Principle 2: Begin To Raise Capital Well Before Its Needed
This is really simple. Raising capital takes time and companies should take that into account when planning to do so for the first and subsequent times. account when planning to do so for the first and subsequent times.
Those companies that raise capital successfully and feel good about the terms and conditions under which they did so are those that have time to go through the process carefully.
Starting the process of raising capital when a company is coming close to running out of funds (less than six months of liquidity) raises many questions about a managements ability to plan and anticipate requirements; or, worse, raises doubts about a companys true potential and/or viability in the market place.
Equally as important then is the fact that being in the process of raising capital under cash constraints can lead to less favorable outcomes on terms and conditions vis-à-vis the investors, as the urgency to complete the financing will permeate the discussions and related negotiations.
Implications of waiting
Some companies wait until they only have a few months of cash remaining, before approaching investors in earnest for capital.
This sometimes is even more so the case for companies that are falling short of their targets, as they fear investors will challenge assumptions, forcing them to acknowledge deficiencies and capitulate to a new outlook. Ironically, these are the companies that have the more immediate need to find financing; but, that may not be able to secure it in the end.
Constantly watching and planning ahead for upcoming capital needs makes a significant difference to the outcome.
Principle 3: Within Reason, Take Capital When Its Offered
The capital raising process tends to be lengthy and time-intensive, particularly the first time a company is doing so from established outside investors.
The time required for the preparation and execution of a process draws management attention away from sales and other important activities that are crucial to the success of a young company. Whenever there is interest and excitement by investors and an opportunity to take in more capital than what appears to be necessary to carry the company through to its next stage, management and the board should very seriously consider doing so.
Of course, more capital from a new investor base will lead to considerations around ownership and governance outcomes that might not have been previously considered, but establishing a strong capital base and having more than sufficient liquidity to aggressively meet market challenges, opportunities or just to weather a downturn can make a significant difference to a companys chances of eventual success.
Next- Principle 4: Look Broadly and Build Relationships
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.