When looking to raise equity capital for your business, it is crucial to understand that there is no one size fits all approach. A business will need to understand the full range of capital raising options available to it and then choose the option which not only optimises the actual cash raised but the value added to the business by an investor. That value may come from tangible or intangible sources – it may be from an investor who can provide new business opportunities, synergies, individual expertise or skills.
There are also a number of different types of investors you may wish to look to:
- Friends and Family: It is very typical in early stage businesses to seek small investment amounts from personal friends and family members.
- Angel Investors: Angel investors typically invest in businesses when capital is needed to develop and commercialise products and services (i.e. when the business is just beyond the start-up phase). They typically look for people or teams of people they believe will succeed.
- Venture Capitalists and Private Equity Investors: VC and PE investors typically invest in businesses with a proven track record who are looking to increase scale, production or to commence a new project. They often invest large amounts of money and are focused on maximising their return on exit and typically expect more control over the business in exchange for their contributions.
- Trade or Strategic Investors: Trade or strategic investors are operating businesses and may be a competitor, supplier or customer of your business. They may be interested in investing for vertical or horizontal expansion or even for reducing competition.
Just like when looking to sell your business, it is critical that your house is in order before raising external capital. Whilst it may seem obvious, it is important that you can present your investment case both in a short form elevator pitch as well as through a long form information pack. The long form information pack should include:
- an investment memorandum describing your business, its plans and details of the proposed capital raise;
- historical accounts and forecast financial information; and
- a strategic business plan and what you intend to do with the money raised.
Regardless of the size of your raise, you may be tempted to receive funding without adopting appropriate corporate formalities. Even if you raise money from friends and family, we always recommend documenting the investment and the rights and obligations of stakeholders. This will typically be by way of a subscription and shareholders' agreement; the shareholders' agreement in particular will help ensure that new investors and current shareholders understand and agree on the terms of their relationship. It will provide a safeguard for all parties that there is an appropriate process to follow when key decisions are required down the track.
Having good professional advisers in accounting, legal, tax, IT and IP matters will also give prospective investors comfort that your business is an attractive proposition. Advisers who regularly engage in capital raising matters will not only run a smooth process but may be able to introduce you to other advisers and third parties who could be of benefit to your business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.