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Staying Close to Your Capital Sources

October 10, 2011 by Kevin Custer

As we have talked about in the past, it is critically important to stay as close as possible to your customers, through frequent, meaningful conversations that give you a pulse on their coming initiatives, needs and wants, and give you an advantage in meeting those needs and wants. However, in today’s economy, just as important as staying close to your customers is staying close to your other source of cash – your capital resources.

At the BMO Capital Markets Education Conference in NYC in September, we clearly heard the private equity companies are eagerly looking for deals with companies with a $1 million EBITD. Venture capitalist firms in the education industry are becoming scarce, and that’s why it is more important than ever to stay close to the capital resources you currently have.  This means constant communication. Don’t call only with good news, or to ask for money, but instead focus on consistent communication. Find out what they care about and what their criteria are. You should be planning 6 to 9 months out – you can’t approach someone and get a check in 90 days.  And of course, it’s easier to raise money from those you know already.

Some investors will not take a second look unless you are improving your bottom line at a rate equal or greater to your revenue stream – just increasing your revenue stream is not enough; you must also focus on increasing efficiency. Other investors want to see that you are becoming more profitable the more customers you add. In those cases, make sure to take a regional approach to optimize your cost structure for a certain region.  Sometimes sources care more about straight growth, and other times they care only about the amount of cash you have in the bank and your bottom line, and are not as concerned about your revenue as much.  The point is, you have to treat these capital resources as though they were potential customers by getting to know exactly what they are looking for.  However, just as it would not be wise to base your entire business around one customer, it is also best to not build your business around what one capital source wants. At the end of the day, you have to stay true to your business, and resist drastic change based on just one firm.

Ultimately, the depth of your relationships with your capital sources is what is most important, not the valuation that someone will give you today. Being in communication now with your capital sources means that you can do the maintenance your business needs, so that you’re not trying to fix your roof once it’s already started to rain.

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