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Tag: Capital Raising

How to Prepare Your Business for Capital Raising: Key Steps and Best Practices

Posted on by Imarticus Learning

As a new entrepreneur starting a business, raising capital is crucial for long-term success. Without sufficient capital, starting a business and competing in the market can be challenging.

While every business/firm faces unique obstacles and aspirations, capital raising is a common priority. This funding promotes overall business development and opens up better opportunities in the future.

Raising funds is important from the beginning and remains so as the business expands. The investors you work with also change over time; in the beginning, you may work with friends and family, but later on, you may work with angel investors or larger institutional investors.

Let us take a look at a few of the methods that you can use to generate funding for your business before you get started.

Steps for Preparing to Raise Capital

Here are all the steps you need to take as an aspiring entrepreneur to raise capital for your dream business:

Step 1: Assess your needs

Businesses need capital to either expand or accelerate stagnating growth. Fast-growing businesses (food, healthcare, finance and IT sectors) need capital to satisfy essential business demands, but slower-growing businesses (bookstores, real-estate agencies and family-owned restaurants) need capital for expansion.

If you’re involved in capital raising planning, you have to determine exactly how much capital you need and how it will be spent. Investors demand a return and equity, so you need to avoid deals that reduce your ownership by more than 25%.

Step 2: Evaluate the timing

Most businesses start with “pre-seed” funding, often sourced from founders themselves, along with support from friends, family, or accelerators. After three to six months, founders typically seek additional “seed” funding from angel investors and institutional backers. Gaining Series A (giving potential outside investors the chance to put money into a developing business in exchange for stock or a portion of the company) funding and later rounds usually take a year or two. It is advised by experts to budget for a two-year cash runway between rounds.

In case you want to avoid shortfalls, you’ll need to prepare funding requests in advance and it has to be secure enough to last until the next round to prevent cash shortages. Consider factors like seasonal market changes that may need larger funds.

Step 3: Develop a projection for cash flow

During the capital raising process, investors expect stable company finances and clear growth plans. These help investors understand where their funds are going and how ambitious the overall business goals are.

In ideal conditions, you should include various growth possibilities in your forecast, along with important choices like hiring more people or extending your product range. This demonstrates your flexibility, determination, and openness to innovation.

Step 4: Design an effective business plan

It’s time to create a business plan if you didn’t already have one when you began. A business without well-defined and realistic plans will find it harder to attract investors. So, when you’re looking for funding, focus on how your business will earn profits to deliver strong returns.

You should make your capital raising plans clear and convincing, and to the point. Steer clear of technical terms and be coherent about your financial plans. It is best to back yourself up with statistically backed projections.

Step 5: Organise your financial statements

During the process of capital raising, investors will always expect strong financial results on their investments. You need to make sure that all your reports, including your balance sheet, profit and loss statements, and financial projects, are up to date and correct. Investors evaluate development expenses, payroll, overhead, and profit margins.

Investors need to see a clear growth plan, consistent performance, and, most importantly, profit possibilities. If your books are disorganised and you need help with the capital raising process, you should think about hiring a professional.

Step 6: Explore your alternatives

You can finance a business through various methods, including bank loans, crowdfunding, venture capital, and angel investors. Every choice comes with its unique requirements and trade-offs. You have to thoroughly study how much you qualify for, the potential dangers, and if you need to give up your control over your business for that perfect investment.

Weigh the pros and cons before you choose from the many methods of capital raising.

Step 7: Research potential investors

Choosing proper investors is the next step after deciding on the kind of funding. You can meet potential investors through:

  • Social gatherings
  • Industry conferences
  • Cold calling
  • Family and friends
  • Online platforms

Step 8: Conduct meetings and gather input

Once you identify potential investors, schedule appointments to pitch your ideas. You have to be truthful and upfront when making your case. Ask for feedback to better your presentations in the future if they decide against investing.

Even if you find a potential investor that can help you start your business, don’t stop meeting new investors as you can get yourself better deals for future investment rounds.

Conclusion

When it comes to launching a new business, investors play a crucial role in nurturing it with a considerable amount of initial funding. Knowing the ins and outs of entrepreneurship and essential business operations is necessary to kickstart your journey to claim success in the long run. However, do you know what else is essential to succeed? 

