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How to pick the right advisors

This is the fifth and final post in our series about how to prepare for funding. If you haven’t seen the first post, which provides an overview of the entire process, start there.

In the funding process, advisors play a number of critical roles – from educating you on the process, to examining your business infrastructure, to negotiating and preparing the documents that represent the funding itself.

Seeking the right partner within the funding process is akin to hiring the right realtor, agent, inspector or contractor when you’re preparing to list or rent your home. You can do it yourself, but the outcome will likely be a lot better if you consult a professional. You might be too close or simply need a level of expertise you don’t have.

What kinds of advisors do you need?

The advisors you need before and during a financing round primarily depend on the phase of your business’ growth, the size of the transaction, and the expertise you have internally.

For almost any deal (even early-stage), you’ll need financial and legal advisors. At a certain size, tax advisors may need to be involved. If you’re looking for a full acquisition of the business (assuming your business is of reasonable size), you may want to involve a good investment banker — and you’ll be glad you did.

Financial advisors

Financial advisors specialize in helping you get your financial house in order before you even sit down with a potential investor, and may be different than your existing individual accountant or investment advisor.

A financial advisor’s job is to help you understand where investors will focus, what documents you have and don’t have, and to help you get prepared for the journey ahead. Few early stage companies are 100% buttoned-up on every financial issue, and many are nowhere close. A good financial advisor will help you fix issues that risk derailing or delaying a deal, and they’ll help you show well through the process.

They will help you analyze the data and answer questions like:

  • Are you calculating your revenues correctly?
  • Are your financial statements clear?
  • Are your forward-looking financial projections sound?

Picking the right financial advisor comes down to more than basic competence with the numbers. It’s also about communication and insight. A good financial advisor will help illuminate the path ahead, and help you avoid turning the process into a painful distraction. You still have a business to run, after all.

Legal advisors

As a lawyer and former General Counsel, I’m probably biased here, but finding a good, reputable lawyer with useful and practical experience should be at the top of your list. A good lawyer will set the tone for the process, and save you time and money down the road. A bad lawyer can not only slow down the process and make it more expensive, they can also steer you in the wrong direction – or kill the deal entirely.

A lawyer will help you look at things like:

  • How was your company formed?
  • Is your infrastructure set up correctly?
  • Are your board minutes in order (if you have a Board of Directors)?
  • Is your stock option plan and cap table set up correctly?
  • What are the risks your company hasn’t anticipated and against which it will need to guard?
  • Is your IP in order?
  • Do you have disputes with customers or employees or competitors that need to be resolved?
  • … and about a dozen other things

Reputations matter, especially when it comes to lawyers. Their expertise isn’t easy to evaluate before you start working together, so the very best advice is to find one from a personal referral. You also need to choose legal advisors who are aligned with your interests — which means you’ll need to be transparent about what those interests are and where the company will need the most help.

Tax advisors

In my opinion, these advisors are less important for early stage companies, especially if the founder is already working with an accountant for day-to-day bookkeeping. If a company is not making meaningful (or any) profits, the tax burden generally isn’t a major issue, and a solid accounting firm can probably handle the blocking and tackling.

Investors will want to understand any tax liability exposure as part of a diligence process, and may bring in their own advisor here to pressure check existing data.

Investment bankers

For early-stage deals where a founder isn’t looking to raise a ton of money, an investment banker may not be needed. However, if a 9-digit transaction is likely, you’re heading into banker territory. Bankers typically get paid as a percentage of the total transaction value, so it needs to be worth their time (and their fee needs to be worth yours).

Bankers are not cheap, but they get paid a lot because they do a lot. Their insight, process, connections and execution support can make the difference between a good outcome and a great outcome for a company. They’ll help you understand what buyers will look for and why. They’ll help shape how buyers view and evaluate your company against your competition. They’ll help you package and present your company to potential buyers, and in many cases they will run the process for you, which can take anywhere from 90 days to 12 months (or more) from your first meeting with them.

