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The Basics of Mezzanine Finance

Quick Facts

Usage

Mezzanine Finance is generally used in combination with an acquisition, restructuring, or other transactions, to bridge the gap between the total purchase price and the equity and senior debt that’s available.

Costs

High interest rates, mid teens up to the low twenties, including an equity component

Term

3-5 years, often with yield protection

Seeking Mezzanine Finance? Let’s discuss how we can help. ►

Overview

Mezzanine Finance is indebtedness that’s junior to the senior indebtedness but is senior to equity. Mezzanine Finance is usually employed in connection with transactions where senior lenders won’t provide the full amount of financing, and there’s a gap between the amount of equity and senior that can be provided and the ultimate purchase price.

Mezzanine Finance is characterized by high interest rates, from the mid teens up to the low twenties, including an equity component generally in the form of warrants or stock.

The term is typically three to five years in duration. Many mezzanine loans come with what’s known as yield protection which provides that during the first several years it’s not permitted to be repaid unless the full amount of interest that would otherwise be payable during that period of time is also paid with prepayment.

Mezzanine Finance is ordinarily used in the context of transactions such as mergers or acquisitions, restructurings, or other transactions to bridge the gap between the total purchase price and the equity and senior debt that’s available.

There are many mezzanine firms, which range from family offices to private equity related firms and specialty credit funds. They are all characterized by those higher interest rates and the same types of provisions and equity coverage.

Let’s discuss how we can assist you with your Mezzanine Finance. Get in touch with our team below.

Increasing Your Chances of Raising Capital

Preparing for a liquidity event or capital raise is a pivotal moment in a company’s journey. Whether you’re seeking investment, planning a merger, or structuring a public offering, the key to success lies in thorough preparation and strategic decision-making. Investors and lenders want confidence that their capital is in good hands, and this requires more than just a compelling product or service—it demands a well-thought-out plan, a realistic valuation, and a seasoned team to execute the vision.

How to Increase Your Chances of Raising Capital

Planned Liquidity Event

A liquidity event is an event in which the shareholders of a company receive the opportunity to receive liquidity for their position in the company. Examples of liquidity events include:

  • Merger or acquisition
  • Public offering
  • Companies can also build in synthetic liquidity events for investors. For example, redemptions, interest, balloon dividend payments or extension payments.

A minority investor in a private company’s biggest fear is that the company will grow and become successful, but that they will continue to remain private with no liquidity events. If this was the case, the investor would have nothing to show for their stake in the company.

When a liquidity event is planned or structured for the near future, most investors are much more likely to invest in or lend to a company.

Realistic Valuation

You can spend weeks analyzing comparables for your company, but at the end of the day, your investors will determine your company’s value. Additionally, there are always ways to claw back dilution later on. We always say, the most important valuation is the one that get your company funded.

Prepare Company

Regardless of company stage, it’s very important to prepare your company prior to seeking funding. This includes preparing all of your corporate documents, preparing historical financials, preparing financial projections, and putting together an effective and aesthetically pleasing investor presentation.

Wondering what path is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►

Experienced Team

When investors invest capital into a growing company, they are betting on the management team as much as, or more than, they are on the products or services. Knowing how to highlight your management team’s relevant experience can make the difference between an investor passing on an investment and putting in capital.

If your management team does not have very extensive or relevant past experience, it can help to add board members or other advisors who have great experience and can provide guidance.

Personal Relationships

Our approach depends upon accessing our personal relationships. Our experience is that personal relationships are far more likely to spend the time reviewing the opportunity, and more likely to invest.

Let’s discuss how our team can help you raise the capital you need. Get in touch with us below.

10 Questions to Answer Before Approaching Investors

Potential investors will have lots of questions for your company.

Prior to approaching investors, you should be able to answer all of these questions.

What is your business model/how is your company going to make money?

While it is important to focus on your product/service and acquiring customers, it is just as important to figure out your business model. How is your company going to charge for its product or service? Are you selling to the end consumers or to suppliers and other businesses?

