Once a founder is personally ready to begin the capital raising process, attention shifts to ensuring the business is ready to raise funds. A key focus for this stage is being able to effectively articulate your business strategy – including your goals for the business and how you plan to get there. Your strategy does not have to be a complex document or over-engineered pitch presentation; in fact, it can likely fit on one page.
A critical element of your strategy is communicating your financials and ensuring they can stand up to the rigours of external due diligence. You’ll generally need to prepare a current balance sheet and profit & loss statements (P&L) for the previous two years, year-to-date, current year forecast and next year forecast. The P&L should be ‘cleansed’ or normalised to exclude any personal expenses but should also include a market rate salary for yourself. The financials are where most founders should and do end up spending most of their time and energy when preparing to raise capital because the numbers go straight to the value of the business – which is exactly what you’ll be negotiating with investors.
The value of your business is based on the historical and forecast financial data, so any errors in your reporting can impact how much your business is worth and weaken your standing when it comes time to negotiate. A corporate finance advisor, auditor, or internal accountant can be a huge help in cleaning up the P&L, pre-empting any potential issues that might attract unwanted investor attention, and clarifying the true value of the business.
Operational readiness is another core focus for founders at this stage. It’s all about the details, such as ensuring you have properly executed contracts and shareholder agreements, an accurate share register and ownership over your intellectual property, among other tasks. When you’re preparing to raise capital, it’s also an opportune time to consider cleaning up your share register (cap table). You can reduce complexity by buying out passive, difficult, or unsophisticated shareholders and in turn, cut down on the total number of investors to which you need to be accountable. A ‘clean’ cap table is generally more appealing to later stage investors as well.
Another point to remember is that while it may be easier to raise capital when the business is performing well, growth-focused investors do not want to see founders padding the numbers or investing too heavily in short term profits that aren’t likely to translate to real growth over time. It’s important to maintain the long-term view of your business while you manage your near-term priorities as best you can throughout the raise.
The reality is that raising capital can be a huge distraction to a founder, and while investors like the Australian Business Growth Fund (ABGF) move quickly (in as little as 8 weeks), the time between you starting to prepare for a raise and cash landing in your bank can stretch from nine to 12 months. You need executive support around you so that you can prioritise your time and energy. Again, it’s worth considering a corporate advisor who can help you map out your raise strategy and provide additional counsel and oversight.