When is the right time to raise capital?
There is no single right answer to this question. Some companies may be raising capital for growth while others may be raising capital to stay in business.
Ideally, a company should raise capital when that injection of funds will allow them to significantly increase the company’s valuation and growth. If a company keeps raising capital without increasing the valuation, the founders and existing equity holders will be increasingly diluted and could end up owning very little of their company.
How should we value our company?
A company’s valuation should be based on comparable companies. One can find similar companies with similar transactions in the past and garner revenue and EBITDA multiples from those transactions.
For example, there are many third party data services like PitchBook that provide valuation metrics for different industries. You can also research public companies in the same industry and value your company based on their enterprise value/revenue multiple. It is important to note that privately held companies tend to trade at a discount to publicly held companies.
Some factors that affect valuation multiples are: growth rate, profitability, and debt.
We say that the most important valuation is the one that gets your company funded. There are ways to allow management to earn back some of the dilution over time through methods like option plans and claw backs.
How much capital should we raise?
The easiest answer to this question is as much as you need. You don’t want to raise so much that you are giving away more equity or taking on more debt than necessary. On the other hand, you do not want to constantly worry about capital, and, as a result, be distracted from operating at fully capacity.
What types of investors should we seek?
Different types of investors provide different value to companies. For example, Venture Capital and Private Equity investors tend to be more hands on than Family Office investors.
If your company is looking for significant guidance as well as capital, venture capital and private equity investors might be the right partners. The downside of the guidance is that it comes with increased control over the company’s operations.
Family office investors tend to have many investments and often run their own businesses as well. They are generally less interested in being involved in a company’s operations and are more interested in being passive investors.
Different types of investors are also interested in different sized companies.
Wondering what is best for your company?
We are always happy to discuss the funding and growth options available to a company.
How many investors should we approach?
It’s always better to approach a number of investors. We like to say, “it’s not closed until it’s closed”. Approaching multiple investors may also get you different term sheets, some with better terms than others.
Even if your company prefers one investor or another, there is usually not a reason to reject an investor until the funds are in your bank account.
Should we raise debt or equity?
There is no simple answer to this question. Debt can be great when the increase in revenue or valuation from the additional funds is so great that paying back the debt won’t be an issue for the company. Debt financing can also be great to finance receivables, purchase equipment, finance a purchase order, or to finance an acquisition.
Equity financing is often preferred by companies because there is no need to pay back the investor. Equity financing does however come with a much greater amount of control. Equity holders are also diluted by bringing in additional equity capital, which may not be preferable if an acquisition or exit is in sight.
Equity financing is also used when a company has existing debt or there is something preventing them from taking in additional debt financing.
Investors often structure their investments as a hybrid between the two, such as convertible notes. These types of structures protect the investor in the event of failure, but allow them to take advantage of the upside in the event of success.
What value does ClearThink Capital provide to companies raising capital?
When we work with companies, we bring our decades of capital raising experience to the table. We work as our client’s advisor and assist them by:
- Conducting a full due diligence to remediate any potential issues prior to meeting with investors
- Introducing the company to potential capital partners, including investment banking firms
- Structuring the transaction to be client advantageous
- Advising as to transaction terms
- Preparing the transaction related documentation
Do we need an audit?
While some investors will require an audit, many will not. Venture capital, private equity, and strategic investors are more likely to require an audit, while family offices are less likely.
Do I need to put together a data room?
Almost all investors will require the company to put together a data room with all their corporate documents. It is best to put the data room in place prior to starting the capital raising process.
How long does the process take?
The amount of time it takes to raise capital can vary dramatically, but the timing is mostly dependent on the company. To ensure the quickest capital raising process, make sure to:
- Create and populate a data room prior to beginning the process
- Respond quickly to document/data requests from investors
For most companies, the capital raising process takes three to six months.
Should I raise capital through a crowdfunding platform?
While platforms like Kickstarter and Indiegogo can be great for crowdfunding products, we generally advise against raising capital through equity crowd funding. In 2018, the average crowd funding investor invested $741. As a result, companies tend to have thousands investors to manage.
Additionally, having such a large number of investors turns off most institutional investors, and will make it much more difficult to raise large amounts of capital in the future.
Taking a look at the statistics from 2018 crowd fundings:
Let us help you navigate the capital raising process.
We are always happy to discuss the funding and growth options available to a company. Please use the contact form below and a member of our team will be in touch shortly.