Who is your target market?

Knowing who your ideal customer is will help your company focus its marketing and sales efforts.

Who are your competitors?

Almost every company has competitors. You should be able to discuss each of the competitors in your company’s pitch deck or investor marketing materials.

What sets your company apart from and makes your company better than the competition?

In addition to highlighting the competitors, you should be able to discuss the things that set your company apart, and why your company is more likely to succeed.

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►

What are the risks and how does your business model minimize those risks?

Investors understand that every company faces risks. An investment without risk would provide little return.

It is important to be able to acknowledge the risks associated with your company, discuss the factors affecting those risks, and explain how your company plans to mitigate or minimize those risks.

What are your financial projections based on?

Anyone can put together a document showing exponential growth for their company over the next few years. What is far more important is the data behind that growth. Your company should prepare an extensive financial projection model that shows all the variables that drive growth.

For example, if you raise $3M, how would that affect your growth? What if you raised $6M instead?

What prior successes does your management team have?

With most early and growth stage investments, investors are betting on the company leadership just as much as the company itself.

What have the members of your management team done in the past that will help them succeed at this job? What skill sets do they bring to the table?

What is the use of the investment proceeds?

Investors want to make sure that their investments are going to good use. You should have a detailed use of proceeds ready to present to investors.

Will you have to raise more capital? If so, when and how much?

More capital raising = more dilution. Investors want to be able to factor into their investment decision their expected dilution over time.

What is your exit strategy?

In many cases, investors do not make anything on their investments until a company sells or goes public. Having a clear exit strategy will make an investor much more likely to invest.

Planning to raise capital? Let’s discuss how we can be helpful. Get in touch with our team below.

The Different Types of Capital Partners

Depending on a company size, needs, and industry, there are many types of available capital partners. This post outlines several different types of financial partners available to companies.

The Types of Capital Partners

Angel Investors

Angel Investors are generally wealthy private individuals who invest in pre-revenue companies. They are may invest individually or as part of a fund or larger organization or network focused upon seed level capital. Investments from Angel Investors are generally less structured than investments from Venture Capital.

Venture Capital

Venture Capital Investors have funds that invest in companies with specific characteristics such as industry, company size, investment size, and geographic location. Venture Capital investments are generally highly structured products with extensive governance provisions, consent rights, and liquidity preferences. Venture Capital investors will often hold their investments for a set period of time and expect an exit by the end of that period.

Small Family Offices

Small Family Offices are similar to Angel Investors, but may manage their own capital as a fund. A family office manages either a single family’s wealth or a small number of families’ wealth. Family Office Investors are often more flexible and patient than Venture Capital Investors as they are investing their own capital, and generally do not require extensive governance provisions and consent rights.

Friends & Family

Earlier stage companies often raise capital from friends and family. Individuals with whom a founder has an existing relationship are often more likely to invest in a business at the idea or pre-revenue stage than an angel investor. Having friends and family invest in your company can, however, be tricky if things do not go well.

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►

Crowdfunding

Crowdfunding is a way for unaccredited individuals to invest in your company. Crowdfunding can make larger capital raises and exits much more difficult later on due to the large number of unaccredited investors in the company. Crowdfunding a product through a platform like Kickstarter can, however, be a great way to get startup funding without giving up equity.

Investment Banks

Investment Banks actively seek all types of investors, including institutional investors and retail investors. Investment Banks will consider many transaction structures such as private placements or public offerings depending on, among other things, a company’s size and needs.

Alternative Commercial Credit

Alternative Commercial Credit providers are either family offices, funds, or other lenders that invest in emerging growth companies or companies not qualifying for mainstream commercial finance. Compared to traditional bank loans, Alternative Commercial Credit providers are more flexible and offer a variety of transaction structures such as term loans, factoring, receivables financing, inventory financing, among many other structures.

Strategic Investors

Strategic investors are investors in similar or connected industries and may invest in earlier stage companies as a result of their desire to access technology, their desire to build a commercial relationship or other reasons.

