Raising Equity

5 Common Mistakes to Avoid When Raising Equity

Raising capital for a business, whether it is a start-up or a mature company, can be an extraordinarily frustrating and time consuming experience. Entrepreneurs want to operate and grow their business, not raise capital. But the fact is that for most businesses, the entrepreneur or CEO is responsible for raising capital.

When attempting to raise capital, CEO’s very often make some crucial mistakes. These mistakes not only can dictate whether or not the business will be able to raise capital, but also how long it will take and the ultimate cost of the capital. Using the wrong assumptions, raising capital can be impossible.

We believe there are 5 common mistakes that CEO’s make when raising capital:

1. Unrealistic Expectations of Value

Most of us has watched Shark Tank at least once. Just watch one episode and you will likely see this mistake. The entrepreneur goes to professional investors with a company that did $100,000 in sales last year and confidently tells the Sharks he will sell 10% of his business for $1 million. What’s the chance of this CEO getting funding? Zero.

With few exceptions, investors will pay for what you have already done – not what you believe you will do in the future.

Business TN – Wizard of Oz?

Remember the Wizard of Oz? Dorothy is searching for the Wizard to send her back home. But when she finds him, he is hiding behind a curtain shouting, “Pay no attention to that man behind the curtain!!”

Congress today is playing the role of the Wizard with the Medicare program. Medicare beneficiaries are looking for the Wizard to make everything right again. Yet just like the movie, this Wizard must ultimately proclaim, “I can’t come back – I don’t know how it works!!”

The problem? Baby boomers begin to turn age 65 in 2010 and the growth of Medicare spending will begin to skyrocket to a level well beyond the government’s ability to pay.

While every single member of Congress knows that Medicare is on a collision course with disaster – there has been a multi-year concerted effort NOT to address the issue. It isn’t because of a lack of understanding – or a lack of viable options – but because of a willingness to throw seniors under the Medicare bus because it is politically expedient to do so. Democrats won’t give the President a “victory” on fixing Medicare – and Republicans won’t give Democrats a “victory”.

Healthcare – Change is Brewing in Washington

Nashville Post – October 2006

Healthcare providers have recovered very well since the Balanced Budget Act of 1997 (BBA), which significantly reduced payments to healthcare providers. As the bill began to be implemented in 1998 and 1999, almost everyone who did business with Medicare suffered. Since then, however, almost all the major sectors have enjoyed a strong rebound.

In the aggregate, the industry is healthy … perhaps too healthy to forestall another round of reimbursement cuts.

Within in the next few weeks, the Centers for Medicare & Medicaid Services (CMS) will announce whether the largest change in the hospital reimbursement system since the 1980’s will be implemented on October 1, 2006. The industry and selected Senators, including Senator Grassley, Chairman of the Senate Finance Committee, have called for a one year delay in implementation. It is likely that CMS will listen and the changes will start in October 2007. While the changes are designed to be “budget neutral”, healthcare providers are concerned. Time will tell whether these changes simply shift dollars from highly profitable procedures like heart surgery and cardiac stent implantation to other less profitable procedures. Often the implementation of new programs has created unintended consequences and both industry and investors are uncertain as to the impact of this change.

Healthcare Recession Proof?

Nashville Post – October 2003

Over the last two quarters, the hospital industry has experienced an unprecedented flattening, and in some cases an absolute decline, in inpatient admissions. In addition, most have experienced a lack of growth in outpatient services. Investors, who have long viewed the healthcare service sector as a recession proof, safe haven in times of economic turmoil, are starting to reassess this view. What has caused this change, and what does it mean for investors and for healthcare service companies?

In preparing this column, we have talked with many senior healthcare executives, and have also reviewed Wall Street research. As is often the case, much of the Wall Street view, in my view, misses the mark. There has been much discussion about the role of higher co-payments and deductibles by employees, the shift of demand caused by technology and increased competition by third-party outpatient service businesses, such as surgery centers and the newer specialty surgical hospitals. While all of these may have a minor role, frankly I see this as fishing in the wrong stream. Higher co-payments might slightly reduce physician visits, but an inpatient hospital visit uses a typical employees co-pay and deductible in the first fifteen minutes of care.

Nursing Shortage?

Nashville Post – July 2003

About three years ago, Wall Street healthcare analysts started to hear about a new challenge in the hospital industry – nurses increasingly in short supply. Since then, hundreds of articles have been written about the nursing shortage. Nurse staffing companies became the rage among investors. Unless you haven’t noticed, the nurse staffing “crisis” is no longer a crisis. In fact, investors may start wondering what the fuss was all about.

Just like most other trends (oil at $35 a barrel going to $100, gold at $700 an ounce going to $1,000), markets and companies tend to react to dislocations in supply or demand. Nothing is constant, and drawing straight lines into the future yields the wrong conclusion about 100% of the time. Either new supply is created, or companies learn how to reduce demand.

Nurse staffing is no different, and apparently the tide has turned. Bottom line: Nurse staffing companies will have trouble making Wall Street earning estimates and healthcare providers will have lower salary & benefit inflation than expected.

What changed?

The original problem was caused by many factors. Over the past twenty years,