VC and Government!
• Mezz. Debt – Sub debt lenders.
• Debt. – Banks and institutional investors

Money is not free… Here is what your investors are going to want from you:

• Equity – Your investors are going to want “common equity” or “preferred equity.”  Often the entrepreneur gets a little concerned at the thought of "giving" away a piece of their company. But keep in mind... you are not giving. You are partnering. In return you get a shot at your dream. Angel's and VC invest when risk is the highest and they deserve a great upside... being successful means know when to share!
• Mezz. Debt – Redeemable preferred equity, convertible preferred equity, or Sub Debt with warrants.
• Debt – Senior debt.

How do you know if you have a business worth investing in? If you can realistically demonstrate a reasonable ROI, you are in good shape. The earlier in the project, the higher the expected ROI. It should be noted, investors (especially early investors) have to believe in the concept, the team, and the plan for execution – so focus on that! But, return is important too.

• Equity – 25% to 35% ROI
• Mezz. Debt – 12% to 25% ROI
• Debt – 6% to 12%

If you can bootstrap until you get to near breakeven your cost of capital can be greatly reduced. As an added bonus, it is easier to get a company that is near breakeven funded (or that is the rumor). So that was the presentation with a little added commentary for me. Are you an investor or entrepreneur? Has your experience differed? Please leave comments and feedback. Soon I will post some of the sources of capital here in Arkansas!