Private Equity

Private Equity investors are similar to Venture Capital investors. They too invest in companies based on specific criteria, and generally offer very structured financial products. Private Equity investors generally invest in larger and later stage companies than Venture Capital investors.

Hedge Funds

Hedge Funds are relatively large diversified pools of capital generally investing in more liquid investments, such as stock, bonds, options, futures, and commodities. Many Hedge Funds do, however, allocate capital to what are known as “side pockets”, where a portion of their available investment funds can be utilized for special situations or projects, such as earlier stage, illiquid investments.

Other Funds

There are many funds that are more specialized and which may provide capital to companies prior to or following a public listing. Transitional Capital funds, for example, invest in companies transitioning from being private to obtaining a public listing. Likewise, PIPE (private investment in public equity) and special situation funds may invest in earlier stage companies from time to time.

Let us help you navigate the capital raising process. We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.

How to Build a Virtual Data Room

When contemplating financial, corporate, or M&A transactions, it is important to have a comprehensive data room in place. Any potential partners, whether investors, merger partners, or strategic partners will want to review all of the company’s documentation relating to their corporate structure, operations, and financings.

The Steps to Building a Virtual Data Room

Step 1: Find a Data Room Provider

There are many data room providers out there. Some of the important differentiating attributes to consider are:

  • Permissioning: most data room providers allow permissioning, with which you can grant different file access to different individuals. This can be useful if you have multiple types of potential partners accessing the data room at the same time. Most platforms can also limit file downloads so that certain people can only view files on the web, not download.
  • Auditability: it can be very helpful to know who is looking at what files, for how long, and how often. This can help you gauge the interest of potential partners. For example, partner A may tell you they are interested in pursuing a relationship but they’ve only looked at three files and only logged in once, while partner B may have logged in numerous times and looked at every file in the data room.
  • Pricing: pricing can vary dramatically between platforms. Some platforms charge flat fees while others charge per user.
  • User Interface: the user interface can affect how potential partners view the process of conducting due diligence on your company. If the interface is slow, it may cause potential partners to fatigue of the process. Additionally, it may be important to choose a platform where users granted access to the data room cannot see who else has been granted access.
  • Storage/File Size/File Type Limitations:some data room providers have very strict limitations on the file types and file sizes allowed as well as the total amount of storage available. It is important to understand these limitations prior to selecting a platform.

Here is a list of some of the top rated data room providers from G2 Crowd.

Step 2: Determine Data Room Structure

Having a cohesive data room folder structure can make the process of conducing due diligence much easier. This is the structure we use for our clients’ data rooms:

  • Corporate Documents and Corporate Matters
  • Securities and Securities Matters
  • Financing Documents
  • Properties/Leases/Insurance
  • Intellectual Property; Rights and Permits
  • Other Contracts/Agreements
  • Products and Inventories
  • Regulatory Documents/Litigation
  • Employees and Consultants
  • Financial Information
  • Environmental Matters
  • Miscellaneous

Building a data room? Download our full due diligence list here. This due diligence list is in the form generally used by investment banks, private equity firms, venture capital firms, family offices, strategic partners, and M&A partners.

Step 3: Upload and Organize Files

When uploading files, you should rename files so the user knows what the file is without having to review it. For example, documents with names like “scan” and dates should be renamed to the actual file type. Additionally, consistent filing nomenclature and format should be used.

Text-based documents should be uploaded as PDFs which makes them easier to view. Financial documents should be uploaded as Excel files when applicable. This allows data room users to manipulate numbers to see how changing variables affects financials.

Step 4: Grant and Monitor Access

Once your data room is built, you are ready to grant access to users. Make sure you pay close attention to the permission settings for each user.

If your platform has auditability features, check frequently to see how active users are and what files they are viewing most. If you see that many users are accessing the same files multiple times, these may be critical files or they may have issues.

Let’s discuss how we can guide you through your transaction. Get in touch with our team below.

