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Attracting Investors

A Marketing Approach to Finding Funds for Your Business

by Philip Kotler, Hermawan Kartajaya and S. David Young


John Wiley & Sons © 2004
246 pages

Focus Take-Aways
Leadership & Mgt. • With globalized financial markets, you effectively compete against every other
Strategy company in the world when you seek financing.
Sales & Marketing
• Given this, you must devise a strategy for approaching the capital markets.
Corporate Finance
Human Resources • Marketing concepts such as positioning your investment opportunity in the market
Technology & Production and differentiating your offering make the difference between failure and success.
Small Business
• Investors aren't looking only for the highest return; they also want to avoid big risks.
Economics & Politics
Industries & Regions • Learn to explain your value proposition to investors in 10 minutes or less.
Career Development
• How you raise cash depends on where your firm is in the corporate lifecycle.
Personal Finance
Concepts & Trends • Start-ups usually begin by "bootstrapping" – borrowing funds from friends and
relatives.
• Different types of "angels," or investors, consider different types of projects
attractive.
• The "Strategy-Tactic-Value Triangle" will help you find appropriate investors.
• Position your company as a solid investment that promises an excellent return.

Rating (10 is best)

Overall Applicability Innovation Style

8 8 8 7

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Relevance

What You Will Learn


In this Abstract, you will learn: 1) How to fund entrepreneurial ventures; 2) How to
appeal to “angels” and venture capitalists; and 3) Which marketing concepts will help
you find investors.

Recommendation
This book is a little like a football play that looks great on the blackboard in the locker
room but doesn’t quite deliver once the players take the field. The concept is excellent:
adapting marketing theory and techniques to the business of acquiring investment capital
for your firm. Unfortunately, authors Philip Kotler, Hermawan Kartajaya and S. David
Young spend a lot of time reviewing basics, such as potential sources of capital, and not
enough on the marketing techniques themselves – which they don’t begin discussing
until about two-thirds of the way into the book. This shortcoming (and the lack of case
histories) is balanced, however, by the authors’ keen, market-oriented analysis of the
characteristics that appeal most strongly to the various types of investors. This book
outlines a smart, methodical approach to finding investors. getAbstract.com recommends
this book despite wanting more information on methodology, believing that even an
incomplete marketing approach to financing is better than chaos in the huddle.

Abstract

Jumping through Hoops


Consider the hoops entrepreneurs jump through to capitalize their companies: borrowing
“Every existing
business firm from friends and family, maxing out credit cards, selling personal assets including real
and start-up firm estate and automobiles, and knocking on the door of every “angel investor” they can find.
needs money.”
The few companies that survive beyond the start-up phase continue to need capital. Many
turn to venture capital (VC) funding. The next step, going public, opens a new world
of institutional investment options, including banks, pension funds, mutual funds and
insurance companies.
Given the financial hurdles you face as an entrepreneur, you need to learn to market
your company to investors with the same discipline and focus you use to market your
company’s products to consumers:
“Massive sums • Devise a strategy for approaching the capital markets.
of capital can • Analyze how you will position your investment opportunity in the marketplace.
move toward your
company, or away
• Find ways to differentiate your company and make it stand out from the crowd.
from it, in the • Prepare to explain how your company will deliver value to its investors.
blink of an eye.
As economists The New Marketplace
predicted as
far back as
Not long ago, if you needed money, banking’s regulatory barriers limited your options.
the nineteenth Now, as foreign exchange controls diminish, the capital markets are becoming global.
century, when You compete for investment dollars with virtually every other company in the world.
capital can flow,
it will flow.” Investors seek not the highest gross return on their investment, but rather the highest
return after they’ve adjusted for risk or price volatility. Investors prefer safe investments
that pay off sooner rather than later – and the greater the payoff the better. They are
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willing to tie up their cash today to earn more tomorrow.
“Sound marketing Marketing’s two basic tenets come into play when you seek investment dollars:
is essential for
any company 1. “Know your product” – Understand what makes your business attractive to investors,
seeking to take full
and be prepared to demonstrate it.
advantage of its
funding sources.” 2. “Communicate effectively” – If you can’t explain your value proposition to potential
investors in 10 minutes or less, the quality of your business concept may not even
matter in the long run.

