Raising capital for your company may seem like a daunting task, but the challenge is less formidable if you follow some time-tested, effective dos and don’ts offered by Vistage speaker and investment banking expert Brad Bulkley .
1. Always raise more capital than you think you need. Raise enough capital to create true “dry powder” — that is, money that goes beyond your immediate requirements. You should raise sufficient capital to meet your company’s needs for 18 to 24 months. Actual capital needs are often greater than projected, and going back to the well is one of the most expensive ways to raise capital because it is usually done under less than favorable circumstances.
2. Run with more than one horse. Whether it’s two agent banks or two private equity investors, having at least two capital sources in a deal tends to keep both players “honest” and provides diversity of risk. In addition, no matter how competitive you believe the terms of a particular capital source to be, creating a “horse race” will inevitably result in a more favorable term sheet.
3. Recognize that “cost of capital” goes beyond the economics of the term sheet. Non-financial terms such as governance can often be the most significant business issues for an owner. Know what rights the capital source has connected with their investment. Even the best economic deal isn’t worth having an incompatible partner sitting across from you at the board table.
4. Remember to tell your story and do so clearly and succinctly. Avoid the tendency to become mired in the minutia. During the first few minutes of your presentation, provide the investor compelling reasons to invest and then build from there.
5. Know the market and know the source. Don’t be tempted to go with the first available capital source. Terms can differ widely across the board. With respect to the specific source you are considering, make a point to speak with other CEOs and CFOs who have previously dealt with them. Specifically, try to contact portfolio companies where everything did not go as planned. The test of a good partner is not necessarily how they behave during good times, but when one is facing some form of adversity.
1. Minimize risk. There are two principal components to accomplishing this objective.
- Do not personally guarantee company obligations unless you absolutely have to do so. In most cases, if your company has a track record you won’t have to guarantee capital commitments. If it is requested, keep looking. If you do have to extend a personal guarantee, negotiate up-front the conditions upon which the guarantee will be either partially or totally released (usually certain operating or financial benchmarks) at some point in the future.
- Never bet the ranch. No individual deal is worth jeopardizing the company. Limit and isolate risk to the extent possible.
2. Do not assume that all capital is a commodity — it pays to be selective.You are selecting a partner. Particularly with respect to junior capital, such as subordinated debt and equity, it is much less of a commodity than most entrepreneurs might think. The source of capital should bring more to the party than money. You deserve a value-added investor. What contacts and expertise can they contribute? What is their record of accomplishment? Have they done business in your industry? If the investment is to be made from a fund, at what stage in its life cycle is the fund? You do not want to be either the largest or the smallest deal in their portfolio.
3. Your deal should never appear to be widely-shopped. In the private capital world, an extensively shopped deal denotes either “soiled goods” (i.e., there is something wrong with the deal) or that too much competition will cause a source to waste their time committing to review the deal. You can gain full knowledge of the market and maximize your chances for success without taking your deal to every Tom, Dick and Harry.
4. In your effort to maximize returns, do not create such an aggressive capital structure that you take on disproportionate risk. Over time, more conservative financial leverage leads to more predictable results — and a better night’s sleep.
5. Don’t surprise. When dealing with capital sources, always follow the rule of “no surprises.” It is always better to be straightforward and honest with a prospective investor. Highlight your strengths, but never hide any company weaknesses or problems, as these are likely to come out in the end anyway. Obstacles or hurdles you highlight are addressable while problems uncovered by prospective investors on their own are far more alarming.
A proven financial advisor who has extensive experience and knowledge of the current market can serve as an invaluable guide and be a critical resource, creating value well beyond the fees they charge.
Brad Bulkley is president of Bulkley Capital, L.P., a Dallas, Texas-based “boutique” investment banking firm that assists nationwide middle market companies finance both growth and exit strategies.