In the second of this six-part series on raising capital, corporate adviser Mark Rainbird talks about how to prepare your business for raising capital, while avoiding some of the mistakes commonly made by the inexperienced and naive.
In my previous article, I discussed that companies with access to capital will have a competitive advantage in the marketplace, even though capital is going to be harder to come by.
However, while capital raising can provide a myriad of new opportunities and strong competitive advantages for your business, it is not necessarily a panacea for whatever malaise your organisation might be experiencing.
It might sound like an obvious statement, but getting people to invest in your company requires a great deal of preparation – yet there are still plenty of companies that eschew the necessary groundwork.
Concrete reasons to raise
The first thing that needs to be established is whether engaging in such an action will actually benefit your company. Certainly, having a foundation of reliable shareholders can make a major difference to your ability to obtain equity in the future, but if you’re unable to demonstrate a strong reason to invest, you’re likely to fail in your endeavours.
Having a clear funding strategy that is linked to your company strategy is important. Unless you have a considered future plan for the capital once it’s been raised, there is every chance you may end up squandering it with little-to-no growth to show for it.
Prospective investors want to see a clear use of funds, and are generally looking for the funds to be utilised for profitable growth opportunities, to bring new products to market, to realise a significant opportunity, or to expand internationally. If you can present them with an opportunity like this then you have a much greater chance of success than if you offer them a role in your “rainy day fund”.
Sure, you might have a great idea and your board members may be passionate about what you’re doing, but will their presence inspire confidence in prospective shareholders?
Before raising capital, it certainly pays to analyse the individual histories and competencies of each of your board members and work out which attributes will be most attractive to investors. In some cases, it can actually be best to remove members of your current board if they don’t actually bring any real value to your organisation.
However, true to the idiom “you can’t see the wood for the trees,” it can sometimes be difficult to separate the truly saleable qualities of your directors from the irrelevant ones. Often, the advice of a reasonably impartial (but well-informed) outsider can help you to distinguish the necessary contributors from not-so-necessary.
If the sum of your board’s credentials isn’t likely to amount to much in the eyes of the public, a necessary option is to supplement the current board skill set with professional non-executive directors. Many senior executives with board experience are available for such roles and can be found via your network or professional organisations such as The Australian Institute of Company Directors.
Make it worth their while to invest
You have got to be prepared to part with a reasonable portion of your business. Remember that investors are primarily interested in making a return on their money. As fascinating as your company’s story may be, if you can’t offer a financially attractive equity share you’re far less likely to succeed.
In order to be able to develop the appropriate share capital structure, it’s of the utmost importance that you’ve had some realistic, all-inclusive financial forecasts compiled; these will give your potential backers an understanding of how much their share of the company will be worth.
Once again, it seems like an obvious trap to avoid, but I’ve seen plenty of directors fall for the same mistake of overvaluing the company and, as a result, offer more expensive shares. You need to balance your passion and expectations for your company with an objective understanding of how attractive the opportunity is to investors. The larger the gap between your company’s balance sheet and the valuation, the harder it is to demonstrate good value to the investor.
The investor exit: have you got one?
Investors are looking to eventually realise their investment – have you realistically thought about how the company will exit?
Whether it’s through an initial public offering, management buyout or trade sale, your company should be able to demonstrate a clear path to achieve an exit for investors. It’s important to create a strategy that is based around your company’s current activities, mindful that it can be reviewed in the future should the need arise.
If the exit strategy you’ve outlined is not achievable – say, if there are multiple options with no clear direction and it doesn’t link to the funding or company’s overarching strategy – then investors will be very hesitant to hand over their money.
The most important thing when looking to raise capital is to maintain a sense of objectivity. Certainly, the extra money could be useful, but is it what’s really needed? Perhaps there are operational and management efficiencies that can be looked at first before asking investors to help you grow. If raising capital is the path that you choose, the ability to take a step back and realise what’s vital to investors is the most important course of action you can take.
Dr. Mark Rainbird is the managing director of Ramscove and has over 15 years of capital and M&A experience, and has held senior executive positions in private, private equity, ASX and Government organisations.Image by Martin Kingsley