8 KEY POINTS TO CONSIDER IF YOU ARE RAISING EQUITY FINANCE
Ownership determines outcomes. So to start with, consider very carefully whether you really need to raise external equity or if there is a better solution. Taking external equity into your business is a big step, with potentially irreversible consequences.
However if you have decided that it is the right way to boost your growth, then listed below are some issues to consider before taking the plunge. So, if you are comfortable with going down the equity route, what are the important issues?
Plan your fundraising carefully and prepare meticulously for a rigorous process. Being organised and fully prepared underpins trust in your organisation and make sure that you can clearly articulate your basic business model. You only get one chance to make a good, first impression.
Think longer term
Be clear about the amount and purpose of your fundraising. Set out clearly how the funding will be used and allow for contingencies. Be realistic but don’t look to raise too little.
Think about the exit
From the outset it is important to articulate how you, and your investors will get their money back. Research your potential investors carefully to ensure they are a suitable fit for your business. Consider their “sweet spot” in terms of objectives, preferred investment size, sector preferences and investment style. Also, think about what you want them to bring to the business beyond money?
Make sure your management team is up to scratch
If you identify weaknesses in your line-up, make the necessary changes or be prepared to explain how these will be addressed. No business is perfect, so be ready to describe the challenges and weaknesses of your business and how you plan to overcome them.
Hire experienced advisers who care
This may be your first equity fundraising, but it won’t be theirs. Listen to their advice to help you achieve your goals. Understand your financial position and forecasts. Be familiar with regularly used phrases and the financial ratios that are important in your business. It’s not enough to leave this to your finance team or your advisers.
Use a recognised methodology to value your business
Work with your advisers to establish the value of your business. Use a recognised methodology (asset based valuation, profit or turnover multiple or discounted cash flow) and don’t be tempted to overvalue your ideas and achievements. Be fully prepared for investors to carry out detailed commercial, financial and legal due diligence on your business.
Remember to do your own due diligence on your preferred investors. Talk to their other investee businesses to find out how they interact with and help them. Put an investment agreement in place to document what rights you and your new fellow shareholders will have to influence both the operations of the company and your eventual exit.
Adopt the right Tone of Voice
Lastly, remember that investors back people. Be likeable and believable and don’t stray into the realms of overconfidence or arrogance.