As you enter the New Year, and you begin planning your company’s growth, it is likely that this growth will require capital. As the saying goes, “Its takes money to make money.” To help you get the money you need to make the money you want, we thought we would share some advice gained through our years of experience in capital raising. Thus, here are five tips for successful capital raising. We hope these will help make 2016 a breakthrough year for you. Happy New Year!
1. INVEST TIME IN THE PREPARATION OF WELL-PREPARED TRANSACTION MATERIALS
After the underlying strength of the opportunity, the quality of the offering materials is the next most important item in ensuring a successful capital raise. You can’t get to the dinner table if you can’t get in the door. Funders make an initial assessment of the strength of the management team and the seriousness of the transaction based on the quality of the offering materials. In many cases, funders will dismiss even strong opportunities if the offering materials are poorly prepared. Money managers are inundated with investment requests. The quality and professionalism of the Information Memorandum (IM) and supporting documentation become an easy way to weed-out transactions. If your IM is riddled with typos, doesn’t convey the essence of the opportunity or fails to answer obvious questions that any prudent investor would raise, your deal will quickly be tossed in the recycling bin. At MNCAA, we pride ourselves on this aspect of the capital raising process and numerous funders have remarked on the quality of our documentation even when they have declined to fund the deal. As result, we are sure that when we share transactions with these funders, they will at least take a look. We advise that you adopt a similar approach and invest the time needed to prepare professional transaction materials.
2. STAY FLEXIBLE
At the beginning of a capital raising exercise, you and your financial advisor may have an initial idea of what form the transaction will take. However, as you go to market, you will invariably find that funders have a different view of the transaction. By remaining flexible, you can align the transaction structure with the feedback you receive from the market and increase your chances of success. Additionally, by remaining flexible, you can spot opportunities that weren’t apparent at the beginning of the process. For example, we were engaged to raise debt for a South African leasing company. We eventually learned that the rates available did not make the transaction viable given the client’s then-current cost of capital. However, through discussions with the client, we learned of the client’s intentions to enter the Rest of Africa, where interest rates are significantly higher, and we were able to secure funding for their African expansion at competitive rates.
3. KEEP AS MANY HORSES IN THE RACE AS POSSIBLE
We have found a tendency among sponsors and companies to “cherry-pick” preferred funders. If an advisor is able to generate significant interest, the company/sponsor may suffer from hubris and try to weed-out difficult investors. It is a human tendency to try to minimize work, and courting and responding to each potential funder requires a considerable amount of work and effort. However, it’s never finished until the transaction is funded. Further, the more horses in the race, the more valuable the opportunity seems -- it is human nature to want what people think other people want. Thus, we always advise clients to take all reasonable steps to keep discussions open with all viable funders that express interest.
A corollary to this tip is that difficult funders should be viewed as an opportunity to respond to difficult questions and perfect your pitch. If you are able to respond effectively to skeptical funders, you will soar when you meet investors that are more excited about the opportunity. Remember, the sales person that accepts the first ‘no” will have hungry children. If you are raising capital, you are essentially a salesperson, selling your ideas, your company’s prospects and your vision and ability to capitalize on these.
4. VIEW THE ENTIRE PROCESS AS DILIGENCE
The entire process should be viewed as part of the funder’s diligence of the professionalism and strength of the management team. The initial process is like dating for the funder, where it decides whether it wants to get engaged, i.e., enters into a term sheet. Savvy investors track whether you arrive to meetings and conference calls on time; whether you follow through on deliverables; etc. If you indicate that you will send a document by a certain date, failure to do so raises questions of the reliability and professionalism of the company’s management. We advise clients to “under promise” and “over deliver”. If it is expected that a license will be received at a certain date, it’s better to give yourself some leeway; and if it comes in earlier than indicated, then you have over delivered. It is far worse to create expectations and not meet them. If this happens too often, it can kill a deal.
5. CAPITAL RAISING IS A MARATHON NOT A SPRINT
When embarking on a capital raising exercise be prepared for a marathon. You will likely have to kiss a lot of frogs before you find your funding prince. Remain enthusiastic and remember every “no” gets you closer your “yes”. As a transaction draws on, many sponsors begin to suffer from deal fatigue. We have seen companies miss potential funding opportunities because they were clearly tired of responding to prospects and were suffering from deal fatigue. However, each prospect should be approached with same enthusiasm and commitment as the first prospect, and the tips outlined above should be implemented for each prospect. Hopefully, if you begin the process with the expectation that it will be a marathon, you will be able to get to the finish line.