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How To Raise Capital To Help Grow Your Business

Written by: Mikael Meir

Article Overview: Learn important insights into the different options and approaches to raising capital for your business. When raising capital it is critical to understand how investors view your business as well as the different types of investors, and what each investor type is looking for. Then you can prepare properly and not only improve your probability of raising capital, but ensure that the money you raise comes at the best possible price, and on the best possible terms.

How To Raise Capital To Help Grow Your Business

Raising capital can be one of the most difficult tasks a company executive has to face. The multitude of sources of capital and types of funding, and the scrutiny and critical analysis they perform on your business can be energy draining, time consuming, intimidating and even discouraging. It’s a complex world. However, like most things in life, once the learning curve is gained, corporate finance can be fascinating and provide critical fuel for your continued value creation.

There are many ways to raise capital, however, the key to being successful, whether simple bank financing or venture capital investment, is being prepared and understanding your audience. When you package the securities of your company, you are essentially creating a product (a corporate securities offering with specific features and benefits) for a specific market (a funding source with an appetite for your specific securities offering). Your company and its securities will be valued based on the perceived probability of you being successful in meeting your business goals and providing a return on capital specific to the type of funding source.

Therefore, it is absolutely critical to have a growth plan that highlights 1) how uses of new capital legitimately support increased sales, market share and equity; and 2) how all associated risks will be minimized by a well thought-out business strategy and plan.

Because raising capital, or selling financing, essentially mimics any product sale to a customer, it is critical to understand your customers’ needs and desires. The critical understanding is that the investor’s perceived business risk and timing of liquidity (when the investor gets their capital and required return back) often determines the valuation of your company, which determines the structure of the investment and how much of your company you exchange for the financing.

Which Capital Source Is Right For You?

When assessing how to raise capital for your business, the capital raising process should be looked at from both a strategic and a financial perspective. A strategic investor (an experienced individual, corporate supplier, large customer or strategic partner) can offer growth capital with a predisposition toward creating significant increase in the equity value of your business. Surprisingly, many of these exist, but the downside can be a loss of autonomy, and the need to play to the interests of the strategic investor.

Alternatively, a financial investor is looking for a rate of return in exchange for funding. From the company’s perspective, the analysis could include costs associated with various sources of capital with a view toward both minimizing costs for your company, as well as understanding the risk-return requirement from different sources of capital. For example, conventional bank financing is the cheapest cost of capital, looking for 6% – 12% in annual interest. Mezzanine/sub-debt lenders are typically looking for between 12% - 25% in some combination of interest income and equity. And finally when raising venture capital or private equity be prepared to show the investors how your company will return between 30% – 100% annually along with a achieving a liquidity event (merger, sale or IPO). When raising equity capital, angels and “family and friends” are also a great source of funds, with costs varying between bank financing and venture capital rates.

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Article Tags: bank financing, business goals, business risk, business strategy, capital source, company executive, corporate finance, corporate securities, critical analysis, customers needs, learning curve, liquidity, market share, multitude, return on capital, scrutiny, specific securities, understanding your audience, value creation, venture capital investment



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How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!
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