Capital Raising Process: Preparation Phase

Capital raising process is a complex journey, with each phase being crucial to the overall success of the endeavour. This blog focuses on the preparation phase, which sets the foundation for a successful capital raising campaign.

For the basis of this article, you may want to read also this blog to have understanding on a fundraising process from higher level. 

Structure & Timelines

The structure and timeline of the capital raising project must be meticulously planned. It is crucial to first identify which types of capital are relevant, what constraints should be imposed on the capital raising process, and the overall scope for which the capital is being raised. The project should be outlined as clearly and simply as possible, minimizing the influence of variable elements. However, it is equally important to remain flexible with certain constraints throughout the project to ensure that the overall solution benefits all stakeholders. For example, prematurely deciding on the terms of a financial instrument without proper exploration can either be detrimental or beneficial to the process, depending on various factors. 

Materials

The necessary materials, such as the company’s presentation and financial forecasts, must be prepared with the utmost care, as they are central to the exchange of information. Properly prepared materials are crucial for effectively communicating the value of the project to potential investors. During the preparation phase, it is important to identify the most essential and compelling selling points of the project and document them clearly. Depending on the nature of the project, a company valuation might also be necessary. 

Here’s a breakdown of the types of materials that need to be prepared: 

• Investment Memorandum: This document serves as the foundation of your capital raising efforts, providing a comprehensive overview of the company’s business. The investment memorandum typically includes several key components: 
  • Market Research: An in-depth analysis of the market in which the company operates, including market size, growth potential, and competitive landscape. 
  • Business Description: A detailed description of the company’s business model, value proposition, and unique selling points. This description can include e.g., the following topics. 
    • Services & Products: A detailed overview of the company’s services and products, including their development stages, market positioning, and competitive advantages. 
    • Organization: Information about the company’s organizational structure, including key management team members and their roles. 
    • Tangible and Intangible Assets: A list of the company’s assets, including physical assets such as machinery, equipment, and technology, as well as intangible assets like patents and proprietary software. 
    • Business Plan: A comprehensive plan outlining the company’s strategy, goals, and the steps it will take to achieve them. 
    • Technology Description: A detailed explanation of the technology the company uses or is developing, including its applications and competitive advantages. 
      
      
  • Financial Overview: A summary of the company’s financial health, including profit and loss statements, balance sheets, and cash flow forecasts. This section should also include financial modeling and projections for the next 5-10 years, historical financial data, and documented financial goals to help investors understand the capital needs and evaluate the credibility and soundness of the plan. 
    
    
• Teaser: This is an introductory document that accompanies the first contact with potential investors. It provides essential information and highlights the key selling points of the project without revealing too much sensitive information or the full scope of the project. The teaser serves to generate interest and encourage further engagement. 
  
  
• Management Presentations: These presentations are developed to support the management team in showcasing the company and its growth plans to potential investors. The presentations should align with the management’s communication style and effectively convey the company’s vision and strategy. 
  
  
• Data Room: The data room is prepared during the process, depending on the nature of the project. It contains additional detailed information, such as financial and contractual documentation, and materials specific to the company’s business, such as technology descriptions, patents, etc. The timing of its preparation can vary depending on the project's needs.

Identifying Sources of Capital

As preparation progresses, it is essential to comprehensively identify potential sources of capital and structure the project accordingly. It is important to engage all relevant negotiation partners simultaneously to effectively create a competitive environment in the negotiations. Sources of capital can be broadly categorized into three main types: equity capital, debt capital, and grant-based capital. 

1. Equity Capital:

Equity capital involves raising funds in exchange for shares in the company. In a bankruptcy scenario, equity holders are often the last in line to receive any remaining assets, which places them in the lowest priority. The return on equity capital typically comes from the appreciation of the company’s shares and dividends paid out to shareholders. 

Investors in equity capital can generally be categorized into financial and strategic investors, or a combination of both. Financial investors are primarily concerned with the return on their investment and whether the investment target aligns with their operational boundaries. For example, many funds have strict criteria regarding the types of projects they can invest in. A decision not to invest may not necessarily reflect the quality of the project but rather its structure, such as the size of the company, industry, or stage in its lifecycle. 

Strategic investors, on the other hand, are often interested in the potential synergies or added value that collaboration between the investor and the target company could bring. Depending on this added value, the valuation of the investment target can be assessed from multiple perspectives. For example, the target company may be valuable as a distribution channel or as an exclusive marketable service package. 

2. Debt Capital:

Debt capital involves raising funds in exchange for collateral, with debt holders often enjoying a higher priority in a bankruptcy scenario compared to equity holders. The return on debt capital comes from interest payments and the repayment of the principal amount. 

Depending on the company’s lifecycle and the overall funding needs, debt options could include state development loans, venture debt, growth loans from funds, bank loans, leasing, receivables financing structures, export credits, and publicly traded bonds. The structure of these loans can vary significantly, with a wide range of terms and conditions available depending on the lender. 

3. Grant-Based Capital:

Grant-based capital, often referred to as “free money,” is highly competitive and typically provided by public institutions. This type of funding usually requires private capital to be raised alongside it. Grants are often targeted at high-risk activities such as product development, technology demonstration, or production investment in a new industry. 

Grants can take various forms, such as direct subsidies paid as a lump sum or tariff-based grants, where the subsidy is paid based on the quantity of the produced good. Due to the competitive nature of grant-based capital, securing this type of funding requires thorough preparation and a compelling proposal. 

Summary 

The documentation related to capital raising is crucial for success, and it is worth investing significant time in its careful preparation. Well-prepared materials not only facilitate effective communication with potential investors but also scale exponentially over the fundraising project, adding value to every party that receives the information. The preparation phase requires a high level of experience and expertise, and it can often consume a significant amount of management’s time. Therefore, it is often efficient to engage external experts to assist in the creation of these materials. 

Identifying sources of capital is a complex and experience-demanding task that requires careful consideration at every level, from the desired capital structure to the individual financiers involved. 

Blog is written by:

Miikka Lievonen
Director, Grannenfelt Finance
miikka.lievonen@grannenfeltfinance.fi 
+358 50 554 5844

The writer has 10 years of experience working in corporate finance and capital raising related projects. He has helped multiple growth companies to raise capital including Vastuu Group, Beely, P2X Solutions, and Varjo. 

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