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Tom Walker, Business Columnist

Read more Innovation & Entrepreneurs columns by Tom Walker.

Contact Tom -- E-mail: twalker@i2e.org.

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Owners seeking aid must think like investors

BY TOM WALKER Comments 0
Published: November 3, 2009

Many of the most recognizable names in business, such as Henry Ford and Bill Gates, have encountered the process of raising private money to help start their business. To do so they had to value their company for the investor.

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Entrepreneurship Week

Global Entrepreneurship Week will be celebrated Nov. 16-22 around the world with activities designed to help young people explore their potential as self-starters and innovators. Founded by the Kauffman Foundation, this year’s Global Entrepreneurship Week activities revolve around the theme of "Unleashing Ideas.” To see a list of Oklahoma Entrepreneurship Week activities, go to the Calendar of Events at www.i2E.org.

In the early years of virtually every start-up business, the founding entrepreneur will need additional capital. Angels and other risk investors supply this capital in return for receiving a percentage of ownership (called equity).

Negotiations between the entrepreneur and investors are based on the "valuation” of the start-up business. Valuation is simply the total dollar amount that the entrepreneur believes the company is worth.

The higher the valuation, the smaller the percentage of the company the entrepreneur has to give up. The lower the valuation, the greater the potential return to outside investors when the company succeeds.

This is where it becomes challenging for the entrepreneur.

Take it from Roy Georgia, a successful Oklahoma serial entrepreneur who says that one of the early challenges many entrepreneurs face is establishing a realistic valuation. Georgia founded Medibis, which provides software based financial analysis to ambulatory surgery centers nationwide.

In growing Medibis into a multimillion dollar business, Georgia received two rounds of angel investment. Like many entrepreneurs, he found that early stage investors tend to be very realistic about the potential downside of any deal.

If the entrepreneur sets the valuation too high, investors will choose not to provide the needed capital. Why? Because their potential financial return, compared with what experience tells them about the risk of this type of investing, will be too low.

Georgia drew on his Medibis experience in setting valuation for his new company, BuzzVoice, which turns text-based blogs and news reports into audio, which subscribers can listen to on-the-go from their smart phones. Georgia has already accepted one round of angel investment and anticipates taking more.

The result? "I’m definitely more informed and have a better understanding of how the implications of what you do today could impact you down the road,” he said.

The message to entrepreneurs: If you need someone else’s money to take your company where you want it to go, be prepared to think like an investor as well as an entrepreneur, especially in these challenging economic times. As Yogi Berra said, "A nickel ain’t worth a dime any more.”

Tom Walker is president and CEO of i2E, Inc., a not-for-profit corporation that mentors many of the state’s technology-based start-up companies. i2E receives state appropriations from the Oklahoma Center for the Advancement of Science and Technology.