Raising Capital: Frequently Asked Questions

Whether you’re funding expansion, developing new products, or stabilizing cash flow, the timing and strategy behind raising capital can significantly impact your company’s trajectory. However, there’s no universal answer to questions like when to raise capital, how much to raise, or which investors to approach. The right decision depends on your business’s unique goals, stage, and financial needs.

In this blog, we’ll break down the key considerations for raising capital, helping you evaluate when the time is right and how to prepare. From determining your company’s valuation to choosing the best capital partners, this guide will provide actionable insights to set you up for a successful capital raise. Whether you’re a startup founder or a seasoned executive, understanding these principles can make the difference between closing the funding you need and falling short. Let’s explore everything you need to know to raise capital with confidence and clarity.

The most frequently asked questions by companies raising capital

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.

Download our report Who is the Right Capital Partner ►

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►.

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.

Download our due diligence list here ►

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:

$161K Average funds raised per unique offering

61% Successful offerings

$741 Average investment per investor

5 Things To Ask Potential Investors

When taking in a capital partner, people tend to focus most on the amount of money the partner is investing into the company and the valuation. While these are both important things to consider, there are many other things a company should ask potential capital partners.

Ask your potential investors these five questions

How involved do you like to be in your portfolio companies?

A capital partner’s involvement in a company can vary dramatically. Venture and private equity firms tend to be highly governance-focused, which means that they impose substantial limitations on management autonomy and have substantial additional consent and other rights. Some capital partners want to know every detail of a company’s business with updates multiple times a week, while others want an update once a quarter.

Our experience has been that family offices generally tend be less focused upon governance and want to be kept current on company progress, but prefer not to assume operational or board roles within their investments.

Generally, we prefer to match companies with capital partners that do not desire to be actively involved in the company’s operations. When we work with a company, we do so because we believe that the company’s management team has the ability to lead the company to success. Partners should be able to provide advice when requested, but should not interfere with a company’s ability to execute.

What is your history of conversion vs repayment?

Many capital partners prefer to structure growth capital transactions as convertible notes, rather than straight equity. A convertible note is debt with the option on the part of the investor to convert the debt into equity.

Investors look at convertible notes two different ways. The first group looks at convertible notes as essentially an equity investment with protections in the case that things should not go as planned. The second group look at convertible notes as a loan to the company, with the ability to take advantage of the upside if they should choose to do so.

It is important to understand a capital partner’s plans relating to conversion so as to give the company the opportunity to plan for repayment or equity dilution.

How important is a liquidity event and when?

Liquidity events are events in which company holders have the ability to sell or otherwise capitalize on the value escalation of their position in the company. The two most common liquidity events are public offerings and acquisitions, although contractual liquidity events, such as redemptions, as common as well.

Depending on the capital partner, a realistic plan for a liquidity event may be very important. From the investor’s perspective, their biggest fear is becoming a captive minority holder of equity in your company.

For example, an investor can purchase equity in a company, only to have the management team pay themselves higher and higher salaries, with no plan for a liquidity event. As a result, the capital partner is left with a lost investment and no return.

Do you engage in a lot of litigation?

It is not uncommon for emerging and middle market companies to experience delays when either repaying debt obligations or paying redemption prices. Growth requires substantial capital and many companies inaccurately budget for these events.

Most capital partners are understanding, to a degree, and will afford their portfolio companies leniency as to timing; others have no tolerance for delays and are quick to assert their rights. While many companies would accuse the latter group of “not being team players”, it is an unfair characterization as investors are entities to the benefit of the terms of their investment.

Understanding the character of your capital partners and their history, as well as proper planning and budgeting, can spare you a great deal of angst when payment deadlines are approaching.

What management positions have you held and boards of directors have you served on?

An investor’s past experience can be very valuable to a company. Many times, capital partners have past experience running and growing their own companies or companies.

Whether or not their past experience is in a similar industry to the company in which they are investing, having someone else with experience on a company’s team can help with strategic decisions. An investor can also provide access to influencers, clients, supply chain partners, and additional capital.