Raising Cash
How you raise capital depends on your company’s place in the corporate lifecycle, which
begins with a start-up phase, moves into an expansion phase, then proceeds through
post-IPO growth to a phase of low growth, called maturity, and finally to the inevitable
“Marketing theory decline that most companies endure.
and practice
involve a highly Start-ups typically engage in “bootstrapping:” resorting to creative and unusual methods
disciplined
approach to
of raising money and constraining costs. After bootstrapping, your firm may seek capital
identifying the best from venture capitalists or “corporate venturing.”
sources of capital
and convincing If you decide to take your company public, you probably will hire a “financial intermediary,”
them of a high such as an investment banking firm, to present your IPO to potential investors. IPO
reward-to-risk commissions range from four to six percent. The intermediary will organize a series of
ratio in lending
their funds.” road shows to present your offering in financial centers.

Finding Your Angel


Even in the wake of the dot-com bubble, angel investors are established in every developed
country in the world. Some angels seek purely financial gains from investing in young,
developing companies. Others enjoy getting involved in entrepreneurial ventures and
guiding them to success. Altruism, while rarely the primary motive, is also a factor
among successful individuals who have built their own businesses and would like to help
“Our answer is not others succeed as well. To find an angel – and about a quarter million of them are thought
to knock on every to reside in the U.S. – you must learn about the different types, including:
possible investor’s
door in the hope • “Entrepreneurial angels” – These individuals have usually owned and operated
of finally finding
a benefactor.” their own businesses, and may invest larger sums than other types of angels – up to
$500,000. Many times these angels seek to diversify their portfolios by independently
underwriting companies; they are rarely interested in becoming involved in your
day-to-day operations.
• “Lifestyle angels” – For them, investing is a hobby. They may invest up to six figures
and tend to avoid getting involved in the business.
• “Profession-based angels” – These angels identify with a professional discipline,
such as law, medicine or accounting, and seek investments in their fields. They often
“Every
businessperson
offer to contribute their professional skills and may invest up to six figures.
is ultimately • “Altruistic angels” – These investors want to do good. To give one example of
competing for
available conduits, the New York-based Community Development Venture Capital
capital and
must market Alliance brings entrepreneurs together with these types of investors.
with hard facts • “Alliance angels” – These investors wish to share risk with others and tend to invest
and convincing
arguments.” in groups. Also, certain deals are too large for any single investor. Such angels gather
in informal alliances that may invest over half a million dollars.

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It’s not enough to know what types of angels are out there, of course. You must also
understand their goals. Here are a few important considerations:
“Until recently,
entrepreneurs • Do you inspire confidence? – Experience has shown that the quality of the entrepreneur
or corporate
managers who
is the most important factor in determining whether a new venture works. Thus your
needed to raise background, expertise, track record and ability to make a persuasive case all play
capital had limited a major role. But funders aren’t looking for just one superb leader; you must prove
options.” that every member of your team has strong management skills, a good educational
background and a solid record of success. Never underestimate the importance of
demonstrating the passion and enthusiasm you feel about your undertaking.
• Are you a good match? – Some angels look to invest in certain industries, or certain
types of businesses or business models. They understand certain fields and know that
they can minimize their risk by working in these sectors. Learn the characteristics
of your industry and demonstrate that your opportunity matches the interests, goals
“It is easier to
get funding from and needs of prospective angels.
international • Does your company have real growth potential? – Investors look for a “hockey stick”
sources because – a graph of profits that promises to turn sharply upward. Is your business ready to take
the foreign
exchange controls off? Are you doing something unique? Is its potential market big enough to promise
that limited flows significant returns? If so, your company will be attractive to would-be angels.
from one currency • Do you offer a mix of products? – Angels tend to be cautious about investing in
to another largely
disappeared a companies that produce only one product – these are do-or-die situations. Sometimes
generation ago.” you can convince investors, however, that yours is the “killer app” that will change the
marketplace – and earn them a handsome return on their investment in the process.
• How solid is your business plan? – Plans run the gamut from excellent to submediocre.
A good business plan discusses your strategy and objectives, demonstrates your
approach to sales and marketing, provides financial projections and outlines exit
strategies that still offer excellent returns.

