DayNa Decker and Muguet Houston founded Lumetique in Los Angeles, California, in 2001 to create products that combine oil lamps, fragrance, and attractive statuary. The lights are not only attractive but use patented wicks and clean-burning, water-soluble, nontoxic fuel. “It’s the first innovation in candles for thousands of years,” Muguet says.
Combining their money with family contributions, the pair developed a product line and applied for patents, but they knew they would need more money to get the candles into high-fashion stores and for marketing. They developed a business plan and started making the rounds of individual private investors.
Very-early-stage entrepreneurs struggle to get meetings with potential investors and often come away empty handed in more ways than one with no funding and no idea how the potential investor rated the company. Such entrepreneurs rarely get a second chance to make a favorable impression. They go from presentation to presentation with little or no feedback to help them make adjustments and improvements. Because of the time it takes to read and evaluate a business plan, most venture capitalists read portions of only 20 percent of the plans they receive. They fund only one out of a hundred plans they do read.
One of DayNa and Muguet’s stops was with executives of Venture Alliance, a nationwide network of venture capitalists, investment bankers, business advisors, and technical experts who look for the best equity investments regardless of size or location. Founders James Casparie and John Garcia have evaluated thousands of entrepreneurial ventures over the years and from that experience have developed a patented evaluation process designed to dig out success indicators that aren’t necessarily evident in a business plan. Through an extensive list of questions, a company is rated on 12 factors: market opportunity, marketing and sales strategy, competition, entrepreneurial experience, management team, founder commitment, board of directors or advisors, financials and pricing, valuation and use of funds, accomplishments, corporate structure, and intellectual property. Some entrepreneurs can’t answer the questions and others won’t take the time. DayNa and Muguet did.
Evaluation and Credit Score
Venture Alliance likens the evaluation to credit scoring of individual consumers that enables lenders to evaluate the creditworthiness of thousands of borrowers quickly. Lenders know that a consumer with a FICO (Fair Isaac Corp.) score of 800 will get a loan and one with a score of less than 500 either won’t get a loan or must pay a higher interest rate. Venture Alliance’s scoring enables its network of investors just as quickly to evaluate the investment-worthiness of many more companies than they could by just reading the business plans. The Venture Alliance-scored information is the same as provided in business plans but in different form.
The evaluation and score also helps entrepreneurs spot their strengths and weaknesses. It gives specific areas on which to work in order to become more attractive to investors. Lumetique’s greatest strengths are its intellectual property and market opportunity. Its weakness is its management team because such an early-stage company is still trying to attract strong executives with specific experience needed to help raise capital. “It’s a matter of which comes first when you need both a strong management team and capital,” Muguet says.
The average company that receives equity investment earns a 70 percent score on Venture Alliance’s 1,200-point scale. In April 2003, Lumetique earned 741 points, or 62 percent. Its intellectual property and market opportunity were good, but DayNa’s experience and the management team were weak.
DayNa and Muguet started working on building up Lumetique in those areas that scored low. Seventeen months later the company scored 841 on Venture Alliance’s scale and subsequently received funding from Angel Strategies, a California-based seed capital investor for high-wealth individuals, and Palladium, a New York investment banker.
“The scoring was quite helpful,” says Muguet who has previously raised money for other technology companies. “Often when we present to individuals, they don’t ask the right questions so they don’t get the information they need to make an investment decision.”
About The Author
Brandon is a finance consultant and part time blogger who has written this article for Tom Gores Chairman and CEO of Platinum Equity, a private equity firm headquartered in Los Angeles.