SMALL BUSINESS : FINANCING & INSURANCE : Leave the Funding Search to Managers

Starting a business and growing one are different things--and when it comes to rounding up outside capital, the sooner the entrepreneur learns the difference, the better.

The entrepreneur and the manager are different people with different skills. Entrepreneurs know how to start businesses; managers know how to grow them. Entrepreneurs give birth to the idea; managers bring the idea to maturity by making it into a business enterprise.

On occasion entrepreneurs become managers, but more often they give way to them--sometimes in a palace coup such as the one that toppled Steve Jobs at Apple Computer some years back, sometimes in a deliberate effort led by the entrepreneur to bring new skill to the enterprise.

It is crucial that the entrepreneur put the enterprise in the hands of professional managers because it is the skill of the management team, not the dream of the entrepreneur, that gets the job done in raising growth capital. Put another way, if you’re an entrepreneur starting a business, you’re on your own; no matter how much you dream of luring venture capital to your enterprise, it is risk-averse, and it rarely backs the start-up.

But things change once the business gets past the start-up stage. Outside capital becomes readily available if professional managers run the business because lenders and equity investors bet on management, not on the entrepreneur or even on the product, and the entrepreneur who does not personally have the skills of the manager must get them in a management team, and then keep the team together.

“In this day and age management is to the growing company as location is to real estate--the most important thing of all,” says Ronald Warner, a partner in Los Angeles law firm Arter & Hadden who specializes in corporate finance and mergers and acquisitions.

Outside sources of financing do rigorous due diligence on the skills of the management team, Warner says. “They know that businesses founded by people with great ideas fail if they don’t have professional management. You can’t get outside capital to take your business to the next level if you don’t have the right focus in your management team.”

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You must also demonstrate the professionalism of your management team, Warner adds. With equity investors, at the very least this means a thorough grilling and background check of the key members of the team. In addition, you must divulge the employment contracts that bind your managers to the enterprise, including the details of their compensation packages--options, bonuses, revenue sharing arrangements, etc.

“The compensation packages have to be fair and adequately incentivized,” Warner says. “There are a number of devices you can use to get the skills you need on site and keep them there. You have to give your managers the feeling that they have a stake in the growth of the enterprise and should remain with it.”

Among other things, professional management gives a kind of gravity to the business plan that drives your need for outside capital, Warner says. A seasoned chief financial officer, for example, understands what outside lenders and equity investors mean by reasonable numbers in future revenue--namely numbers that take into account all of the factors that could affect them, including slowdowns in the specific industry in which you operate, slowdowns in the U.S. and in the global economy, changes in interest rates, and even the impact of labor unrest, Warner says.

“What scares lenders and equity investors are ‘hockey stick’ projections in your numbers,” he says. “If all of a sudden your numbers shoot up and the only reason for the growth is the new capital you put to work, something may be wrong.

“You have to take into account as many factors as can affect your business, particularly those that can affect it negatively. You have to produce numbers that will reflect not the best case and not the worst but a reasonable case.”

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All too often entrepreneurs believe their own press, as it were, Warner says. They become so enraptured with the idea that drives the business that they don’t see things realistically, and as a result, they often have no chance to round up the outside capital they need to bring the idea to maturity.

Seasoned, professional managers--particularly managers who have worked for growth companies in the past--often make the difference, Warner adds.

“I see lots of businesses come to a halt because, even though they have a good business plan and good markets for their product, they don’t take the steps necessary to capture that market,” he says. “The business plan is a road map--and professional management is the key to turning that road map into money.”

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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.