EQUITY RAISING MISTAKES TO AVOID: EIGHT EASY WAYS TO DESTROY YOUR CHANCES OF RAISING EQUITY CAPITAL
To be in the race to successfully raise equity capital, here is a list of equity raising mistakes to avoid. These equity raising mistakes were made by real-life equity seekers at a genuine pitching session. You must not repeat these mistakes! Forewarned is fore-armed.
Warning: There is a considerable amount of information here relating to equity raising mistakes to avoid in your dealings with potential investors. The mistakes will kill your chances of raising equity. I understand how important this information is to you when making up your mind as to who can best help you with the expansion of your business. Consequently, as the guide covers a lot of ground, expect a long read.
Business Owners and Entrepreneurs can be their own worst enemy. Here’s how:
In equity raising, first impressions count. This webpage explores the need for the development of good relationships between the business owners and entrepreneurs who seek equity capital and the investors who wish to place investment funds with growth companies. You all know the drill: first impressions are important and you don’t get a second chance to make a first impression.
So the first time that you meet an investor to discuss your investment proposal, you must be adequately prepared. In particular, you must have all your company’s figures and projections on tap. If there is one piece of information that you don’t have at your fingertips, you can almost bet your bottom dollar that you will be asked about that particular piece of information. Serendipity Rules!
First contact. Elsewhere in my website, I discuss how you should interact with investors once they show serious interest in further investigating your equity offer. But in this webpage, I wish to deal with first contacts. The information in this webpage is the result of a survey of Australian small and mid-sized business enterprises who were seeking equity funds through a pitching session before a number of investors. Although this survey took place some time ago, the outcomes from the pitching session are relevant today, because the results provide a practical lesson that companies seeking equity capital cannot ignore. They emphasise the equity raising mistakes to avoid.
Importance of a favourable response. The results highlight how business owners and entrepreneurs must initially approach investors in a way that encourages a favourable response to the equity offers proposed. If business owners and entrepreneurs cannot, or do not, get a favourable response at this first contact meeting, reality and experience suggests that they will never be serious candidates for equity funding.
Survey details. The Australian Manufacturing Council and AusIndustry (an agency of the Australian Government) carried out the survey and published the results in the Department of Industry, Science and Tourism’s ‘Investment Readiness Study’ 1997. The survey identified shortcomings by small and mid-size business enterprises in their ‘first contact’ presentation of their investment offers to potential investors.
Survey results. The survey results show clearly how these small and mid-sized business enterprises were neither professional nor practical in representing their own best interests. These matters are raised here for information because my role as Chiron! the business doctor.™ in your equity raising program is to ensure that your company is both ‘investment ready’ and ‘investor friendly’ and able to meet general investor requirements prior to a ‘first contact’ meeting. With my involvement in guiding you through the equity raising process, you will not face the problems set out below, because they simply will simply not arise. The survey results cover seven areas of investor concerns or requirements.
Investor Requirement 1: investors required evidence of a high rate of growth
Equity investors indicated to the small and mid-size business owners seeking equity capital that they required a rate of return of 25% to 30% pa, thus indicating to the small and mid-size business owners that their requirement was for strong growth potential from the investee company.
So how did the small and mid-size business owners (who supposedly were serious or genuine in seeking equity funds) respond to the investors’ requirements? They responded very poorly! In response to the question ‘How would you describe your sales growth over the last twelve months?’ 61% of the small and mid-size business owners described their sales growth in the last twelve months as being moderate, or as having no change at all or that their sales actually declined.
In response to the question ‘What do expect your sales growth to be over the next twelve months?’ 62% of the small and mid-size business owners described their expected sales growth in the next twelve months as being moderate, as expecting no change or that their sales were expected to decline.
Reality Check 1. The Lesson: Make sure that you meet investor requirements for high growth potential.
Think about these business owners’ responses for a second! The investors stipulated that a basic requirement or condition for investing was for ‘strong growth potential’, indicated by a minimum projected growth rate of 25%. Yet a substantial majority of the small and mid-size business owners making a presentation for equity funds did not or could not comply with this basic investor requirement.
After all, a ‘moderate’ sales growth in the past twelve months or expected in the next twelve months is hardly a recommendation for ‘high growth potential’. Neither is the admittance by the business owners that sales are basically stagnant with no change at all over two years – the last twelve months and the next twelve months.
As for the small and mid-size business owners who admitted that their sales were declining, I can only wonder at what they were doing there! There were some of the small and mid-size business owners who met the investors’ challenge: 9.6 % of the small and mid-size business owners described their sales growth in the last 12 months as being rapid; while 5.7 % of the small and mid-size business owners described their expected sales growth in the next 12 months as being rapid.
It is not difficult to see where the investors would have put their money.
Investor Requirement 2: compatibility of owner and investor long-term objectives
An important part of the investors’ assessment of the investment readiness of a small or mid-size business is ensuring that the owner and investor have similar long-term objectives that are based on the growth of the business, and can be reduced to agreed action plans.
The investors made it clear to the small and mid-size business owners that they required investee companies to have written organisational goals, and more preferably, a written business plan that included a formal budget/financial plan. The small and mid-size business owners were also asked to rank the relative importance to them of certain business goals, so that the investors could assess whether the business development goals of the investee company owners matched the business goals of the investors.
