Raising Capital Can Be Hard
I invest in around 12 different companies and at any point in time one of them seems to be raising money. When a company raises money they are either in a position of running out of cash and need a new injection to survive, they are on a rapid growth path and need new cash to accelerate growth or in some instances they need capital to fund an acquisition (and thus accelerate growth).
Capital raising is always a fun process. You need to get the balance between valuing the company as high as possible to avoid too much dilution while at the time providing the new investors with upside. However the balance of power is often driven by your current cash position and just how desperate you are to raise money.
When thinking about capital raising, it is always important to be realistic. You need to look at the current state of the business and then build a realistic plan for the future. Based on this plan, you can then determine how much capital you need to raise. One mistake often made by companies is not raising enough capital. Companies sometimes forget that they will almost definitely incur the expenses but the revenues may be missed. If you miss the revenues, you will need more money. Therefore budget appropriately.
Secondly, you need to put together a document that clearly articulates the capital raising objectives. Make sure the document is realistic and clearly articulates the current state of the business and its potential. Of course you have to be clear about why you are raising the money and what you plan to use it for. It is much easier to raise money to fund growth while retirement of debt is always a problem and helping existing shareholders cash out is basically a no-no.
When raising money it is important to go back to existing shareholders and give them the chance to put more money in. You never know what they will do. In offering existing shareholders the chance to put more into the company, it is always a good idea to give them a discount to new shareholders coming in. Also allow them to over subscribe so that some can take up more shares if they want to.
Having offered the existing shareholders the chance to take more, getting new shareholders is clearly the next choice. Now the selection of the shareholder is very important. They tend to fit into a number of categories:
- Industry specialists – these can be investors who are in similar businesses in other countries. Often they will offer access to skills as part of the investment. This often doesn’t amount to much more than talk. Take this route with care.
- Vendors – these are often businesses in advertising who will contra in advertising for equity. I am always cautious a about this as the equity is locked to a certain outcome. Perhaps it is best with this to price the equity higher or tie the equity to outcomes.
- Customers – these are often a good choice for investment as they get the business and are often wanting to share some of the upside. Make sure you don’t give one major customer too much equity as this can cause other customers to not do business with you. Therefore offering to all customers equally could be a good outcome.
- VC’s and Professional Investors – they are definitely a good source of capital however they often come with terms and conditions that other investors don’t. Look a these offers carefully and then, if you take the money, fully understand what the terms and conditions are.
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