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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.
Next- Principle 4: Look Broadly and Build Relationships