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.

Can You Finance Your Accounts Receivables?

For small and medium-sized companies, maintaining healthy cash flow is crucial for sustaining growth and managing day-to-day operations. However, unpaid invoices often tie up critical working capital, creating financial bottlenecks that can slow business growth or even threaten its survival. This is where accounts receivable financing can play a pivotal role.

Accounts receivable financing is a type of loan that allows a company to leverage its unpaid invoices as collateral to secure funding. Instead of waiting 30, 60, or even 90 days for customers to pay their invoices, businesses can access immediate cash to meet their financial needs, pursue growth opportunities, and maintain operational efficiency. For companies looking to finance growth, this option can be a game-changer, providing a steady stream of working capital without taking on excessive debt or diluting equity.

How Accounts Receivable Financing Works

The mechanics of accounts receivable financing are relatively straightforward. A company with outstanding invoices turns to a lender who assesses the value and collectability of those invoices. The lender then provides a percentage of the invoice amount upfront—typically 70% to 90%—as a loan, with the remaining balance minus fees released once the invoices are paid. This process gives businesses the flexibility to continue operations, fund payroll, purchase inventory, or finance new projects without waiting for their customers to settle their accounts.

Accounts receivable financing is particularly attractive for companies that experience seasonal fluctuations in revenue or operate in industries where long payment terms are standard, such as manufacturing, retail, and logistics. By converting unpaid invoices into quick cash, businesses can stay ahead of expenses and focus on achieving their strategic goals.

Alternative Lenders: A Flexible Option

When small and medium-sized businesses don’t meet the stringent credit or collateral requirements of traditional bank loans, alternative lenders offer a viable solution. At ClearThink Capital, we specialize in introducing companies to these alternative lenders, who are often family offices or specialized funds. Unlike banks, which tend to have rigid structures, alternative lenders provide more flexibility in terms of financing structure, interest rates, and repayment terms.

This flexibility makes accounts receivable financing accessible to a broader range of businesses, particularly those with inconsistent cash flow, limited credit histories, or unconventional financial structures. Alternative lenders are typically more focused on the quality of the receivables and the creditworthiness of the company’s customers, rather than on the borrowing company’s balance sheet.

How ClearThink Capital Works

At ClearThink Capital, we take a unique approach to helping businesses secure accounts receivable financing. Unlike some competitors, our compensation is generally derived solely from our client companies, not from referral fees or commissions from lenders. This means we are fully aligned with our clients’ best interests and incentivized to secure credit financing on the most favorable terms.

Our goal is to ensure that our clients not only gain access to the funds they need but also benefit from financing structures with limited or no covenant restrictions. This approach allows businesses to operate with greater financial flexibility and confidence.

What Accounts Receivable Lenders Look For

When evaluating whether to finance a company’s accounts receivables, lenders consider several critical factors. Understanding these can help businesses prepare and position themselves as attractive candidates for financing:

1. Contracts and Purchase Orders

The validity and enforceability of the contracts or purchase orders tied to the receivables play a crucial role in a lender’s decision-making process. Lenders will often review these documents to ensure there are no ambiguities or risks that could hinder the company’s ability to collect payment. Clear, well-drafted contracts increase the likelihood of approval and can also lead to more favorable financing terms.

2. Creditworthiness of the Obligors

One of the most important considerations for an accounts receivable lender is the creditworthiness of the customers who owe the invoices. Even if the borrowing company has a limited credit history or operates in a high-risk industry, having reliable customers with strong credit profiles can significantly boost the chances of securing financing. Lenders may even offer lower rates if the obligors are large, reputable companies or institutions.

3. Time to Payment

Accounts receivable lenders typically finance invoices with payment terms of up to 90 days. Invoices with shorter payment cycles are generally seen as less risky, which can result in faster approvals and better rates. For businesses with longer payment terms, it’s important to evaluate whether their receivables fit within this time frame before seeking financing.