Choosing the right banker is among the most important decisions you’ll make if you are looking for a significant exit, and fit matters.

Choosing the right banker is among the most important decisions you’ll make if you are looking for a significant exit, and fit matters. The biggest deals — obviously — will get the bank’s best people and the most attention. Ideally, you don’t want to be the smallest and least important deal on your investment bank’s mind.

Interview questions for advisors

For each kind of advisor, naturally you’ll want to ask for references and listen carefully to what those references have to say (and what they hint at but leave unsaid). Here are some good questions to ask potential advisors to understand the value they might bring:

  • Have you worked with a business like mine before? Tell me about a relationship that went particularly well, and tell me about an experience that wasn’t great.
  • What kind of challenges do you typically face working with a company our size?
  • How will communication work between our firms?
  • What is the best way for our company to work with you to get the best results?
  • What do you expect from us?
  • What should we expect from you?

Beyond skills and experience, look for candor, clarity and professionalism. Good advisors give it to you straight.

Four things to get right

1) Make sure your advisors have the appropriate experience, are fully aligned on costs and outcomes, and that you feel a solid personal connection with them.

2) Get buttoned-up and stay buttoned-up. You’re being quietly evaluated throughout the funding process. If your team presents well, your financial house is in good order, and everything is professional and polished, investors will feel good about building a future with you. It’s easier to do things right along the way than it is to go back and clean everything up right before you have to present it.

3) Have realistic outcome goals. Smart founders should come to the table with a solid sense of market norms. If you don’t know what norms are, ask around.

4) Remember your advisors are your advisors, so you’ll need to be sure they’re aligned with your interests.

What should you do if you don’t have a powerhouse network (yet)?

If you’ve had your head down building a great business, you may not have had the time to build amazing connections. But part of your job at that level is to broaden your network and surround yourself with professionals who provide the advice you’ll need.

If you’re starting from scratch, here are a few natural places to start (in this order):

Ask your peers. Like most things, a referral is always the best place to start. You aren’t the first who’s gone through this process. In most cases, they’ll know someone. Or at least who to avoid. Ask about their own selection process.

Potential investors. If you are already in these conversations, ask who they would recommend. It’s probably someone good if they trust them, but keep in mind, there is some affiliation here and they may be on the pricey side.

Your senior leaders and other advisors. The extended team, and the accountants or attorneys with whom you already work may have suggestions or advice. They’ve seen similar situations before and can help you look around corners.

Google and LinkedIn. You’re probably not going to pick someone directly from a search result, but it’ll give you a sense for who’s out there and how firms compare. You can be a little more targeted on LinkedIn.

Industry events and associations. Bankers and advisors are commonplace at tech industry events like Dreamforce or CES. There are targeted meetings and associations as well. For example, there’s a group called Tech GC, and similar groups for CFOs.

The golden rule: know thyself

Relationships matter, so build the bridges before you need them. Assuming you can just hire advisors on the fly just isn’t a good idea. “I’ll just hire the best from one of the top law firms” is a sentence that will cost you more than $1,000 an hour.

On that subject, now is a good time to evaluate your team. Great teams balance out each others’ strengths and weaknesses. Every team needs brilliant technical brains, as well as people who are comfortable with finance issues, customer strategies, and talent strategies. It’s rare for all those skills to exist at full strength in any one person.

Great teams balance out each others’ strengths and weaknesses.

Smart founders know their strengths and weaknesses, and great teams know where they need to step up and fill gaps and when to step back and let a stronger partner lead.

Are you ready for funding?

A good investment process is fundamentally a search for the right partnership, where both partners gain more than either could have won on their own.

If you’ve read the entire blog series, you should now have a pretty good sense of how the process will work and what you can do to prepare. You might also want to review the most important factors investors look for when valuing an IT services business.

The next step after that is simple: start talking with potential investors.

We hope you’ll consider talking with us at Tercera. You can start here.

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