Strategic leadership skills!

Building on this very important skill, Imarticus Learning brings you the Executive Certificate Programme for Strategic Chief Executive Officers – a comprehensive course created to nourish future CEOs. 

Initial Public Offer – Role of Prospectus

Posted on by Imarticus Learning

When we talk about capital markets, one of the most important feature that I can think of is of ‘Capital Raising’ – after all most of the companies do need capital to invest for their long term prospects. Companies can raise it by issuing two types of instruments – Equities and Bonds, as learned in the financial analyst course.

The issuance is done via a process called Initial Public Offer. As part of the process, companies need to prepare a document called a Prospectus.

A prospectus is a legal document (filed with the regulator of the respective country) that is an invitation to the general public to buy securities from the company. As a document, it contains a lot of information about the company – from the history to its present – including the reason for raising capital. In other words, the main aim for such a document is to help all potential investors in making an informed investment decision on whether they should or shouldn’t invest in the company. Prospectus’ are generally very lengthy as they need to contain all the requisite information (can run into 700+ pages).

Some of the main sections of a prospectus include:

  • Product/Services of the company
  • Its financials (assets, liabilities etc.)
  • Goals & business plans
  • Risks that the business faces
  • Competitors of the firm and their impact
  • Other factors in the economy that will impact the firm

Golden rules for prospectus preparation

  • Only the true nature of the company businesses should be disclosed
  • Strict and specific accuracy shall be maintained throughout the document
  • In addition to other mandatory disclosures, the company should voluntarily disclose any info that it deems to be
    a fair representation of itself

In case there have identified any misstatements during the invitation to the public, the directors of the company, promoters and people authorized in issuing the prospectus will be liable to punishments/penalties and fines (all three if you ‘really’ lucky). There have been many lawsuits that have been brought by the Registrar of companies incase companies have not utilized or mis-utilized any of the proceeds from the IPO .

There are two main types of prospectuses, as learned in certification courses in finance.

  • The preliminary prospectus is the first offering document provided by a securities issuer. Some lettering on the front cover is printed in red, which results in the use of the nickname “red herring” for this document
  • The final prospectus is printed after the deal has been made effective and can be offered for sale, and supersedes the preliminary prospectus. It contains finalized background information including such details as the exact number of shares/certificates issued and the precise offering price

Let’s now look at a recent IPO (Interglobe Aviation Limited) and review a bit of the information provided

  • At the start, they have provided the date on which the company was formed (Jan 13, 2004) and the date on which they renamed themselves
  • The IPO will help them raise capital with a value of Rs 1,272.20crs and additional sale of 26,112,000 equity shares by the promoters
  • Refer to the risks of the issue, general risks and the responsibility of the company in the issue
  • The Global book runners and lead managers of the issue (Citi Global Markets, JPM India, Barclays bank, Kotak Bank and UBS)
  • The registrar of the issue is Karvy Computershare Pvt Ltd.
  • Since the capital is being raised for future investments, the company also includes statements such “Forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance”
  • Some of the risks that could derail the company include:
  • How effectively we apply the low-cost air carrier model to the markets in which we operate or plan to
  • Operate and how successful we are in implementing our growth strategy
  • Inability to profitably expand to new routes
  • Inability to continue to negotiate reduced prices in future aircraft purchases
  • Significant amount of debt that we have taken and which we may take in the future to finance the acquisition of aircraft and our expansion plans
  • Availability of fuel and internationally prevailing fuel price including taxes
  • Depreciation of the rupee against the US dollar
  • Event of an emergency, accident or incident involving our aircraft or personnel
  • Inability to obtain regulatory approvals in the future or maintain or renew our existing regulatory approvals

They go into detail and list of 68 risks that can affect a company. If you observe, any of the above statements can easily come true and have a major impact on the company. But such information has to be provided to the investors. This comes back to a point which I had mentioned earlier – ‘help all potential investors in making informed investment decisions’

The prospectus also refers to all litigation cases (for and against the company).

Overall, the role of a prospectus is crucial as it lists both the positives and as well as the negatives that a company can offer to the public. This will therefore provide a clear cut idea to help investors decide if they are willing to invest in the company.