How to raise growth capital by finding the right investors

For business owners who need an infusion of growth capital, the first step is to plan.

“I try to get business owners to articulate the goals they’d like to achieve through the rest of their lives — both with their businesses and outside their businesses,” says Scott McRill, director of transaction advisory services at SS&G. “Having that rough road map will lead them towards a better-educated decision about what to do with their businesses.”

After a plan is in place, it’s time to find a financial partner that can help achieve those goals. Clearly defined objectives make it easier to identify the type of investors to reach out to.

Smart Business spoke with McRill about the capital raising process and what business owners need to know.

What are the stages for raising capital?

Broadly, there are three types of capital raising. The early startup stage, sometimes called friends-and-family money, is when an entrepreneur has an idea and needs funds to get the business off the ground. The second stage, often referred to as venture capital money, is where venture capital firms invest in pre-profitable and sometimes even pre-revenue companies. The final stage is growth capital.

How has growth capital changed?

Historically, growth capital came primarily from private equity firms, which typically invest in cash flow positive businesses. They generally want a majority or large minority ownership stake in the business, in exchange for the growth capital and professional management they bring to the table.

Post-recession, two alternatives, family offices and individual investors, have become more significant players in the market.

Family offices are wealthy families who hire professionals to manage the capital they’ve built over generations. Recently, more family offices have been making direct investments or co-investing in businesses. They tend to have a longer investment horizon, sometimes holding an ownership stake for decades.

Similarly, after corporate America downsized, talented executives who were without a job but weren’t ready to fully retire started looking to invest in and manage smaller companies. Matching the right executive with the right small business is a challenge, but it’s also a nice alternative for an owner looking for growth capital and management assistance.

Where do banks come in?

Expanding an existing line of credit with a lender can be an option to obtain growth capital. Most growth capital transactions are put together with some combination of equity, senior and sub debt, along with a line of credit facility. Debt leverage into deals has also improved significantly, creating lots of opportunities for deals with less equity than was required four or five years ago.

How do business owners get in front of the right investors?

It’s an art, not a science. One way to start — once you’ve set your business and life goals — is with a trusted business adviser. He or she can help put a team together to determine your next steps, whether that comes from direct introductions to potential investors or to an investment banker.

Many business owners who were fairly frugal while building their business can get scared away from investment bankers and the fees they may have to pay to assist in selling or raising growth capital. An investment banker, however, sells businesses and raises capital for a living — and they are good at it.

What other tips do you have for putting together funding proposals?

Preparation is of utmost importance to making a pitch. Business owners who’ve frugally built their companies from scratch may have trouble understanding the value of spending money on professionals. Investors see lots of pitches, and can quickly tell who is prepared and who is not.

Take your time, hire advisers who can help you prepare and be completely honest. Make sure your books and records are clean and prepared for the buyer or investor diligence process. Don’t try to skirt around answers to questions if you don’t know the answer. You’ll maintain more credibility by saying, ‘I’m not sure about that. I’ll look into it and get back to you.’

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