Today’s investment environment in Ohio, especially in its major cities, is very strong. Investors — individuals, companies and firms — have a lot of cash and want to grow and they’re looking for opportunities to put their money to work.
“There’s a big appetite for investments,” says Michael Stevenson, managing partner at Clarus Partners. “Making the right pitch to the right people can make that money accessible.”
Smart Business spoke with Stevenson about raising capital at different stages of a company’s life cycle.
What are the most common reasons businesses and startups raise capital?
Established businesses typically raise capital ahead of an expansion, when they’re looking to buy a business, start a new service or launch a new product. There are also balance-sheet needs, for instance when a company wants to shore up its balance sheet for a potential sale, so it pays down its debt with capital. Established companies also use capital to diversify their ownership holdings, providing aging owners more latitude to put their money elsewhere while giving other investors an opportunity to buy in.
Owners of startups often invest a lot of their own money into their fledgling company. As they grow, their working capital needs increase, but their money is tied up elsewhere, so they’re in an illiquid position and they need outside capital to shore up their working capital and pay employees.
What types of capital are being sought?
Existing businesses are pinning their capital hopes to Small Business Administration or commercial loans. These are the top choices because existing businesses have the equity to back a line of credit or term loan. Their cash flow, or the increase in cash flow expected from the capital injection, gives the lender the confidence that the loan will be paid back within the term.
For startups, they’re looking for angel investors, which typically want to invest in a company but don’t want an ownership stake. Rather, they want 20 to 30 percent return in exchange for taking the risk.
Who should businesses and startups seek advice from before raising capital?
Accountants can put together a plan that accurately quantifies and identifies the company’s capital needs, which is important because investors and banks need a number when looking to back a venture, and they need a rationale to commit.
An attorney can help the business as it builds and shapes its management team, which is important because banks and investors are throwing their money behind people, particularly people who they believe can manage the business to success.
It’s also good to involve an attorney in the formation of the business plan. They’re skilled at telling concise stories with information that’s the most relevant to potential investors.
How do startups connect with investors?
Startup owners need to go out into the community — via chambers of commerce and other economic development organizations — to make connections. They’ve got to get out and tell their story to people in the community. It increases the chances that they’ll meet an investor looking for an opportunity.
What should startups keep in mind when pitching investors?
Whatever the business thinks its capital needs are, double it. A startup doesn’t want to be in a position, having received an investment, of having to go back to the investor and ask for more money. That hurts the business owner’s credibility and makes it seem as if he or she doesn’t have a complete understanding of the company’s needs.
Also, investors want the business’s story. The numbers are important, but revenue streams and markets change so rapidly that forecasts become useless. It’s better to differentiate the business from others in the same space. Prepare a deck when raising capital to tell the story of the company.
It’s really important to have a full and complete understanding of the business. Owners need to be able to answer investors’ questions quickly and completely to prove that they understand the business and the marketplace in which it operates to convince finicky investors that the company is worth the risk.
Insights Accounting is brought to you by Clarus Partners