You want a lot of information on how the investment can be spent when you are an investor being approached to provide a growing corporation with millions of dollars in cash.
There’s a fairly strong understanding about how much funds they want and a sense of where they’re trying to invest the dollars and provide the business with the biggest effect,” says Michael Paparella, managing director at Signet Capital Advisors. “I’d guarantee 90% of the capital-raising transactions we’re going to implement. But with some precision, they have not nailed it down. That is the aspect that builds confidence in the investor’s eyes.
Paparella has more than 20 years of expertise in investment management, development of strategies and M&A, as well as middle-market and big cap enterprise capital raising.
“Investors want to know the purpose and use of those funds with a fair amount of precision,” Paparella says. “That will help determine whether it is the type of investment that will provide an acceptable return or not.”
Smart Market Dealmakers speak to Paparella in this Dealmaker Q&A about the three things any investor needs to hear before offering funding and what to think if you’re leery about giving up your company’s equity.
Before trying to collect money, what do businesses understand ?
When thinking about making an investment, there are three characteristics that any investor can look for. If it’s a capital raising or someone seeking to sell the business, this is real.
They will evaluate the consistency, scope and breadth of the leadership team. They will analyse the company’s previous financial results or the potential whether there is a fund raising for a start-up to see the company’s expected financial output. The third element is the potential for growth that the business provides.
These are not only the three most important points to remember, but they are also potentially the most important ones in that order.
Investors will almost often aim to analyse the management team so they invest in the team rather than an idea or a company. Many businesses do not have a well-defined three-year growth plan, whether it is a start-up or an organisation that has been in business for decades, where they can articulate how the corporation, the markets, geographies, goods and services and consumer categories can continue to expand. It is very important to be able to nail the plan on a capital raise for a startup. It is something that brings value to the company while you are selling the company. At the end of the tunnel, it encourages investors to see the light of how the business can get from where they are now and where the investor needs to move them in the future.
How do you know the amount of money that you need ?
The quantity you need is contingent on the target. The issue with spending more than you need is that you’re going to give away more resources than you need. Usually, if you don’t lift enough and still require some, it’s not a question. When you can make improvements, the business gets more profitable as you make progress. Therefore you’re giving up less equity for the same dollar sum. If the organisation has not done as it said it will on the initial capital raising round the possible risk of not raising enough capital may become more difficult to eventually raise the capital you need. That’s undoubtedly a juggling act.
It’s both science and art. The science part is that you start with a three-year plan and then layer in a financial model that reflects the strategy to classify all the expense components and scale it for development to decide what you think the need is going to be. The art aspect of it is where you take a step back and just look at it from a gut instinct and see if it makes sense. You will decide at that point that you do not need as much as you thought, so you see in your financial model that you can probably hit a cash flow generating point in month 18 that will self-fund for the remaining 18 months everything you need. So you do not need 36 months of money.
What if it scares you for selling equity ?
You can also be profitable if you don’t raise the money and may be able to accumulate the amount of financing you need steadily, making strides before you get to the point that the business will self-fund. You don’t give up much equity in that situation and you remain in charge of the company. That’s presumably the way to go if that’s important to you. The bad part is you’re not going to evolve as easily. You face potential competition that could be avoided by business speed.
You’re in the market easier if you collect a lot of money upfront and you offer up any of a lot of equity for that capital. You have a greater chance of growth and a greater likelihood of being a bigger organisation than you will achieve on your own. You have more money and you have outside experience that comes from institutional investors for that capital. Personal choice and risk aversion really boils down to it.
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