|
Your company needs cash. what kind?
|
|
|
Jeff Stone is Managing Director, Crescent Fund, a Wall Street private equity consulting and promotional firm that provides corporate capitalisation and investor relations consulting services. Crescent Fund manages a private equity fund and invests in private equity investments.
|
|
|
There are only two ways to obtain money for your company: take on debt or sell equity. In deciding which option to choose, important variables include the reason why funds are needed, the circumstances in which the company finds itself and its style of ownership and management. Accordingly, careful consideration, strategic thinking, thorough planning and sound decision-making are essential when it comes to financial expansion ventures.
One Size Does Not Fit All
It’s easy to get lost in the nebula of marketplace variables and financial complexities and lose sight of some very basic elements that need to be in place before one can go out and raise cash. Here are a few commonsense guidelines that may sound obvious, but are quite frequently overlooked.
- Create a comprehensive document that demonstrates how the initiative that requires funding is aligned with the company’s overall strategic plan. How exactly will the money be used and which strategic objective will it help to meet? This document serves three purposes. One, it shows investors, venture capitalists and lenders that the company has done its homework and has researched its growth potential, industry and competition. Two, the plan will be the primary tool and map for orderly growth. Three, relating the current short-term objective to long-term strategy may show which type of financing is optimum in the long run.
- Establish how much money is needed to accomplish the endeavour. Any attempt to raise a more or less arbitrary amount will always end in failure. First, it’s a sign of poor planning and will either lead to a shortfall or poor execution. Two, if management has not properly gauged what it needs, how can it articulately convey its requirements and objectives in discussions with investors or lenders? Three, the exact amount of money needed may be the deciding factor in choosing one type of financing over another.
- Determine which type of financing works best - debt or sale of equity. If quick growth is necessary, raising money through the sale of stock may provide the best opportunity for fast action. However, wider equity participation implies a dilution of ownership, which may not be acceptable to some business owners.
- Provide accurate, timely and complete information to investors, including an honest expectation of return on investment. Remember, timing is everything for investors. Their strategy is to make a large return by being the first in on a new venture. But they also need to be sure they are not proceeding on false performance claims or investing in a company involved in financing practices that may be dilutive to ownership.
- Never proceed with the venture until the full amount of necessary capital is in the bank. Becoming undercapitalised is a common and dangerous mistake. Many companies procure a portion of the capital needed and then rush into implementation in the hopes of raising the remainder along the way. In almost every case, the economy works against them, and the shortfall turns the entire project into an unrecoverable investment.
- Never raise more money than needed to meet the objective. Selling more equity than necessary only serves to dilute the ownership position at a lower valuation. And in the case of debt, why pay interest on unneeded funds?
Getting the Stars to Line Up
The IBMs and Microsofts of the world didn’t reach astronomical size with a big bang. They made the stars line up for them by adopting sound growth principles right from the very beginning. Those principles are neither complex nor mysterious. They boil down to simple good business practices revolving around an intelligently crafted plan and a series of smart financial decisions that align each expansion phase in the direction of the long-term strategic goal.
|
|
|
|
—For queries, log on to www.crescentfund.com or call 914 613-3232.
|
|
|
|
|
|
August 2007
|
|
|
|
|
|
