Contributed by Theodore E. Lavoie
So you’re thinking about raising capital, congratulations! This means that you have grown your business with your own vision, ingenuity, sweat equity, and personal drive to a point where you see opportunities for further growth that additional capital can provide.
Or, you have used your vision and ingenuity to create a new business model that is compelling enough to be perceived by others as having the potential for success and future value. In either scenario, there are some basic concepts for your consideration before you begin.
Will Having an Investor Fit Your Temperament?
First, understand what having a capital investor, whether it is an Angel, investment bank, or private equity entails. How will it fit with your temperament and your key management to have others that will want input, comment and some control over how you choose to run your business?
Have you considered debt versus equity? A bit more costly and sometimes a bit more difficult to arrange, but less dilutive to your ownership and that of any stakeholders you may have. If you have an existing relationship with a good bank, consider the effort necessary to maintain that relationship, the reporting requirements and whether or not you would be able to increase your borrowing capacity to accomplish the goals that you are trying to raise capital for.
How Solid Are Your Financials and Financial Management?
Be honest with yourself regarding the state of your current financial information for your business. Do you have one, two or three years of adequate historical financials? Have they ever been audited? Do you have appropriate and experienced financial management in your organization to assist you in managing a capital raise and the process?
Do You Have the Time?
Be honest with yourself about the time commitment that is necessary to raise capital. It can be a disruptive process for most management teams and as CEO and owner of your business it will require a significant amount of your time during the process. Look at your current weekly and monthly schedule, and consider how a 20% or 30% commitment of your time, and some of your key management, for the next four to six months, will impact your current operations or strategic goals. Then consider getting some experienced help, with this process.
Create Your Pitch
You and your Management team will have to develop all your Presentation Materials; Executive Summary, Presentation Deck, Financial Projections, Assumptions, Historical Financials, etc. which must articulate your business model, what you intend to do with the capital, and how that will leverage your growth, in terms easy enough for all investors to understand, and must be compelling, realistic in assumptions, and financially cohesive between your assumptions, your market and your projections.
Selling the Investment Committee
As with most Angels, Private Equity Firms, and Investment banks, the decision to proceed with your company for investment is not a singular decision. Your chosen representative must bring your company’s information to his/her investment committee. The committee reviews it and then gives the green light for the committee/analysts to burn the time on due diligence that will be required.
Before a financing source will burn any time on the review due diligence or your business model, the potential investor will generate an engagement letter for your company that will detail the terms and their fees for the financing. The engagement letter may contain the targeted types of financing vehicles that will be sought on your Company’s behalf – including their recommendations of the best “type” of investment vehicle for your business model and state of development. This may be different from what you have originally anticipated, or considered; keep an open mind. And have access to counsel; this is just the “Term Sheet”…the “Definitive Agreements” (many more pages) will be days or weeks in the crafting, review, discussion and Agreement.
After the Term Sheet
After execution of their engagement letter and review of the due diligence materials and refinement of our presentation deck and materials, your representative will contact the potential investors that he/she considers most likely to invest in your Company. In some instances they may provide a list of such targets to you, to determine if there is any complementary relationship, conflict or overlap. After there is some indication of interest, in-person meetings will be scheduled with the potential investors. Most firms are considerate of your and your management’s time, and will try to concentrate these to a logistically favorable location over the space of several days to maximize the time of the investors and yours.
This is principally a rough rendition of the private capital raising process. The public process with attendant S1 preparation and road shows, would take another Chapter (and a lot more Fees).
You, your financial team or thought leader, your outside advisors, or some experienced help you have obtained, should have scrubbed all of your assumptions and presentation materials prior to submitting anything to an investment committee. If you have been able to garner some interest, timing of your submittal will be critically important. Most smart money capital sources are looking at 200 plus potential deals per week!
Putting the Basics in Order
From capital raising experience in both the private and public markets, your Executive Summary, Presentation Deck, Financial Projections, Assumptions, Historical Financials, corporate structure, IP materials, etc must address the following, and be compelling:
- The legal entity information regarding your company, with appropriate documentation. This should already be established, but be aware, the type of entity (Delaware C Corp, S Corp, LLC, etc.) may eventually be determined by the investor preferences in your capital raise. Be flexible.
- A clearly defined Capitalization Table – with the percent interests of the existing principals, and with an initial valuation (or perceived valuation) on a pre-money (pre investment) basis. The valuation may be supported by a recent transaction, and or the approximate value of the current year free cash flow from the existing operations, peer comparisons. When determining the number of shares, units, etc – you should ensure enough to provide the necessary equity to incent management, (including those you plan to hire) Board or Advisors, key strategic partners and your legal, accounting, banking and consulting professional services.
- Intellectual Property – a clear list of patents, ownership, or license to your company as an entity and clear, comprehensive description of what it does to advance your company’s business model and provide a barrier to entry (how broad and unique) will be vitally important to investors since this may be a “horse race” with other competitors in your Industry to establish a first mover advantage.
- Management – descriptions, bios and functionality of each of the officers and all management associated with your company. Include an organization chart, description of duties and responsibilities, and their level of experience with same.
- Advisory Directors/Advisors – provide a list of all that are functioning as Advisory Directors or Advisors for your company (including those with public company and or board experience will be a plus since investors like to know that those responsible for deploying their capital and safeguarding their capital, have done this for other firms and shareholders, before).
