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By
Kimberly Valentine
Partner Deloitte & Touche Corporate Finance LLC
Show Me
the Money……..PLEASE!
Raising Money
in Today's Marketplace
Money is being
raised and investments are being made; however, it will come as
no surprise that the deal values have decreased substantially. According
to Venture Economics and the National Venture Capital Association,
in the 1st quarter of this year, 60 deals were completed with a
dollar value of $1.6 billion as compared to 1st quarter of 2001
in which 70 deals were completed worth $8 billion. However, amongst
a dismal economic outlook, there exists good news: the key to a
successful capital raise is not a secret.
The following
list will serve as a helpful guide for raising capital. Additionally,
anyone seeking money will find it most helpful to work with a financial
advisor (either a friend or hired help) to assist you with personal
introductions and deal structuring issues.
The
Key to Money: Preparation and Patience
Preparation:
Preparing and packaging your company for funding is critical. In
deals completed during the past two quarters, money sources have
been funding companies with the following traits:
(1) Experienced
and proven management teams, including strong CEO/CFO/VP's. On
a few occasions over the past few months, the financial sources
assisted in recruiting new CEO's.
(2) A strong and proven business proposition supported by a compelling
business model. This means that your company must have a coherent
and convincing "go to market" or "product"
strategy. The investors are focused on evidence of a strong sales
pipeline, increasing customer base, growing revenues and a strong
bottom line. If there are holes in the strategy, an investor will
sniff them out and move to the next opportunity. There is a great
deal of money in the marketplace, but few good deals and, generally
speaking, investors will not spend time fixing the companies problems.
(3) Realistic financial projections. Even with a tough economy
and lower revenues, a company can still successfully show its
ability to: meet budget versus actual numbers on a quarterly basis,
trim excess organizational fat and to rework outstanding debt
obligations. Investors are looking for many different types of
positive signs, so do not be discouraged solely with poor market
conditions and the current impact in the company.
(4) Understand your company's requirements: It is important to
determine exactly how much the company needs for both survival,
as well as strategic growth. Investors are looking for you to
be the expert. Although, they will have suggestions and provide
expert advice, they want you to understand the details of your
organization, including current cash flow considerations.
(5) Approach
the "right" money source: This entails doing your homework.
There are many sources of potential capital that could fund your
company: such as, debt, mezzanine and equity. Most groups focus
on specific industry areas and different stages of funding. Many
have different goals and objectives. It is important to research
the different groups and their specialty and concentration areas
so that you pick the right partner(s). Over shopping your opportunity
is one of the worst mistakes companies make when approaching the
market. The financial community is tightly knit and if you choose
to use the machine gun approach, you will be successful in receiving
many "passes". It is highly recommended that you find
a person to make a personal introduction to the money source.
Patience:
There are at least two things you can count upon when looking for
money these days:
(1) The due
diligence period is substantially longer than it was two years
ago, and
(2) The days of bidding wars are over.
It seems as though most founders want to have their big payday
in the public markets. Unfortunately, the days of quick and rewarding
IPO's are over - at least for awhile. Keep in mind that investors
make financial commitments to the company in hopes of a more successful
exit in the future; hence, they begin with the end in mind. With
respect to recent capital raises, the money sources were already
planning the method and timing of a possible exit even before
the initial money raise transaction was completed. It's a calculated
way of mitigating risk and hedging their bets against a bad economy.
It appears from
recently completed money raising transactions that nothing is happening
quickly. There is little upside and huge downside risk if investors
proceed too quickly with a potential investment. Two years ago,
a deal could close within 3-4 months. Today that time is at least
double with fewer deals being completed. Greater time is spent performing
due diligence in a variety of areas: historical and projected financials,
in-depth management background checks, market positioning and strength,
customer viability and allegiance, contract legitimacy and revenue
recognition, etc. Any company seeking funding should be well versed
in all potential areas of due diligence, before approaching the
market. Strong financial advisors can help you with the preparation.
The more you prepare, the smoother the due diligence process and
the ultimate closing.
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