4. Existing Liens

If the company already has liens on its assets, this could impact the lender’s ability to finance its receivables. However, many alternative lenders specialize in structuring accounts receivable lines even for businesses with existing liens. Companies should work closely with advisors like ClearThink Capital to identify lenders who can navigate these complexities and craft a workable solution.

Advantages of Accounts Receivable Financing

There are several reasons why accounts receivable financing has become a popular option for businesses looking to improve cash flow without incurring additional debt or diluting equity:

  • Improved Cash Flow: By converting unpaid invoices into immediate cash, businesses can cover operational expenses, invest in growth initiatives, and avoid financial disruptions.
  • No Equity Dilution: Unlike raising capital through equity financing, accounts receivable financing allows business owners to maintain full control of their company.
  • Fast Access to Capital: The approval and funding process for accounts receivable financing is typically much faster than traditional bank loans, making it ideal for time-sensitive needs.
  • Flexible Financing Options: Alternative lenders offer customizable terms to meet the specific needs of each business, providing greater flexibility than banks.
  • Growth Without Debt: Since accounts receivable financing is based on existing invoices, it allows businesses to grow without taking on long-term debt obligations.

Is Accounts Receivable Financing Right for Your Business?

For businesses with cash flow challenges due to delayed customer payments, accounts receivable financing can be a lifeline. However, it’s essential to carefully evaluate your company’s financial situation, customer base, and specific needs before pursuing this option. Partnering with an experienced advisor like ClearThink Capital can help you navigate the process, identify the best lenders, and secure favorable terms that support your growth objectives.

Accounts receivable financing offers a powerful tool for businesses to unlock the value of their unpaid invoices and fuel their growth. Whether you’re dealing with seasonal revenue fluctuations or need immediate cash to seize a new opportunity, this financing solution can provide the working capital you need to move forward with confidence. Contact ClearThink Capital today to explore how accounts receivable financing can support your company’s success.

The Venture Capital Reality: Is It The Right Path To Capital?

The Myth

For many years, the dream of receiving financing from a venture capital firm, whether from Silicon Valley, New York, or elsewhere, has captivated entrepreneurs and has been one of their central focuses. The image of plentiful venture capital readily available to creative entrepreneurs has been cultivated by the industry itself, as well as by the media. In reality, the image is a mirage or myth.

According to the American Venture Capital Association, the NVCA, in 2017, venture capital firms deployed an aggregate of $84.2 billion into 7,783 companies. While this fact on its face appears impressive, this represented the lowest number of companies since 2012 and includes both initial investments and follow-on investments. Indeed, the NVCA notes that overall there were fewer transactions taking place, that consummated transactions were at higher values and that companies were later stage, e.g., more mature. Specifically, 2017 saw a 6% decrease in terms of aggregate deals over 2016, yet a surge in total deal value of 16% year over year.

The Reality

Start-Up.co reports that 565,000 start-up companies are launched monthly in the United States and that the average funding of these companies is $78,406, resulting in aggregate funding, whether seed, early, growth, or late stage, and irrespective of funding source, of $531 billion per annum. Startupshepherd.com estimates that, of these companies, only 1,400 per year receive funding from venture capital firms. For purposes of illustration only, based on the foregoing, if we assume that 90% of all start-up companies in a given year would for various reasons be ineligible for venture capital investment, venture capital firms would still only be financing approximately 0.2% of eligible start-up companies in any given year. Indeed, Forbes.com notes that “Less than 1% of startup businesses actually get their financing from VCs or angels.”

Even with respect to the firms that do receive venture capital investment, the question should be “Why are you raising venture capital in the first place, instead of another capital structure?” Forbes.com

Nothing mentioned in this post is intended to be offensive to venture capital firms. ClearThink maintains active relationships with many firms and has advised numerous clients with respect to venture capital transactions. That being said, all entrepreneurs (ourselves at ClearThink included) need to recognize and plan for the reality that, in all likelihood, venture capital will not be in their future.

So …

The companies not financed by venture capital firms are obtaining capital from somewhere. But where?

