Outside investors want to understand a business' strategy as well as its financial statements
The need to raise capital from outside investors requires a great deal of preparation across multiple dimensions. Among many things, investors look to understand details around the market opportunity, and the unique strategy and value proposition that allows the company to successfully address that opportunity.
A company's financial and operational plans then represent the way the management team plans to use financial, human and fixed capital to execute its vision.
Given the level of sophistication of the investor community, each of these dimensions requires a great deal of thought and analytical rigor to fully develop. Of course, the analytical rigor applied to all these dimensions informs investors of the opportunities and the risks, allowing them to determine their interest and the terms around which they might be willing to invest. However, four surprisingly basic principles, born out of various observations, can mean the difference between success and failure in raising capital.
Principle 1: All of the Elements of the Story Should Hang Together
Some companies spend a disproportionate amount of time fine-tuning the financial models and projections or other specific elements of the story. Yet, developing a highly sophisticated view of the financial statements is of little use when the actual and/or estimated performance does not tie to the size and orientation of the market opportunity nor to the operational or other requirements necessary to deliver results against the plan.
Once they understand the strategic elements of the story, investors look to the financial statements to understand the current condition of the company and its business model.
The financial statements also validate the future business plan.
Financial statements and projections are merely the numerical representation of the overall plan. So, the numbers should be solidly grounded to the view of the market as its understood and all of the elements of the operational strategy that will be executed to pursue the plan. Its important for investors to see both the forest and the trees, as it allows them to better gage the integrity of the overall approach.
I worked with a company that targets an exciting high-growth area in enterprise software. The team did a great job of identifying the target market and defining the growth strategy that the company needed to pursue from a product, sales and marketing perspective. Yet, the management team created a conservative financial plan that could not possibly allow the company to execute against the market opportunity. When the company spokesperson went out to speak to potential new investors, they were confused by the mixed messages.
On the one hand, the management team convincingly described a great new opportunity. On the other, the company and its existing investors seemed to say through the financials that they lacked confidence that the opportunity existed and/or in managements ability to execute. What would you believe?
Next- Principle 2: Begin To Raise Capital Well Before Its Needed
About the author
Elias Mendoza, Managing Director of Investment Development and Strategy
Mr. Mendoza joined Siris Capital in 2013. Mr. Mendoza's responsibilities at Siris include identifying and evaluating trends within existing and potential industry verticals for investment opportunities, and assisting our Executive Partners in evaluating underlying business strategies of targeted companies and existing portfolio companies. Prior to joining Siris, Mr. Mendoza was a Partner at Union Square Advisors, where he served as its Chief Operating Officer and a senior banker across the firm's verticals. Through July 2011, Mr. Mendoza held various senior positions at IBM, including Vice President and Global Head of Corporate Development. In such capacity, he was responsible for identifying , executing and integrating all acquisitions, investments and divestitures for the company on a worldwide basis. Mr. Mendoza's previous experience includes over twelve years spent at Morgan Stanley & Co., most recently as an Executive Director in the Investment Banking Division. Mr. Mendoza received a Landegger Program Certificate in International Business Diplomacy and an MBA from Georgetown University. He received his AB from Princeton University.