Lacking sufficient capital to grow is the main constraint for most small and middle market companies. To reach the next level of success, capital is the fuel that drives the company’s growth engine. Without it, reaching that next level is almost impossible.
Many entrepreneurs are skilled at starting and building small, successful companies. But growing a small company into a big one is very different, and in many ways a more difficult task, which is why raising growth capital is so important. Entrepreneurs and business owners often stumble in obtaining growth capital because they are inexperienced and unprepared.
Here are the key questions, and some answers.
What do I do first?
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1. Prepare your company to raise capital. Hire an experienced management consulting firm to help you prepare your company and to help you raise the capital.
Raising capital means seeking investors whether it is debt equity through a bank loan or investor equity through an investment firm. To prepare for either choice, clean up your books and records, prepare for due diligence, update your strategic business plan, detail how much capital is needed including its purpose and uses, and plan the optimal deal structure. Lean on your consultant for help with all this.
2. Develop growth and expansion plans. Prepare detailed financial Pro Formas showing monthly income and expenses. Institutional investors look to invest in companies that have a clear differentiation, scalability, execution capabilities, and a great management team. Your growth plans must be creative and strategic.
Consider forming a joint venture, strategic partnerships or strategic alliances with your customers, vendors or competitors.
3. Hire a valuation company to render a “market valuation” opinion. Don’t expect the sort of sky-high valuation entrepreneurial companies enjoyed in the past. Investors have returned to ground level and realize that many of their investments will not qualify for an initial public offering 12 to 24 months later. Therefore, be prepared to give up more ownership for smaller amounts of capital and possibly even more control if you need to raise equity capital.
4. Prepare a “leave behind” presentation. Prepare marketing materials such as an executive summary, management presentation and due diligence materials.
Your knowledge, confidence, experience, commitment and enthusiasm are critical to your success. Practice the presentation. Know your numbers!
Where do I find growth capital?
First, decide whether you are willing to give up some equity and some control of your business.
If not, then your options may be limited. The path you will then follow is to seek debt financing or debt equity through a variety of sources:
(1) Small Business Administration loan programs have significantly expanded over the last decade ranging from loan program guarantees to women’s business centers; (2) asset based lenders; (3) factoring companies; (4) mezzanine financing companies (a hybrid of debt and equity); (5) self-funding (second mortgage on your home; tapping retirement accounts); (6) friends and family; (7) banks (revolving lines of credit and structured financing); (8) Small Business Investment Companies; (9) business incubators; (10) peer to peer lending and investing; (11) OFIs (other financial institutions, such as GE Capital); and insurance companies.
If you are willing to give up some equity and some control of the business, then your options expand substantially and you can follow both paths of debt equity and investor equity. I tell our clients to look at a variety of sources: (1) angel and venture capital investors; (2) high and super high net worth individuals; (3) family offices; (4) private equity firms; (5) investment bankers; (6) merchant bankers; (7) crowd funding; (8) joint ventures, partnerships, alliances; and (9) SBA venture capital programs.
Make no mistake about it. Plenty of growth capital sources are waiting for the right opportunity. However, there is a price to pay and a cost to bear for growth capital. Expected returns vary significantly depending on the source of capital. The cost of capital is considerably higher for privately held companies than for listed public companies. Investors in this space are seeking high returns.
I tell clients, it is best to raise capital when you can, not when you need it. It doesn’t matter who the capital sources are, if you’re desperate for funds, they will smell it a mile away. Your chances of success will be reduced greatly if you are playing with a weak hand.
The best institutional investors act as partners. They bring in other investors, open doors for business development, help in recruiting, act like coaches, are objective in their advice as your company grows, and guide you through the inevitable difficult times.
Choose your source wisely. Match your choice to your goals. Be aggressive, creative and persistent and develop the ability to convince others to buy into your vision and share your dream on a foundation of substance, trust and integrity. Remember, growth is the greatest driver of enterprise value.