Preparing For A Successful Capital Raise - Common Pitfalls And Solutions

Companies need capital to cover their day to day operations (working capital) as well as for their growth (hiring, expansion, new equipment, etc.) In this article, we will go over how to prepare for a successful capital raise, common mistakes and solutions as well as some important tips to keep in mind.

1. Best time to raise capital is when you don't need the money.?

A common mistake we see often is that entrepreneurs only go to investors or capital markets only when they are in dire need for a capital injection. This puts entrepreneurs in a difficult situation where the business survival is dependent on investors coming in for the rescue.?

Instead:?

1. Create a capital/funding plan with contingencies.?
2. Set up lines of credit/funds with investors that you could tap into.?
3. Ensure you have access to capital to take advantage of opportunities that suddenly arise.?

2. Understand your cash flows:

80% of small businesses fail due to mismanagement of cash flows. We see a lot of entrepreneurs focusing on their capital needs for growth and expansion (new hires, new equipment, investments, etc.) but they don't account for delays in receivables and maturity of payables.?

Instead:?

1. Build a monthly cash flow projections and account for potential delays in receivables.??
2. Use credit lines or financing when needed/possible and reserve cash for arising opportunities.?
3. Keep a close eye on your profitability on the company level (including all overheads and fixed costs).?

Frequently monitor your:?

1. Burn Rate: the rate uses its cash. Burn rate = expenses - revenue
2. Cash Runway: How long you have until you run out of money.?Runway = Bank balance / Avg burn?
3. Growth Rate:?The rate at which your revenue is increasing.?Growth Rate = Revenue (2nd month) - revenue (1st month) / revenue (month 1)?
4. Survive Test:?do you have enough cash to reach profitability??and how much cash you need to become profitable?

3. Prepare your own Financial Model & Terms:?

We commonly see entrepreneurs relaying on investors to provide them with assessment on investment terms (e.g. investment amount, valuation, tenor, affordability, etc.). Most investors, whatever their level of sophistication is, won't have the deep knowledge the entrepreneur has on their business and its requirements.??

Instead:?

1. Build your own financial model and projections
2. Identify your capital needs based on your own models.?
3. Identify what you could afford to repay investors (valuation or interest).?

4. Know when to stop selling (facts vs projections):??

It is quiet common for entrepreneurs to lose track of what the vision/goal/projections are and what is actually available today. Investors are typically interested in the future but are more focused on understanding how what is available today could potentially lead to the projected future. Too much focus on projection usually leads to investors believing that there is not much available today and might walk away or account for additional risks in their terms/offer.???

Instead:?

1. Focus on your key differentiators today (team, processes, know-how, track record, etc.)?
2. Clearly differentiate between facts and projections in your marketing materials, and be conservative with projections.?
3. Provide concise fact based answers to investors' questions during due diligence.

5. Approaching investors before you’re truly ready?

This?leads to premature burnout and reputational damage.?

Instead:?

Be ready with Data Rooms, try to keep a Data Room up to date and populate on a day-to-day basis, so that you don't lose time once you decide to raise capital.

Ensure you have the documents & information necessary to present to potential investors during the pitch and due diligence processes. For example:?Executive summary, company structure, business and marketing strategies, profit and loss statement, balance sheets, tax returns, bank statements and legal documents

Also, make sure you:?

1. Try to keep a few investors engaged at the same time to build a competitive spirit. Do not put everything on one investor or they will sense it and use their leverage in negotiations.
2. Understand the market, and don't anchor yourself or investors with numbers that might come back to bite you. Be flexible - you might not always get what you want.
3. Understand your business and can sell the strategy simply in 1 minute. It has to be clear, crisp and easily understandable.

Raising capital is a crucial activity for many companies on the path to long-term success and stability. While the specific context and objectives can vary greatly from one business to the next, the general goal is clear: raising capital can support a company as it seizes opportunities for growth, development and continued relevance in the future.