Top 5 ways to ensure a successful capital raise

Raising capital is tough at the best of times, and increasingly difficult in today’s Covid environment. As investors (be they equity or debt investors) search for companies in which to invest, many are becoming more cautious in their investment criteria.

While every company, and capital raise is unique, we thought it helpful to share the five most common reasons founder’s and their company’s get funded.

Reason 1:  Valuation

Having a realistic valuation of your company is often cited as one of the primary reasons investors get behind an equity raise.

As anyone who has raised equity will tell you, it is truly an art to determine a proper valuation. Valuation can be driven by myriad, often subjective factors, including reliability of future cash flows, available market comparables for your business, your business life cycle and size of market opportunity. Valuation may also be impacted by the methodology used to derive the value, whether that by using a discounted cash flow (DCF), market multiples or build-up approach. 

Valuation may also play a role in debt financings, in particular for management buy-outs, buy-ins and mergers & acquisitions (M&A). In these scenarios, an investor might be financing a significant portion of goodwill created by the transaction which often carries no tangible security for said lender. As a result, having a firm grasp of valuation ensures all parties understand apportioned risk based on available security and size of investment.

Reason 2: well-defined path to commercialization / growth 

At the heart of a capital raise, is the idea that making smart and thoughtful investment in one’s company will lead to greater growth and prosperity. Founder’s and business owner’s alike need to be clear on where they want to see their business in 5 or 10 years from a revenue, profitability and size perspective, and be able to articulate the steps needed to get there. An important part of the work we do with our clients is getting them market ready which means taking that growth story and putting it down on paper in an intelligible and well though-out manner (review our latest blog post on why a strong Confidential Information Memorandum (CIM) is the most important marketing document in a capital raise).

The story will differ depending on whether you’re a start-up looking for pre-seed /seed financing (in which case determining market size might be more ambiguous, and difficult) or later-stage company looking for funds to expand market-share in its pre-existing market.

Ultimately, by preparing a clear growth plan, investors will be able to better understand the investment opportunity.

Reason 3: How will funds raised be used

Closely tied to reason 2, investors will want to know on which initiatives and when, investment will be required in your company. It’s helpful to think of sources and uses of investment capital graphically as steps. At each step, you will require additional funding to reach the next step. Clearly articulating what amount of money is required to fuel each growth initiative, in turn moving from one step up to another, is important. This shows investors that you have though about where funds are best used in the business and provides management accountability with respect to meeting various growth milestones.

Reason 4: lender & investor alignment  

Businesses today are as varied as the capital sources available to finance them. Company’s are ultimately successful in raising capital because they target investors that specialize in financing companies at their current business life cycle (see chart below) and in their particular sector.

For example, at the introductory stage, founder’s, family and friends, angel investors (either through crowdfunding or direct investment) as well as various grant & SR&ED funding, will typically provide the initial capital to get your company off the ground. Venture capital firms may also invest at this stage, through to growth-stage companies.

At the growth stage of a company’s life cycle, venture debt, bridge lenders, private equity firms, as well as factoring and PO financiers, might play a role financing a company’s growth. As discussed in detail in a previous blog post, venture debt might be an option at this stage, especially when bank debt might not be available or when VC-based companies are looking for a non-dilutive way to grow their company, before a subsequent equity raise is contemplated at a higher (future) valuation.

Finally, at the opposite end of the growth curve, mature companies will often obtain traditional (senior) bank debt to help them grow. Subordinated and mezzanine debt may also be used at this stage of growth in order to augment leverage provided by the senior debt lender.

Finally, other factors that you should considered when comparing investment offers is the investors industry expertise in your company’s sector, geographical footprint, as well ability and willingness to make future investments in your company if and when fresh capital is required.

Reason 5: Strength of management

Strong management is key in any capital raise, irrespective of industry sector or type of raise. Highlighting management’s experience in the business being financed and its commitment to hiring and training the right people to build the company and brand are critical in any capital raise. Strength of management talent underpinned by investment by the founder’s or owner’s in their company also signals an alignment between management and the company’s goals.

Finally, it’s important founder’s and owner’s are able to articulate their growth strategy to investors. At the end of the day, investors invest in people, not businesses. Thus founder’s that present well and can convey their company’s growth strategy in a compelling and enthusiastic manner, are much more likely to get funded.

Are you thinking about a capital raise and have some questions about whether now is the right time and whether you’re market ready?

Cheers, Trevor

Founder & Managing Director