Pro and Cons of Raising Capital

The challenge of securing capital to grow a company can be both exhilarating and daunting.  Get it right and those scale-up dreams are likely to come to fruition. Get it wrong and your plans can be seriously derailed. Entrepreneurs cannot escape these challenges but, by knowing what they are, can at least prepare for them. The Alchemists Forum are collaborating with international specialists CapEQ to give a few pointers to help you through the process.

Tip 1: raising money takes longer than you think

In emerging companies, owner-managers devote as much as half their time, and a lot of creative energy, trying to raise external capital. Some founders drop nearly everything else they are working on to find potential investors and convince them to part with their money.

The process is stressful and can drag on for months as you search through potential funders for the right fit and ethos. Even though approval is relatively straightforward, the challenge for owners is perfecting their sales pitch, preparing presentations for the ‘roadshow’ phase, and gaining the attention of the right contact within each institution. Many VCs can be more risk averse than owners expect.

When a company is growing rapidly and directors are ‘maxed out', the focus on finance often means less attention is given to cashflow, employees and customer relationships culminating in a negative impact on revenue, margins and profit.

Tip 2: Capital can cost more than expected

Even if the search for capital is successful, out-of-pocket costs can be higher than expected. Bank loans over £1m tend to require stringent audits, business valuations, and legal fees for contracts – and the business must shoulder these costs.

Business owners need to understand this and factor it in before setting out to raise finance.

Tip 3: Keep other potential investors warm

When a business owner finally secures growth finance, most shake hands and sign the terms, then relax – cutting off discussions with alternative sources of funds. This can backfire. 

If businesses start to miss their KPIs, that lender may start getting cold feet at evaporating margins and start demanding warranties or an equity stake for a bargain price.

Business owners should keep other investors ‘warm’ throughout the investment cycle. They will probably not be needed immediately, but if an unexpected cashflow crisis occurs, the owner has options and won’t get stuck with a take-it-or-leave it ultimatum. Growth entrepreneurs always need to think of the next funding round.

Tip 4: Let advisors take the strain

An experienced corporate finance advisor is invaluable in doing much of the heavy lifting while entrepreneurs carry on with day-to-day operational matters. They help owners put together the investment prospectus, screen and vet initial interest, and schedule an investor roadshow.

With thousands of venture capital funds, and a myriad of alternative investors available (asset finance, bridging loans, mezzanine finance etc), this huge workload is enough to put any business owner under huge strain and prone to make mistakes.

However, business owners should choose a corporate finance advisor carefully. Those with strong ethical credentials are better placed to give an honest appraisal, with judgment not clouded by the desire to secure their fee regardless of the merits of the investment offer and terms.

Many advisors also partner with experienced corporate lawyers who are highly efficient at working through the small print and highlighting risks.  

Conclusion

Considering the factors above, entrepreneurs should be wary of setting out on their own to land that six or seven figure investment. Despite the pitfalls, thousands of SMEs and start-ups borrow significant sums every year to accelerate growth.

In today’s business world of intensifying competition, demanding customers and skills shortages, scaling up quickly goes hand in hand with the ‘grow to sell’ model of many business owners. Doing nothing carries its own risks.

The Alchemists Forum has guided many members through the complex process of raising finance, providing expert advice and sharing valuable personal experiences.  We believe that being in a room with those who walk in your shoes every day is “the difference that makes a difference.”

Let the Alchemists Forum help to guide you through making the best decision on raising capital in 2022. Contact Alan Branagh alan@alchemistsforum.com for more information.

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