Great Business Ideas: Look for “Smart Money”

Great Ideas for your Small Business: Look for “Smart Money”

Byron roth, president of roth capital Partners in Irvine, California, has watched his small investment banking firm grow to $60 million in annual revenues with 225 employees. His job is helping entrepreneurs finance their dreams.

Based on years of dealing with thousands of entrepreneurs, he said small business owners make two major mistakes while hunting for financing:

  1. They often give up too much equity too fast, instead of thinking long term.
  2. They take money from anyone with a checkbook, rather than holding out for “smart money” from investors who know their industry and can help grow the business.

“When we put money into a deal, one of the most important things to me is, who else can I get to invest, and what do they bring to the party?” said Roth. Finding investors who can help your business flourish by making high-level connections and serving on your board is critical to success.

“Some people say ‘all money is as green as the rest,’ but I don’t agree with that,” said Roth. For example, Roth helped finance a small apparel company that was lucky enough to attract a major investor in the industry.

The investor, who owns about 10 percent of the company’s stock, also serves on their board, and his presence has helped attract other prestigious investors. It’s a situation that’s truly benefited both parties.

Too many entrepreneurs make capricious financial decisions “in order to get to the next step, without thinking two or three steps beyond,” said Roth. For example, two partners in a popular twenty-five-location restaurant chain wanted to raise some quick cash by selling Bay Area and other U.S. rights to their concept. “I discouraged them because it seemed like they were selling their soul for too little money,” Roth said.

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He recommends that entrepreneurs consider giving up a bit more equity to investors who have the knowledge and contacts to help grow the business. “If you want to raise $2 million, an investor may require 20 percent of your company, but you might want to give up 25 percent instead to attract smarter money,” he explained.

He said that smart money investors are usually looking for a long-term relationship, and they may be turned off if your focus is on increasing sales at the expense of other goals. Still, money does fuel growth. “When a company gets big, with smart money behind it, it’s scary how quickly they can move and grow,” he said.

Roth Capital Partners has offices in Irvine, Los Angeles, Seattle, San Francisco, and Santa Barbara.