3 Step Capital Raising Strategy

The first thing any business needs to do when capital raising is to carefully select the right advisor, as I’ve explained in a previous post. (Choose Your Advisor Carefully)

The second thing is to put good management in place to look after the business, as the capital-raising process can take up to six months and become all-consuming for a business owner. I’ve seen too many businesses fall off the rails when owners become distracted by the search for investment capital.

So, having carefully selected an advisor and knowing your business is being well managed in your absence, you should be ready to begin.

Your advisor should take you through an overview of the capital raising strategy but essentially you have to:

1.       Prepare a solid business model

2.       Prepare an investment proposal incorporating the summarised financial position as calculated in step  1

3.       Present the report to potential investors

Simple enough, but step 1 and step 2 take considerable time to prepare, edit and prepare again.  Never call your final version “final” – take it from me – it never is!

Step  1 – Preparing a Business Model

Underpinning all the investor reports, there needs to be a  detailed “three way business model” going out three years, which  supports the summarised forecasts and charts that you are going to include in the investment proposal in step 2.

A three way business model is a financial forecast that projects and links the profit and loss for three years, the business’s cashflow and the resultant balance sheet. Such modelling can be difficult to do but your accountant (or perhaps your advisor) will be able to complete this for you.

Business modelling requires your direct involvement with your full agreement of the assumptions underpinning the forecast.  If you’re successful in raising the capital sought then the investor will hold you to these forecasts (and that’s not unreasonable). That’s why these forecasts are critical.

Step 2 – Preparing an Investment Proposal

Investors have many opportunities to invest, so your proposal MUST be compelling, concise and easy to read. It should:

  • Be no longer than 15 to 20 pages (no death by PowerPoint presentations allowed!)
  • Explain the company’s product and include good photos
  • Include an organisation chart highlighting key personnel, the business segments they oversee and roles they carry out
  • Outline the company strategy and explain why it makes sense in the market that you are serving. Make sure you clearly outline the “channel to market” – it should explain why customers will be drawn to you and why the “channels” are deep and long lasting.  In the verbal presentation to the investor this is where you should be most articulate and passionate.
  • Demonstrate through charts the company’s revenue growth, EBITDA and net profit tracked back for at least the last two years (good charts always add to the wow factor) and then add on the forecast period.
  • Summarise  in the  proposal, the profit and loss forecasts for the next 36 months (split by half year) and add the critical assumptions (particularly revenue  – price rises, new products and improved volume efficiencies should be highlighted)
  • Show the balance sheet for 36 months and split by half year.
  • Show the forecast cash flow (again, 36 months and split by half year) at high level – make sure this one is thoroughly validated – it’s possibly the most critical page of the presentation
  • eThe The last page can ask for questions and finish with two simple words “Thank you”.

Step 3 – Presenting an Investment Proposal

When presenting to a potential investor, make sure you are open, friendly and confidently able to speak to your proposal.

Know the proposal backwards and try to anticipate any questions. In the meeting don’t just rely on effortless charm and verbal gymnastics – people like to buy, but they don’t like to be sold to, so don’t overdo the sales pitch.

Don’t make the meeting too much longer than an hour (except if the investor keeps asking questions), and leave a copy of your investment proposal with them. After that, leave it to your advisor to follow it up.

Finally, trust me, it becomes easier with practice – at the end of the capital raising strategy you will be a pro.

Happy hunting!

Steve Hogan is Client Director at Vantage Performance, a profit improvement and turnaround specialist. Vantage Performance is a member of the Turnaround Management Association Australia and winner of the 2008 and 2009 “Turnaround of the Year” awards.

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