Finding the right financing is a key part of any successful business’ growth journey. Most business operators know the basics – a solid business idea/plan, strong management team, expansion opportunities, good operating systems, etc. However, the fundraising process can also have hidden risks and can actually hurt the business if something goes wrong.” Our sales team has laid out some of our top tips for raising capital.
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Know the value of your business
Proper valuation and financial modeling that is verifiable and backed by evidence shows that you are “investment ready” and is critical to an investor’s decision to inject capital. It’s also important to get the right appraisal to make sure you know what you’re giving away and aren’t giving away too much equity. You should always put yourself in an investor’s shoes 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 past performance on which to base the valuation – which introduces a lot of subjectivity into the process.
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Debt or equity?
Too often, businesses think they need equity when it’s not necessarily best for the long-term success of the business. There are a wide range of factors that affect the decision to raise 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 that of debt. Equity investors will not be guaranteed for their investment with discretionary dividends. Thus, they generally expect more for the additional risk they are taking. Of course, if a company takes on too much debt, the costs of that debt increase as the company takes on more debt. So it’s important to seek the right advice and get the balance right.
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Tell investors what they really want to know
We often see passionate entrepreneurs producing detailed information about their business, but omitting the most important elements for investors. The actual investment proposition, financial parameters and expected returns are often more important to investors than scientific, technical or background information.
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A little money has more value
Not all investors are equal. A savvy fundraiser will look for investors who can add value to the business with relevant industry experience and other relevant contacts who can actually help improve and grow the business.
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Yes you need a lawyer
Often, business operators think they don’t need lawyers as long as they limit fundraising to the relevant exceptions in the prospectus. However, even when fundraising does not require a prospectus, promoters still have obligations, including that any material or information they provide must not be misleading or misleading or contain false statements. Lawyers can assist in the verification of any briefing note, ensuring that fundraising is unregulated, including appropriate disclaimers, confidentiality deeds, and generally ensuring that Fundraising documents (such as shareholder agreements and subscription agreements) adequately protect the operator of the business.
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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 embark on a disclosure process without obtaining a confidentiality deed or without considering the practical risks of “information leakage” and a competitor gaining access to sensitive business information. Economic operators must be aware of this risk and take adequate protection.
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it will cost you
The cost here does not only refer to expenses for accountants, lawyers, other advisors or additional compliance costs after the introduction of investors. Companies often fail to consider the other “costs” of raising capital, particularly the time and effort involved and the cost to the business if the process takes too long. Investor due diligence processes can alienate founders and key executives from managing and growing the business. These costs can cripple a business if fundraising ultimately fails and the business isn’t strong enough to withstand it. Businesses need to be aware of these hidden costs when considering when to fundraise and also plan for these costs in their financial modelling.
