capital raising

 


The Traditional Approach

The capital raising process traditionally focuses on presenting the existing strategy to potential investors. Organisations often find capital is difficult to raise without understanding why. The most common reason is that their business strategy, structures, team and financial projections are not sufficiently robust to attract investment. This approach is often unsuccessful and wastes time for everyone involved. Worse still, if the process is successful in raising capital, the chances of a successful outcome are reduced with an inferior and untested strategy.



XSallarate Approach

 

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XSallarate takes a different approach to raising capital which involves optimising short term operational performance, ensuring there is a credible accelerated growth strategy and finding the most synergistic investors. The key steps are as follows:

Preparation

  1. 'Strategy hardening' tests the current strategy to determine a strategy for truly accelerated growth that excites and motivates all stake holders in a unified direction

  2. Financial modelling to extract and model the true drivers of business growth which then underpins investment returns

  3. Implementation of tactical operational improvements to ensure KPIs are tracking sharply upward and to rapid-test key strategic hypotheses.

  4. 'House-keeping' ensuring all elements of the business are in order such as shareholder agreements, balance sheet items, ASIC records, ESOPs to allow simple, hassle free due diligence and deal closure

The preparation process typically takes 2 to 4 weeks and positions the business ideally to expeditiously secure capital from a synergistic investor at the right valuation.

Capital Raising

  1. Lock in the investment proposal – required capital, valuation, terms, timing

  2. Develop a succinct Investor Pitch Deck

  3. Build out the list of target investors to approach from:

    • XSallarate's list of over 1,000 investors and

    • Strategic mapping of the industry to identify synergistic parties to approach

  4. Approach the target investor list to qualify interest

  5. Close the investment including overseeing any due diligence, legal and accounting requirements, term sheets and shareholder agreements

Follow-up

  1. Ensuring all loose ends of the investment are tied up (ie: documentation, ASIC)

  2. Assisting to ensure the plan is implemented

 

Overview

For business owners, the capital raising process can be fraught with challenges. Through taking an ill-guided approach, it is very easy to waste significant amounts of time. Avoiding some of the common traps is crucial:

  • Not giving up too much equity at an early stage in the venture: where a high valuation cannot be sustained, it is often better to accept the lower valuation and take less capital to reduce dilution

  • Not under-valuing the business: low valuations can cause too much dilution and can also send the signal that the team does not have the commercial wherewithal to value their company appropriately and in turn may not have the vision to make a truly valuable business

  • Not over-valuing the business: the main risk is that the investment round takes far too long or may never succeed with significant opportunity cost. It may be better in these cases to take less money at a lower valuation and to close the round quickly and just “get on with it”. A follow-up round can then be done at a higher valuation once some of the key ‘proof points’ have been demonstrated

  • Taking enough money: once a business can sustain a larger valuation, raising amounts that are insufficient to really address the market can say to an investor that the team really do not have a ‘killer instinct’ and that they are either unrealistic about what can be achieved with less funding or are not visionary.

  • Not being too quick to take ‘dumb money:’ money is not ‘money’ and a capital raising offers a rare opportunity to deeply engage a party who can genuinely drive the business. This is often around sales and distribution but an include key advice and knowledge or preferential access to supply.

  • Having your house in order: a business that is run really well is organised, has its agreements in place, has no threatened litigation, has a tidy balance sheet and is generally under control. If these things are incomplete or sloppy, it sends all the wrong signals during a due diligence process, undermines confidence in the team and can derail the investment.

  • Accelerating short term performance: the most recent historic performance of the business – sales, traffic, distribution or whatever, is what potential investors actually believe. Having these metrics tracking ‘North’ creates believability in the business plan.

  • Testing strategies: every business looking for capital will have plans that require funding however wherever possible it is best to implement and iterate an MVP of these strategies to both de-risk the investment and show that the plan actually works

  • Robust financial forecasts: most early stage businesses have poor forecasts as a general rule. Apart from underpinning the financial analysis for a capital raising, good financial forecasts should minimise cashflow surprises in a business and allow corrective decisions to be made well in advance of any real issues.

  • Strong handle on the numbers and metrics of the business: potential investors are always looking for a deep understanding and knowledge of the metrics of a business from the team

 

Engaging an advisory firm or going it alone?

If you have an existing or known investor who is prepared to put in the next round of funding at a satisfactory valuation then it may well be easier to not use external advisors. Even if a business is of the view to ‘do it themselves’, it is probably still worthwhile to have a chat to an advisory firm or two just to check off that the key areas that should be covered are in fact going to be covered internally.

The main advantage of using an external advisor is to save time and the opportunity cost that this time represents for the business. Secondary advantages can include:

  • Achieving a higher valuation

  • Exposure to a broader range of strategic investors

  • Getting a higher level of investment

  • Getting an experienced external view on strategy, capital matters and the vision for the business

  • Let’s the team focus on building the business