How to attract the right capital for successful growth
How do you attract capital? More importantly, how do you attract the right capital for successful growth? EV PE Investment Director Espen Strøm has eight key questions you should consider if you want to successfully secure the best growth capital investor for your business.
- How should we approach investors – and when?
Quite simply, the best time to raise capital is when you do not need it. Raising funds usually takes a minimum of three months, but it can take 6-12 months. Well before you need that capital, start socialising with the investment community. Tell them your story, get them interested – you want them to be chasing you, not you chasing them, when it’s time to fundraise.
Take your time to build and cultivate relationships with investors, get to know them. How can they help you reach your goals? Which investor would add more value to you and your company?
When it is time, be ready to tell your story. Understand and focus on your unique selling points, demonstrate market knowledge, be realistic in your financial projections and be clear about why you are raising growth capital. Are you focusing on organic expansion like adding more tools or expanding geographically, are you looking at a merger or acquisition, are you looking to reduce some risk by selling some of your shareholding? In short, come prepared.
For example, at EV, since our first fund in 2002, we have helped our portfolio companies commercialize over 100 technologies through our investments. We take a partnership approach when providing growth capital, and we use our experience and network to help companies grow more rapid by opening doors to new clients, identifying and recruiting key talent and introducing opportunities for strategic M&A.
- How much should we raise?
Too often companies underestimate how much they should raise, because they are keen to reduce dilution. But, raising funds can be a massive distraction from day-to-day business. If you don’t raise enough, you’ll have to seek more, which might result in lower valuation and you could end up continuously fundraising; continuously talking to investors; and continuously looking over your shoulder, rather than focusing on developing and growing your company.
Investors are often willing to put in place tranches of capital or warrants, at a set or escalating price, and this could be a good solution for companies that do not want to raise too much capital initially.
- Should we bring in a CFO?
There is a misconception about the role of a CFO, and smaller companies often think that they do not need one, or that the controller can handle the task in the early growth phase. In my mind, a CFO is more than accounting. They are looking forward. They are planning. They are a strategic partner to the CEO. Your CFO can help negotiate with potential investors and give you stronger leverage in those discussions, hence help you get a better deal.
At EV, we strongly advocate bringing in a CFO early. For us, CFOs are more than just looking at numbers.
A good CFO allows company founders and CEO to focus more on the business and provides control and structure to the company.
- What should we look for in a good CFO?
I look for strong financial modelling skills, of course, especially around cash planning and forward-looking projections. A CFO should take the time to learn the business and technology, have a strategic mindset and be able to be a key partner to the CEO, to help develop a roadmap for growth. Last but not least, they should have integrity and for us that’s a very important quality.
- Do I need to bring in an advisor when raising funds?
Some companies engage investment banks/corporate finance advisors to raise capital. These can be a tremendous help in building the story and reaching out to a large investor community. Hence creating competition, and potentially driving valuation up. But, while you might get a better valuation, you could drive away the right partner and you will miss out on higher longer-term value. My advice would be to be clear with your advisor on what you are looking for and try to link the advisor’s success fee to more than just valuation.
- What are the alternatives to growth equity?
Debt is an option and it may look less expensive than equity. However, if you start missing your covenant targets, the financial institutions will (in most cases) enforce their rights and this will be a distraction to the business. If you do take debt, don’t take it too early. Focus on building a sustainable business with predictable cash flow. Still, building good relationships with financial institutions is an important activity for your company’s CFO and, here, your investors’ network and relationships can be very helpful in opening doors.
- The brisket test: How do you pick the right investors?
Often, there is too much focus on valuation and not enough focus on picking the right partner. It may be labouring the point, but, this is a decision that’s up there with a marriage proposal and there will be times when you spend more time with your investor than your spouse.
A good tactic is what I’ve once heard called ‘the brisket test’. It’s quite simple; when you meet a potential investor, ask yourself, ‘would I be willing to invite you around for brisket with my family on Sunday afternoon?’ If the answer is no, that’s not someone you should partner with. And this goes both ways. There needs to be some chemistry in this relationship. Find a financial partner that’s right for your business, that understands your market, your business and your technology.
It’s a lot to take in. But, to summarise, my advice is to look to raise sufficient capital, come prepared, understand what you are selling, do not inflate your projections, and Know Your Investor. Getting the right partner for your company is more important than getting the one willing to pay the most.