Posted on: August 2nd, 2019
Capital raises are major projects involving a tremendous amount of time and resources. Success goes to well-advised and well-organized companies.When planning out your raise, the most important part is making sure you are raising the right amount. You don’t get a second chance to set the opening ask amount, so getting the right raise amount is absolutely critical.
Yet, all too often, companies sleep walk through this step and adopt a flimsy basis for their raise number. Sometimes the reasoning is based on historical antecedent “well we raised $2 million two years ago, so we must need $4 million this year”. Sometimes, it’s an emotional comfort level, “well $5 million sounds about right”. Neither approach works. To determine the right raise size, you have perform a detailed assessment of the future cash flow need, based on the specific scale up approach the company is pursuing.
This involves forming assumptions about your scale up horizon and the variable factors at play. Often there are long and indeterminable lags, with little ability to influence them. In acquisitions, this is especially true as it relates to integrating operations, process flows and corporate culture. Within each of these steps, you control the pace of only a few of the things that have to be coordinated. This harsh reality underscores the need to bring a conservative lens to forming underlying assumptions, and in particular, the level of capital you need.
Capital raising is a fixed process regardless of the amount of capital you are targeting to raise. If you are asking for $5 million but really need $7 million, there will be little to no change in the process. Given this, it really pays to do it right and make sure you are raising the right number. Here are the 3 Attract Capital tips for sizing your capital raise:
- Add at least 20% to your capital raise estimate – There is always an unforeseen surprise or two that will take time and money to rectify. When you have extra liquidity, you have staying power to get through tough times.
- Look at monthly data – liquidity analyses require monthly forecasts. You cannot really discern the real trend from annual information. Look at granular cash flow related data to figure out how much additional working capital headroom you really need.
- Think offensively, not defensively – When have more capital, you can create value on a new scale. You see new possibilities and new fertile ground for investment. Detached from the yoke of capital constraints, you can build big value.