  • Friends and Family
  • Angel Investors
  • Crowdfunding
  • Strategic Investors
  • Private Equity Firms
  • Investment Banks
  • Alternative Commercial Credit

Each of these capital sources have distinct advantages and disadvantages.

Non-Venture Fund Sources of Capital

Family and Friends

Family and friends tend to be the least sensitive to valuation and investment terms and tend to be the most patient. That being said, failure of an investment to succeed can result in some awkward family and social gatherings.

Angel Investors

Angels tend to be “accredited investors” under the Federal securities laws and provide capital and expertise to early stage companies. FundersandFounders.com estimates that the U.S. angel investor universe is approximately $21 billion, and that the average investment is approximately $37,000, as opposed to approximately $7.5 million for venture capital firms. As a result, angel investors make investments into far more companies annually than do venture capital firms. Score.org estimated that in 2014 there were approximately 268,000 angel investors in the United States.

Crowdfunding

Crowdfunding is a relatively recent structure created by the JOBS Act in 2012. In short, crowdfunding contemplates small investments by large numbers of generally unsophisticated individuals. According to the Securities and Exchange Commission, or SEC:

“With Regulation Crowdfunding, the general public now has the opportunity to participate in the early capital raising activities of start-up and early-stage businesses. Anyone can invest in a Regulation Crowdfunding offering. Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income.”

Crowdfunding has had a lackluster history to date. Based on the SEC’s whitepaper, of 187 crowdfundings conducted, 24 were withdrawn. The remaining 163 sought to raise an aggregate of $101.1 million, but raised in the aggregate only $8.1 million or 8% of the amount sought. Further, of 104 crowdfunding offerings with terminal dates during 2016, 18 were withdrawn and only 33% raised their minimum target amounts.

As a result of the large number of resulting stockholders following a successful crowdfunding, companies availing themselves of crowdfunding have experienced substantial difficulty in raising additional capital in subsequent rounds, and institutional investors have tended to shun companies which have raised money through crowdfunding. In addition, as crowdfunding investors are generally unsophisticated, valuations utilized in crowdfundings have tended to be over-inflated, resulting in substantial down-rounds subsequently, which has the potential to result in investor resentment and potentially litigation.

Strategic Investors

Strategic investors are companies in the same or related industries or markets to the company seeking capital. Transactions are often structured to establish an ongoing business relationship between the investor and the recipient of the capital and have tended to have higher valuations than pure venture financing, especially reflecting adjustment provisions built into venture capital documents.

Private Equity Firms

Certain companies will appeal to private equity firms. Private equity is similar to venture capital, but focuses on later stage companies and can seek to provide control investments, minority investments, growth capital and other structures.

Investment Banks

Investment banking firms aggressively seek emerging growth companies in search of financing. Depending upon, among other things, the company, its industry, and market conditions, transactions can be structured either as a private offering or a public offering, and can range from convertible debt securities to pure equity. These offerings are highly regulated, although institutional interest for the right company and the right transaction remain high, and certain funds, known as transitional capital funds, have specialized in providing private capital to companies seeking public offerings in the near future.

Alternative Commercial Credit

For companies which qualify, there is a large community of family offices and funds which specialize in the provision of commercial credit to companies which would not otherwise qualify for bank financing. These firms can be creative in structuring lines of credit, asset-backed lines, purchase order financing, equipment financing, and other forms of commercial credit.

Is raising capital in your future? Let’s discuss how we can be helpful. Get in touch with our team below.

What is Due Diligence?

Perhaps the most important aspect of any corporate transaction, whether a private offering of securities, a public offering, a merger or acquisition or otherwise, is what is known as “due diligence”.

“Diligence is the mother of good fortune.” – Benjamin Disraeli

The Basics of Due Diligence

Due diligence requires the review of all material documents and other information with respect to a company in order to ensure that any disclosures which a company makes, whether in offering materials or an agreement, are true and correct and satisfies any applicable standard of liability.

What does “material” mean?