- Strategic Partners (or Clients) –and their respective leverage for your company’s business model – especially whatever strategic partner(s) (or Client) that is pivotal to your business model’s ability to scale – whatever their role.Your business model is only as good as effective, saleable, deployable products or services, and the network to collect and leverage the data. If investors perceive that reputable firms are working with you and your Company, they will be more likely to accept your growth projections and assumptions in your Business Model. Your Executive Summary and Deck materials must highlight these Strategic Partners – it is Key to show this relationship
- Key Professional Service Providers – List of current legal, accounting, banking and others providing any critical service to your company. Investors will want to see firms with which they can feel comfortable. Provide good summaries/bios on these service providers, especially important in the areas of IP, Information (your IT and ERP Systems), legal and accounting (watching their capital.)
- All of your existing contracts (with the key clients, strategic partners, executives, investors, attorneys, accountants, advisors) need to be grouped functionally:(HR, Sales, Operations, Property, IP, Management, Advisors, Vendors, Professional Services) and readily available.
- Historical Financials if possible – you must have some historical financial information to present, along with your projections. Audited financials would be preferred but this may not be possible. Easier for firms with a track record, but be ready to provide what you can and for the request for the above.
- A comprehensive list of all locations where your product, pervice or technology is already installed, purchased, used, etc. Even your Beta clients – and timeline and targets for future revenue growth with rationale as to where and why (this will probably be replicated in your Assumptions Data for the Financial Projections).
- All Diligence Data listed above, as well as all your projections, assumptions, Investors Overview, Presentation Deck, should be assembled and accessible electronically. If you have no experience in this part of the process, get some help with those that have created a Data Room before – where your information can be securely stored and accessed by interested investors using a “permission based” secure system to allow full or limited access. Experienced CFO’s will have worked with firms that offer this software relatively inexpensively – several excellent companies offer this functionality in addition to providing your company with a strategic advantage in the capital acquisition process.
Your Financial Modeling Assumptions
Your Revenue Projections in your Growth Model should be able to illustrate all of your revenue Streams (that you currently plan or anticipate):
- Sales Revenue, Complimentary Revenues, Recurring Revenue, Advertising Revenue, etc. Any unique identifiable revenue you can track separately as a line item. Also, since some investors and the analysts at your capital Source, may want to do sensitivity analysis on the projections – the revenue projection should be able to be varied by your assumptions For example, if you assume 5% of overall market and your potential capital source wants to model 7% or 3% – the model input should allow this type of variability.
- Assumptions for your market size and market share for your venture. Your Executive Summary materials and assumptions on the potential size and capture of your portion of this market should be supported by the best independent outside statistics you can obtain (and footnote!). Again, Model functionality for sensitivity in the assumptions that drive the revenue projections would be preferred – the more the analysts can play with it, the more they like, and begin to believe it.
- Capital costs for your business model – Will be important to have your best estimate of the actual capital cost that the growth of your business model will require, and how much of your UOP (Use of Proceeds) this capital requirement will represent. A detailed UOP will be reassuring to your potential investors…telling them how and what their capital will leverage for your growth will be spent on, increase the value of their initial investment.
- Your “Backroom/Backbone –IP, Software and Network development – In your assumptions, the first challenge will be convincing investors that your software will be robust enough to scale to the growth anticipated in your projections, to facilitate both the information capture, tracking, billing, and be reliable when mated with a financial reporting ERP system. If you are allowed to mention affiliation and assistance reputable strategic partners here (Oracle, SAP, Cisco, etc.) It will add additional credibility and assurance to your potential investors.
- Demographic growth targets in your assumptions – justification of high opportunity areas of growth, for your business model, and why. This can be partially supported by independent statistics, and also by the Assumptions already included in your Executive Summary. Be ready to defend domestic and International growth targets It is a tough world market, be ready for tough questions.
- General Admin Costs – many start up financial projections include unrealistic cost assumptions for the management and employees they include in their plan – there are HR, staffing firms, national audit firms, and your competitive peer analysis that can supply at lease comparable salary and burdens cost expenses for your market area, and same for C-Suite executives, board members or board advisors. The analysts doing the diligence at your will have access to this kind of data so you need to be realistic.
Every business model has hurdles to overcome, when it comes to raising capital, including yours. The most common ones include a sound communication of the rationale of the need for your product or solution when compared to your competition, market, trends or global economic realities.
Your second hurdle may include timing. Convincing potential investors to put their capital into your company, ahead of or concurrent to cash flow positive performance, additional contracts or revenue creation; convincing them of the reality, timing of your strategy, and that their capital will accelerate this outcome, is the hurdle, and your challenge.
Third, is building investor confidence in the ability of your business model, to scale. Your current level of software, network, IP, delivery, production or supply chain, to scale to accommodate your growth assumptions, and handle the normal business ERP functions as your sales increase rapidly per your projections. Anything that can be disclosed regarding your relationship with credible strategic partners, or key (even Beta) clients, will help to resolve this issue.
Ensure that your valid independent statistics regarding the “Why” of your business model are sound and make a compelling business case. Your task is to convince Investors to commit their capital, by mating the “why” with a believable “how”. Show your investors the how and why.
This is an incredibly exciting time for your business, and I congratulate you for reaching this milestone. Be honest about your ability to multitask, and that of your team. Reach out for help, from your peers, business associations, and those that can offer a depth of experience in this process. Cerius Interim Executives can help you with that. Saluting you, and wishing you and your Business Model, continued Success.
Theodore Lavoie has 30 years of experience serving high growth public and private companies as CEO, COO or CFO. He has served also as a public company Director, Audit Committee Chair, and Board Advisor/Consultant. He can be reached at [email protected]