Seed Money

Three questions you need to answer to land a capital investment.

Like many executives who dream of stepping off the corporate ladder to start their own business, fashion designer Nina McLemore knew how to develop and market her product line and how to manage her team. After all, she’d founded Liz Claiborne Accessories and grown it into a $165 million powerhouse.

“What I didn’t know much about was the financing side of business,” she admits. “When bankers would ask me questions about debt-to-equity ratios or other aspects of the balance sheet, I didn’t know how to answer.” So McLemore earned her MBA at age 50, then cofounded and ran a private equity fund for seven years. In 2003, she opened her self-named business and began creating clothing for successful women like herself.

As someone who has worked on both sides of the financing fence, McLemore has seen entrepreneurs with great ideas, experienced teams and keen marketplace knowledge stumble over financing questions. Here are a few key questions you should expect to answer when pitching your idea or company for capital investment:

How much money do you need? Articulate what you will do with the investment and how long you need it to last (e.g., in the case of a startup, until the enterprise is cash-positive).
What is your exit strategy? Venture capitalists, angel investors and private equity firms seek about a 35 percent annual return and the ability to divest themselves within five years. That means positioning your company for an initial public offering (IPO) or acquisition, a leveraged buyout or other restructuring.
What is your company worth now, and what will it be worth when you expect to divest? This depends on the valuation of companies in your industry in the past. “If you tell your investors that you’re going to sell the company for 10 times revenue and the industry average is five, you’re not going to be taken seriously,” McLemore says.

McLemore also advises that you’ll be best prepared to answer these questions when you’ve defined your business type. “An entrepreneurial business is one you start with the primary objective of making money and realizing your investment by selling it. A lifestyle business is one you plan to run for 10 to 15 years,” she explains.

>> Learn more from McLemore by watching the Women Who Excel broadcast at NationalCity.com/women.

What Bankers Look For

When it comes to borrowing money in the current economy, the more things change, the more they stay the same, says JoAnn Berryman, Senior Vice President of National City Business Banking in Troy, Mich.

Credit has tightened considerably and lenders have “lost some ability to be flexible, especially in riskier segments,” Berryman says. But she stresses that lenders are looking for the same things they always have: “We understand that in the current economic climate, your revenues may have declined. That’s OK, as long as expenses remain in line with earnings. If you’ve always earned a 2 percent bottom line, you should still show that margin.”

Another area of concern is a how a company’s customer base is affected by the economy, and how diversified it is. “If you have a high concentration of business going to a narrow customer base, that’s a red flag,” Berryman says.

Real estate purchases have also become tricky. “We work with our internal real estate division to determine a range of reasonable prices per square foot,” Berryman explains. “That offers our clients an additional assurance that they’re not overpaying.”

“We’re still lending,” Berryman stresses. “But we’re being cautious—and we’re advising our clients to be cautious as well.”