The Supreme Court has held that something is “material” if there is a substantial likelihood that it would be deemed important by a reasonable investor in making a decision to purchase or sell a company or its stock or as to how to vote their shares.

A due diligence review will inform you as to the material attributes of a company or person, including their commitments, contracts, and liabilities, their business, prospects, financial condition, and results of operations.

  • Does the company exist?
  • Who are the owners?
  • How does the business work?
  • Who are its customers?
  • How do you know that a company has the contracts it claims?
  • How do you know if the projected financial results are based upon accurate and reasonable assumptions?
  • What are the liabilities or contingencies?
  • The answer to these questions, as well as many more, lies with effective due diligence.

Due Diligence for Public and Private Securities Offerings

Securities offerings are governed federally by the Securities Act of 1933, as amended. Pursuant to Section 11 of such Act, as a general matter, if any disclosure with respect to an offering of securities contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the issuer of such securities, the officers and directors of the issuer, partners in the issuer, the investment bankers conducting such offering, and professionals retained by the issuer with respect to such offering, are subject to liable for such material misstatements or omissions.

While there are no defenses to the foregoing available to the issuer and only limited defenses available to the members of the board or executive officers of the issuer, the other parties listed above may rely upon what is known as the “due diligence defense”.

The Act provides that it shall be a defense to such liability if such other party had, after reasonable investigation, e.g., a “due diligence review”, reasonable grounds to believe and did believe that the statements in such disclosure were true and that there were no omissions to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

Due Diligence for Mergers and Acquisitions

In the context of mergers and acquisitions, due diligence serves the role of fact finding, disclosure checking, and confirmation, e.g., that the representations and warranties set forth in the operative transaction documents are true and correct.

While the standard of liability in this context can be modified by contract, a due diligence review ensures that the purchaser or purchasers are receiving what they believe to be correct.

Importance of Due Diligence

The failure to engage in a complete and effective due diligence process can be catastrophic and result in substantial litigation.

Below is a list describing some of the greatest due diligence failures of all times and some of the consequences that resulted.

ClearThink Capital’s Due Diligence Process

Any due diligence process is based upon organization: the company subject to the review will need to organize its material documents and descriptions of undocumented material facts so as to provide full disclosure in all material respects.

Although most companies can accomplish this process with little disruption, companies that have not kept complete and organized records and documents may be required to dedicate substantial time to establishing an organization process and adhering to the process.

ClearThink seeks to make the due diligence as easy and simple as possible and provides a form of initial due diligence request list that reflects the organization expected by transaction participants and provides a structure for the categorization of documents.

In order to expedite the transaction process and assure full disclosure, ClearThink does the following:

  • Dataroom: ClearThink will establish for each transaction an organized dataroom in the form expected by the transaction participants and corresponding to our initial due diligence request list.  ClearThink reviews and remediates the due diligence of its client in advance of disclosure to others
  • Report: ClearThink will review all due diligence materials provided by its client, as well as other parties to the contemplated transaction, will document its review, and will make suggestions regarding, and endeavor to assist with, remediation, amendments, or explanation required in order to provide full, fair and accurate disclosure
  • Gatekeeping: ClearThink will act as the gatekeeper to the dataroom, providing access only with the consent of the relevant parties, thereby minimizing the possibility of the compromise of sensitive data

As a philosophical matter, ClearThink is a strong proponent of full disclosure of both positive and negative information.  That being said, proper management of the due diligence process will assure that corrective measures are completed prior to disclosure to third parties, thereby maximizing the probability of a successful transaction.

ClearThink and its principals have extensive experience in the management of due diligence reviews, including reviews relating to 240 public offerings raising an aggregate of $9 billion of public debt and $6 billion of public equity for companies such as The News Corporation Limited, Fox, Comcast, TCI Communications, British Sky Broadcasting, and Liberty Media, among others, as well billions of dollars of mergers and acquisitions.

Planning a corporate or financial transaction? Let’s discuss how we can be helpful. Get in touch with our team below.