“This means that Powers of Attraction


when companies After angels, venture capitalists (VCs) are the next rung up on the financing ladder.
compete for
the loyalty of Most VC investors are looking for projects that require between $5 million and $20
investors, they million. They calculate that they need this level of investment to offset the costs of
don’t compete only investigation (due diligence), administration and overhead. These investors are looking
in their industry;
they compete
for opportunities that fit a specific model, and they dismiss nine out of 10 opportunities
against all other rather quickly. Entrepreneurs often reduce their chances of success because they don’t
companies at understand the types of risks that venture capitalists avoid, which include:
comparable risk.”
• Unpredictable markets.
• Negative industry trends.
• Problems associated with growth.
• Governmental or regulatory approval.
• A perceived lack of accurate and complete information from the entrepreneur.

“Although the
Assuming your company is able to assuage venture capitalists' uncertainties and close
world’s capital a deal, venture capitalists expect to act as coaches, encouraging you to meet their
markets are bigger financial, growth and operational objectives. Venture capitalists employ specific exit
than ever, the strategies to help them recoup their investments plus good returns. Overall, winning VC
competition for
capital has never funding is far more complex than finding an angel. VCs are professional investors whose
been greater than careers depend on the results they return to their companies; because of that, they take a
it is now.” methodical, systematic and disciplined approach.

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Banking on Banks
Of course, other funding options exist beyond angels and VC firms. Most individuals
who need financial support receive it from financial institutions. Institutional investment
instruments include simple loans, both short and long term; government-sponsored
financing, such as Small Business Administration loans; commercial paper, often used
by large firms for credit needs that they repay within one to six months; bonds, which are
“Today, managers fixed-income securities that individuals and institutions can own and trade; “factoring,” a
talk about type of lending that involves a financial institution’s discounted purchase of a company’s
creating a value
proposition for accounts receivable; “private placements,” in which you sell partial ownership to a large
their customers. institutional investor with whom you already have a strong relationship; “direct public
They must do offerings,” an alternative to IPO (initial public offering) financing in which you forgo
likewise for their
capital providers.”
the usual investment banker and offer your stock directly to the public, thereby avoiding
banking fees; and so-called “junk bonds,” which are below-investment-grade securities
that offer higher rates of return than traditional investments.

The “Strategy-Tactic-Value Triangle”


Marketing theory suggests employing a marketing mindset to find investors who will
support your company. First, position your firm as an attractive investment that promises
to deliver a good return. The “Sustainable Marketing Enterprise Model” has three
elements, and each element has three key concerns:
1. “Strategy” – This encompasses “segmentation,” “targeting” and “positioning.”
2. “Tactics” – This includes “differentiation,” “marketing mix” and “selling.”
3. “Value” – This involves “brand,” “service” and “process.”
These three elements form the “Strategy-Tactics-Value Triangle.” In the strategy phase,
“The first element you define your company, determine its mission, research its market and segment the
of value is available capital markets so that you target your marketing to those segments most
brand, which
is a company’s likely to respond to your offer. Targeting focuses your resources. Positioning involves
value indicator establishing your company’s credibility in the minds of potential investors.
– enabling it to
avoid the These tactics enable you to gain “mind share” with potential investors. Companies such as
commodity trap.” Starbucks and Berkshire Hathaway differentiated themselves from every other company in
their markets. “Marketing mix” means employing a range of creative marketing techniques
to build market value. The type of selling you conduct will almost always be based on the
relationships you develop with potential investors – in other words, “relationship selling.”
Finally, value encompasses the processes that help you avoid becoming a commodity. “In
practice, stratgey, tactics and value must all be balanced.” Ultimately, your ability to master
these value-producing marketing principles will determine if you can win investors.

About The Authors


Philip Kotler has written 35 books, including Marketing Management. He is a professor
of international marketing at Northwestern University’s Kellogg School of Management.
Hermawan Kartajaya, co-author of Repositioning Asia and Rethinking Marketing, is the
founder and president of a strategy consulting firm in Southeast Asia. He is a former
president of the World Marketing Association. S. David Young is professor of accounting
and control at INSEAD international business school. He is the co-author of Profits You
Can Trust.

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