March 9, 2004
- To PPM or not to PPM…that is the question
by
Bill Snow
As we have seen many times in
this page, the early stage entrepreneur’s quest for money is only exceed by
his…well…quest for money.
One hoop in the money raising
process that far too many early stage entrepreneurs think they have jump through
is the venerable private placement memorandum (PPM). A search of Google yielded
approximately 9,000 results, and a quick scan of some of the sites included, “An
Introduction to Private Placement Memos,” “Sample Private Placement
Memorandums,” “We Will Write Your PPM,” and so on.
So, what’s going on here? Is
this something early stage entrepreneurs should explore? Is it worthwhile?
Does it help the search for cash?
Capital seeking early stage
entrepreneurs…here’s the dirty little secret about the PPM: Don’t waste your
time.
Based on copious amounts of
study and first hand experience, your humble columnist has identified four
reasons why so many early stage entrepreneurs become infatuated with the PPM.
The reasons are:
1.
Confusing activity with accomplishment
Hiring an attorney to draft the PPM will involve time. While the attorney will
do most of the heavy lifting (although he will largely rely on boilerplate
legalese), you will be actively involved with the process, making decisions
about valuation, share allotment, stock prices, the business plan, the projected
financials, and so on. All of this requires work, work requires time, and if we
spend time working that means we are doing something constructive? Right? Of
course not. It is a waste of your time. You’ll be better off watching TV.
2.
Confusing completing a PPM with completing an S1
In the back of their ever-optimistic minds, I think that entrepreneurs must
believe that completing a PPM actually means something. A PPM without actual
(and good) operating results is worthless. It is merely a very expensive
exercise in legal paper shuffling. Remember the phrase track record,
because you gotta have one, and it’s gotta be a good one. It’s a chicken and
egg thing. What came first, the company’s track record of revenue growth and
predictable earnings, or the stack of impressive looking legal documents?
Entrepreneurs often make the mistake of forgetting which needs to come first.
With the exception of the freak years of 1998 to 2000 (when the Nasdaq became a
public market masquerading as a ‘friends and family’ investment clearinghouse),
companies that raise money by using those fancy-pants legal documents (be it an
S1 or a PPM) do so because the company is already a going concern with and
operating history.
3.
Path of least resistance
Early stage entrepreneurs need to stay busy, they have to do something. For
many entrepreneurs, calling a lawyer and forking over the money to construct a
PPM is actually easier than calling people and asking for their business, or
their investment money. It is easier to hire someone than it is to get someone
to hire you.
4.
The New Shiny Thing (NST)
The NST syndrome affects far too many early stage entrepreneurs. An
entrepreneur with NST has a short attention span, and is constantly jumping full
bore into any and everything that is new. I’ve seen far too many entrepreneurs
do this. It reminds me of my dog, actually: “What is this? I don’t know, but
it must be great! I think I’ll spend the rest of the day sniffing it.” While
this is kind of funny, it actually sends a very bad message to other people: “I
do not place any value in the things and people I already know. Instead, I
place value in things and people I do not yet know.”
At the end of the day, the
early stage entrepreneur who frets and fritters away his time putting together a
PPM is merely cascading down the path of stupidity. He is falling for the big
fallacy: Thinking this stack of papers is actually worth something.
OK, enough entrepreneur bashing, tell us what money people think of PPMs. Won’t
they think a professionally prepared PPM means the entrepreneur is a
sophisticated person who is serious about business?
The short answer…no! Just
because you have a nice looking, and nicely worded document at ready disposal,
does not mean you have a venture worthy plan. Remember Snow axiom #47: No
amount of spit and polish will make a bad idea compelling.
PPMs can also have the opposite effect with sophisticated investors. Instead of
thinking the entrepreneur is sophisticated, they will reject the PPM out of hand
as a sign that the entrepreneur is a clueless twit. This is similar to the
stereotype of the country bumpkin putting on his grandpappy’s 1880 suit, replete
with coattails and a top hat, driving into the city on a tractor, expecting to
be considered a sophisticate because he’s wearing a suit and driving a horseless
carriage. If you are an early stage entrepreneur and you hire an attorney to
draft a PPM, you will be considered a rube.
Sophisticated investors balk at PPMs because PPMs layout the terms of the deal,
and sophisticated investors want to set the terms. They want to write the
contract, not agree to a contract that your attorney wrote. Similar to the fact
that power lies with the person with the money, the power lies with the person
who writes the contact.
What should we do, oh wise
one?
Here’s a novel idea. Instead of incurring all kinds of legal fees to produce a
worthless document, spend your time hunting down investors for your dream. Talk
to your friends and family. Look for wealthy angels by hanging out at posh
country clubs (learn to play golf). Hit up your dentist...or any dentist. Or
any doctor. Another dirty little secret in the world of business is plenty of
early stage companies are initially funded by dentists and doctors, because
dentists and doctors have plenty of cash and they have one enormous Achilles
heel: since they are very smart in one subject (medicine), they tend to believe
they know everything about everything. They’re worse than me! For all their
considerable smarts, dentists and doctors are usually bad business people who
are susceptible to the lure of the new shiny thing: Your great idea.
Once you’ve identified some
suckers, er, investors, hash out the terms of the investment, and then
hire an attorney to draft the necessary legal documents. Don’t waste your time
hashing out details without investors…find the investors first!
Has your company been profiled by Bill Snow? Send
an email to introduce your company:
bill@billsnow.com
About the author
Bill Snow runs this site. If you haven't figured that out yet, I can't
help you.
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