Don’t meddle with things you don’t understand! Or: Why smart founders should not carry out investment or exit transactions without expert advice.
Investors invest, founders found – and ideally they both understand their respective crafts. For them to also understand each other’s crafts, however, would be the exception.
Therefore it is surprising how often founders and managing directors enter into negotiations with investors without an advisor. In 1997, raising capital of $40 million meant going public with the participation of three credit institutions. Fifteen years later, this sum is typical for Series B and C rounds without the advice of bankers. At the same time, raising capital is a complex process which includes both the positioning of your company to investors as well as choosing potential partners. Furthermore, in the run up to a financing round, the necessary attention must still be paid to running your company. Controlling these complex processes is more art than science. The same applies to mergers and acquisitions.
Reputable M&A advisers often account for the success-defining difference in upcoming financing rounds and exits. Anyone who looks after such deals day in, day out can draw upon experience which a founder would find difficult to acquire.
But not only is it amazing how often advisors are not present, but also how often senior management at technology companies wait until a transaction is imminent before calling in advice. The most effective time to do this is actually far in advance. The best advice is only possible if the advisor can assist the company in an early stage of development, regardless of when the actual transaction takes place.
And what if a company is in the fortunate situation of already being courted by investors and potential buyers? Why should you hire a consultant then? With things that can seemingly be dealt with in-house, companies tend to work on them themselves and leave advisors out of it. But very few people decide to sell their apartment or fix their car all by themselves. Instead,they go to a real estate broker or an auto repair centre when the task exceeds their skill level or the time they have available.
And just because there is interest on the part of investors, it doesn’t mean they will handle the matter with kid gloves. Negotiations will be tough and without mercy, and if you haven’t done your homework you will quickly get a bloody nose – and it can sometimes affect the success or otherwise of the entire company. It makes sense in this respect to rely on the help of experts, even though other so-called experts will always argue otherwise. But if an entrepreneur is planning a world-changing transaction, is it not also a good idea to seek out the best advice?
What do you think? Do you believe entrepreneurs should seek out the best external advice, or is it best for them to talk to investors by themselves? Let us know below.