Four Basic Principles for Raising Capital

Saving money and growing capital financial concept

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 it’s understood and all of the elements of the operational strategy that will be executed to pursue the plan. It’s important for investors to see both the “forest and the trees”, as it allows them to better gauge 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 management’s ability to execute. What would you believe?

Principle 2: Begin To Raise Capital Well Before It’s 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 management’s ability to plan and anticipate requirements; or, worse, raises doubts about a company’s 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 It’s 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 company’s chances of eventual success.

Principle 4: Look Broadly and Build Relationships

Boards and management teams worry about how much time company leadership spends on capital-raising activities and away from the business, so they sometimes narrow the search for new investors, in an attempt to be more efficient.

However, going through a capital-raising process does afford management teams the opportunity to meet with a variety of financial investors and to tap into their portfolio company networks, as well as with corporate investors that could eventually buy or partner with the company commercially. In the longer-term, companies with a network of relationships and partnerships are likely to have more strategic and financial options and potentially a higher probability of success.

So, take advantage and leverage the work and preparation of the process to reach out selectively to parties that can both have an immediate interest and/or represent a future relationship or funding sources, as well as potentially helpful strategic or commercial outcomes.

As a buyer of small companies for a large technology conglomerate, I noticed that familiarity with the company made a big difference to the business sponsors. On more than one occasion, companies that reached out to us through a capital raise or a business development process tended to move up the priority stack for acquisitions, strategic partnerships, or mutually-beneficial commercial relationships. In some cases it made all the difference in the world for a company’s future prospect.

Moving Forward

Investors want to understand a company’s market strategy and value proposition in addition to the financial statements. The overall business plans represent the way the management team plans to use financial, human and fixed capital to execute its vision. Employing the four principles outlined in this article can help your business get the capital it needs to move forward.

Related content:

Keys to Obtaining Funding

Small Business Capital, Digital Lenders and Angels

RELATED POSTS

7 Steps Toward Driving Small Business Productivity

7 Steps Toward Driving Small Business Productivity

Share priorities and plans with people who can contribute to your small business productivity. Once you understand your time usage better you can focus taking back control of your time with a few productivity tips. In part one If You Want to Accomplish Something...

9 Ways to Show Up as Your Most Authentic Self on Social Media

9 Ways to Show Up as Your Most Authentic Self on Social Media

It's about being real, relatable, and building genuine connections. Social media. It's the highlight reel of our lives, a curated world of travel pics, perfectly styled outfits, and mouthwatering food snaps. And for small businesses and personal brands, it's a crucial...

Five Components of Business Success and Change

Five Components of Business Success and Change

A business can’t thrive unless its owner is responsible and willing to lead Business owners keep in mind 5 things to successfully implement business processes and operations. The business world is a fast-paced, radically evolving environment. Because of this,...

Video Gallery

Polls

Sign Up for the Latin Biz Today Newsletter

PR Newswire

Featured Authors

Innovation & Strategy

Money

Talent/HR

Legal

Marketing

Culture

Fashion

Food

Music

Sports

Work & Life

Mindfulness

Health & Fitness

Travel & Destinations

Personal Blogs

Pin It on Pinterest