5. Raising Equity Capital(Parte III)

What’s new, reader?! How are you doing? I’m back with you to see if I can finally finish with our story on raising equity capital. Just to freshen up, Pizpurri had lent us an office space in CrediConfia; and we were starting to look for people or equity funds to invest in our idea: “Resuelve”.

As I told you in last month’s column, during 2009, there was no seed-capital or Venture Capital (VC) industry in Mexico. There were two active funds, one was managed by the Canadian of the (horrible) Christmas sweaters, and the other one was the beginning of what today is Angel Ventures, of Hernan Fernandez. Since we didn’t have traction with them, Zorro and I had to look around to find people who were used to these type of investments: the famous 3 Fs (Friends, Family, and Fools).

But, where to start? As the professional hustler I am, which is what the elegant term “Capital Raise” really means (so much so that my friends had threatened to kick me out of our group chats because I keep selling or asking for things all the time), I’ll describe the profile we’ve defined, and we like, for this type of investors.

These are some of the ideal characteristics we look for in an F:

They have money, but not that much

Very wealthy people generally have a sophisticated team in charge of managing such type of investments. Typically, through property bankers, or if they’re very big fish, through their Family Office. Such “gatekeepers” usually believe that such money is theirs (they tend to be very arrogant), they’re Excel geniuses for making their DCFs, calculations, and reading financial statements; but they know very little of the business, making it difficult to convince them of investing in Start-ups in terms that make sense for the entrepreneur.

Additionally, an investment of the size that start-ups usually require tends to be small for rich people’s “needle to move” (as “George” would say). If they decide to invest in your project, it’s most likely they won’t care much, and it’s more of a hassle to keep them up to date. Literally, every board meeting you must remind them of what you do.

Finally, it’s not uncommon for rich people to believe that they’re doing you a favor by investing with you. Nevertheless, the favor is mutual. Yes, they’re trusting in you, and giving you “coins,” but as my buddy “Chichili” would say: “you’re inviting them to a chance of having great returns.” Conveniently, that last part goes unseen by most of those with tons of “dough” (not all of them). The investor we’re talking about has it very clear, and that’s why he or she is always grateful and keeping up.

The ideal F, regarding property, is someone who won’t be in trouble if your start-up goes to hell, but if you strike home run, you’ll make a significant difference for them. It’s highly possible that this person will be productively involved in how the business is run; this results in their valuable participation because they understand well, and are up to date with what’s going on.

They understand the type of risk, and time, it takes to invest in a Start-Up

Any person investing in a Start-up must be willing to let their investment go to zero, and/or having their cash “stuck” in the project for, at least, 10 years.

This first characteristic assures that, if things go regular or wrong, you won’t have the investor breathing on your neck every day; instead, you have space to run the business. Besides, it minimizes emotions surfacing during discussions or board meetings. When things aren’t as good, it’s essential to analyze, be objective, and leave feelings on the field.

The second characteristic gives you the flexibility to grow your business. Generally, when you want to create liquidity in a company, by incrementing sales margins or share dividends, the available amount you could invest to grow the business tends to decrease. If by the second year you’re being pestered about the EBITDA margin or with the question: When can I see my returns? They’ll probably reduce the amount you can invest to grow the company.

They have operational experience.

This is solid gold for us!

That’s why, whenever someone asks us to refer them to a VC fund, we always mention those whose partners have experience running businesses. For example Jaguar, of Erick Perez Grovas; or Dila Capital, of Alejandro Diez Barroso and Eduardo Clave.

The main reason being that, when you run a business and think all day about its operations, it’s highly valuable to listen to someone who has already approached or solved similar issues in another company.

During board meetings or talks with an investor, it’s awesome when you make a presentation about a topic or issue, and the conversation starts like this: “We, in X place, had a similar situation, and what we did was “Y” or “I saw a similar issue when I was trying to do “Z” in this other company.” Generally, this starts an awesome back and forward of ideas, between the investors and the entrepreneur, on how to approach the subject.

However, the meetings or talks that start like this: “Haven’t you thought of doing “X”? are a shame. Many times, not always, when this happens to us, we’re tempted to reply: “Even though we’ve been obsessing about this issue, non-stop, 24/7, we haven’t thought of your super idea!” (sarcasm). Regardless, we never reply that.

Frequently, we waste tons of time pretending to be shocked by such brilliance, and later discussing with the investor about why that idea might not solve the problem. Being honest would be much more efficient with everyone’s time. I called it the “truth game”, but Zorro doesn’t allow me to play it, hahaha! Saying everything we’re thinking without fear of feelings getting hurt (like Sheldon Cooper).

Jokes aside, the reality is that the probability of someone who’s not involved in the business, and hasn’t had significant operational experience, has an idea you hadn’t thought of before, is pretty low.

Pretentious suckers.

There’s nothing cooler in a person than the mix of success and humbleness.

If you’d ask my wife, Andreina, she’d most likely tell you that I lack both of those characteristics… haha. In spite of lacking the first one, she’d emphasize on my troubling relationship with the latter. Our arguments tend to finish with phrases like: “You know what? People hate know-it-alls” or “I don’t give a fuck what ‘The Economist’ says.”

From Zorro’s, and my, perspective, humbleness lies in knowing how to listen to fully understand the details of the company or the problem at hand (the devil is in the details). The mix of proper understanding of details, with successful experience, is an excellent formula for getting over things.

In a start-up (and life in general) arrogant people not only don’t add but subtract. The correlation between arrogant suckers and people who can listen is of -1.

It’s not that easy to find someone who matches those 4 characteristics we just mentioned; if you have candidates who have 3 out of those 4, you’re cool (being an arrogant asshole is a definite deal breaker). Assuming that, most likely, you’ll find a group of members who complement amongst each other, since some of them will have certain characteristics that others may lack.

Back to our story, Zorro and I were looking for our “Fs,” and we didn’t have much of a clue about where to start. That’s when Pizzpurri got generous and sent us to Alan Smithers, who was his investor in CrediConfia.

If I had to describe the characteristic that best defines Alan, it would be “anti arrogant sucker”; in spite of being terribly successful, and one who doesn’t 100% fit in characteristic number 1; Alan is one of least arrogant people I’ve met.

We went to his office to pitch Resuelve, and he really liked the concept. He said he was interested, and that he could refer us to three more people who might invest. That was truly valuable, and it started a snowball by which, reference to reference, we started meeting our future shareholders.

The best part of the meeting with Alan was when we were saying goodbye in the elevator, and the door was closing; he put his hand to stop it and said: “Dudes, I love your idea, but if this one doesn’t work, we’ll find a new one in which, for sure, we’ll make it big.” and the doors shut.

However much I try, I can’t finish this story, and I’m running out of lines again.

I promise to finish in February’s column. See you, and we’ll read each other next month.

If you have any comments, questions, complains, or suggestions, nag me on Twitter. You can find me as @javivelop.