Reality Check 2. The Lesson: Make sure that you have similar long-term goals to the investors, and that such objectives are based on the growth of the business.
The survey results showed that the small and mid-size business owners were their own worst enemies in making effective presentations for equity funds. Their responses to this specific issue of compatible long-term goals raised by the investors indicated that the small and mid-size business owners:
- were not hearing, let alone responding to the messages given out by the investors, or
- were naïve in their belief that they did not have to comply with investor conditions, or
- thought that they would just have to turn up and a cheque would be written for them, or
- showed that they just didn’t care about complying with investor requirements, or
- expected that the investors, after investing their funds, would simply permit the owners to carry on as they had in the past.
Investor Requirement 3. business plans
Investors required investee companies to have comprehensive business plans that set out achievable business objectives with supporting financial forecasts and projections. 64% of the small and mid-size business owners responded that they did not have a written business plan, while another 24% of the small and mid-size business owners responded that they did not have a formal budget/financial plan.
Reality Check 3. The Lesson: You must make sure that your business plan is comprehensive. Investors require a comprehensive plan.
No investor (repeat: no investor) will ever invest in a project without a comprehensive business plan that includes budgetary forecasts and projections. Any business owner serious about raising equity capital must therefore prepare a comprehensive business plan that includes budgetary forecasts and projections that are as reasonably accurate as it is possible to be.
Investor Requirement 4. written organisational goals
Investors required investee companies to have written organisational goals. 52% of the small and mid-size business owners responded that they did not have written organisational goals.
Reality Check 4. The Lesson: You must ensure that you develop and record organisational goals. Include them in your business plan. Investors require them.
No investor will invest in a project without written organisational goals. If you disagree with this statement, see Reality Check 3.
Investor Requirement 5. business goals and company growth
Investors indicated that their first priority in evaluating any investment proposal was to examine the rate of growth of the investee company. Only 15% of the small and mid-size business owners ranked company growth as their first business objective, with only 56.4% ranking it in their top 3 objectives.
Reality Check 5. The Lesson: An investor’s first priority is to examine the investee company’s rate of growth.
85% of the small and mid-size business owners pitching for equity funds from the investors automatically ruled themselves out of contention for equity funds by not indicating that their primary business goal was the growth of their company. This is a fundamental requirement for investors. It is not good enough to include company growth as a 2nd or 3rd option. It has to be 1st, unequivocally.
Investor Requirement 6. equity seekers’ business goals
Investors asked business owners to declare their own personal goals in an effort to identify that the owners and investors had similar long-term business objectives. 14% of the small and mid-size business owners ranked tax minimisation as one of their top three business goals, and 11% of the small and mid-size business owners ranked lifestyle as one of their top three business goals.
Reality Check 6. The Lesson: You must make very sure that your long-term business objectives are similar to the investors’ long-term business objectives.
Small and mid-size business owners who consider that extraneous secondary issues should take precedence over company growth as the primary business objective will be quickly rejected by investors. Investors will be very suspicious, wary or nervous where a business owner nominates his or her personal lifestyle as a substantial business goal. The investor will be worried that the investment funds may be diverted from business support to owner support, and owner support will not contribute to profits.
Moreover, no investor will accept tax minimisation as a priority business goal. A business should not exist as a tax minimisation vehicle for the business owners.
Investor Requirement 7. Market competitiveness & market advantage
Investors advised the small and mid-size business owners that the investee company must be highly competitive in the market and have a sustainable competitive advantage. The investors asked the small and mid-size business owners for details of their marketing, sales and profitability results in relation to that of their competitors. Once more, the small and mid-size business owners excelled themselves in a display that simply demonstrated that they had not done their homework on an important issue of serious concern to investors.
Only 16% of the small and mid-size business owners knew that their company was more profitable than their competitors. 29% of the small and mid-size business owners were unsure whether their company was more or less profitable than their competitors. 12% of the small and mid-size business owners thought that their profitability was lower than competitors, and 43% of the small and mid-size business owners thought that their profitability was the same as their competitors.
Reality Check 7. The Lesson: You must not under-estimate the importance of market competitiveness & market advantage to investors.
Top marks here for the 16% who knew that their company was more profitable than their competitors. We can’t say the same for the other 84% who appear to be living in blissful ignorance by not appearing to be at all worried about their competitors’ business activities.
Reality Check 8. The Lesson: You must know the business of your competitors; investors will ask you about them.
55% of the small and mid-size business owners only thought that their profitability was lower than, or the same as, their competitors. Just think about that. Those business owners have apparently never considered it important to check how their business measured up against their competitors. If investors know one thing, its how a business can be damaged by an aggressive competitor, particularly when you have no idea of the competitors’ commercial strength, marketing strategy and sales objectives.
There is little doubt from the survey results as to why investors bypassed the great majority of these businesses as viable investments. These business owners simply failed to identify the equity raising mistakes to avoid before their interaction with potential investors. I can give you a gold-plated assurance that if you retain me to help you grow your company, these types of investor difficulties will never arise.
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© Graham Segal, Author. March 2013. All Rights Reserved
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This website and the associated webpages content are produced by Graham Segal trading as Chiron! the business doctor.™. They are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License based on Graham's work at https://chironthebusinessdoctor.com.
Date this webpage was last reviewed/updated: 5 May 2013