top tips for capital raising
3 mins reading time
Sourcing the right funding is a key part of the growth journey for any successful business. Most business operators know the basics – a solid business idea/plan, strong management team, opportunities to expand, good operating systems and the like. However, the fundraising process can also be fraught with hidden risks and may actually damage the business if something goes amiss. Our Commercial team has set out some of our top tips for capital raising.
1. Know the value of your business
A proper valuation and financial modeling, verifiable and supported by evidence, shows that you are ‘investor ready’ and is key to an investor’s decision to inject capital. It’s also important to get the valuation right to ensure you know what you are giving away and that you are not giving away too much equity. You should always put yourself in the shoes of an investor and think about what they are looking for and get the right expert advice. This is especially true for start-ups that might not have any past performance on which to base the valuation – which introduces a lot of subjectivity to the process.
2. Debt or equity?
Too often, businesses think they need equity when that’s not necessarily best for the long term success of the business. There are a broad range of factors that impact the decision on whether you should be fundraising through debt or equity, such as where the business is in its life cycle, and the current economic climate. Generally speaking, the long term cost of equity is higher than debt. Equity investors will be unsecured for their investment with discretionary dividends. So, they generally expect more for the additional risk they are taking on. Of course, if a business takes on too much debt, the costs of that debt increases as the business becomes more highly leveraged. So, it’s important to seek the right advice and get the right balance.
3. Tell investors the stuff they actually want to know
We often see passionate business operators produce extensive information about their business but omit the things that are most important to investors. The actual investment proposition, financial metrics, and expected returns are often more important to investors than scientific, technical or background information.
4. Some money is more valuable
Not all investors are equal. A savvy fundraiser will look for investors that can add value to the business with relevant industry experience and other relevant contacts that can actually help to enhance and grow the business.
5. Yes, you need a lawyer
Often, business operators think that they don’t need lawyers so long as they keep the fundraising within the relevant prospectus exceptions. However, even where the fundraising does not need a prospectus, promoters still have obligations, including that any documents or information they provide must not be misleading or deceptive or contain false statements. Lawyers can help with verification of any information memorandum, ensuring that the fundraising stays unregulated, inclusion of suitable disclaimers, confidentiality deeds, and generally ensuring the fundraising documents (such as shareholders agreements and subscription agreements) adequately protect the business operator.
6. Do you really want to show everyone your ‘underwear’?
To attract investment, you generally need to disclose everything to investors. Too often we see operators eager to raise capital start a disclosure process without obtaining a confidentiality deed or considering the practical risks of ‘information leakage’ and a competitor gaining access to sensitive business information. Business operators need to be mindful of this risk and take adequate protections.
7. It’s going to cost you
Cost here does not just refer to the outlay for accountants, lawyers, other advisors or any additional compliance costs after the introduction of investors. Businesses often fail to factor in the other ‘costs’ of raising capital – particularly the time and effort that goes into it and the cost to the business if the process takes too long. Investor due diligence processes can take founders and key management personnel away from actually running and growing the business. Those costs can cripple a business if the fundraising ultimately fails and the business is not sturdy enough to withstand it. Businesses should be mindful of these hidden costs in considering the timing of when to fundraise and also plan for those costs in their financial modeling.
Macpherson Kelley’s Commercial team can assist clients in navigating the capital raising process from first negotiation with investors through to successful completion of the funding transaction.
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top tips for capital raising
Sourcing the right funding is a key part of the growth journey for any successful business. Most business operators know the basics – a solid business idea/plan, strong management team, opportunities to expand, good operating systems and the like. However, the fundraising process can also be fraught with hidden risks and may actually damage the business if something goes amiss. Our Commercial team has set out some of our top tips for capital raising.
1. Know the value of your business
A proper valuation and financial modeling, verifiable and supported by evidence, shows that you are ‘investor ready’ and is key to an investor’s decision to inject capital. It’s also important to get the valuation right to ensure you know what you are giving away and that you are not giving away too much equity. You should always put yourself in the shoes of an investor and think about what they are looking for and get the right expert advice. This is especially true for start-ups that might not have any past performance on which to base the valuation – which introduces a lot of subjectivity to the process.
2. Debt or equity?
Too often, businesses think they need equity when that’s not necessarily best for the long term success of the business. There are a broad range of factors that impact the decision on whether you should be fundraising through debt or equity, such as where the business is in its life cycle, and the current economic climate. Generally speaking, the long term cost of equity is higher than debt. Equity investors will be unsecured for their investment with discretionary dividends. So, they generally expect more for the additional risk they are taking on. Of course, if a business takes on too much debt, the costs of that debt increases as the business becomes more highly leveraged. So, it’s important to seek the right advice and get the right balance.
3. Tell investors the stuff they actually want to know
We often see passionate business operators produce extensive information about their business but omit the things that are most important to investors. The actual investment proposition, financial metrics, and expected returns are often more important to investors than scientific, technical or background information.
4. Some money is more valuable
Not all investors are equal. A savvy fundraiser will look for investors that can add value to the business with relevant industry experience and other relevant contacts that can actually help to enhance and grow the business.
5. Yes, you need a lawyer
Often, business operators think that they don’t need lawyers so long as they keep the fundraising within the relevant prospectus exceptions. However, even where the fundraising does not need a prospectus, promoters still have obligations, including that any documents or information they provide must not be misleading or deceptive or contain false statements. Lawyers can help with verification of any information memorandum, ensuring that the fundraising stays unregulated, inclusion of suitable disclaimers, confidentiality deeds, and generally ensuring the fundraising documents (such as shareholders agreements and subscription agreements) adequately protect the business operator.
6. Do you really want to show everyone your ‘underwear’?
To attract investment, you generally need to disclose everything to investors. Too often we see operators eager to raise capital start a disclosure process without obtaining a confidentiality deed or considering the practical risks of ‘information leakage’ and a competitor gaining access to sensitive business information. Business operators need to be mindful of this risk and take adequate protections.
7. It’s going to cost you
Cost here does not just refer to the outlay for accountants, lawyers, other advisors or any additional compliance costs after the introduction of investors. Businesses often fail to factor in the other ‘costs’ of raising capital – particularly the time and effort that goes into it and the cost to the business if the process takes too long. Investor due diligence processes can take founders and key management personnel away from actually running and growing the business. Those costs can cripple a business if the fundraising ultimately fails and the business is not sturdy enough to withstand it. Businesses should be mindful of these hidden costs in considering the timing of when to fundraise and also plan for those costs in their financial modeling.
Macpherson Kelley’s Commercial team can assist clients in navigating the capital raising process from first negotiation with investors through to successful completion of the funding transaction.