This month at Christopher Ward we have been exploring the possibility of raising capital again via a new venture round. For many small businesses, whether starting out or more established, securing external finance is a key means of unlocking growth. However, a venture round can also pose several risks and pitfalls, and seem daunting to those unfamiliar with the private equity market.
From personal experience, I have been involved in private equity and raising capital since the mid-1990s, when I initially tried to buy the high-end shoes and leather goods business Cable & Co. In 1997 I raised, along with my business partner Peter Ellis, £540m to buy the Littlewoods chain of stores, but Littlewoods later decided not to sell. After that, we bought the Early Learning Centre from John Menzies, backed by 3i, selling it to Tim Waterstone in 2004.
With both confidence and due diligence, raising capital is much simpler than it may initially appear. Here is how to best go about it.
(1) Understanding your needs
The first step is to understand exactly what you seek the capital for, and how much of it you need. Is it for general growth or a specific project? What will increased capital offer that otherwise wouldn’t be possible?
Working out how much money you need must be part of your wider 3-5 year business plan, dependent on how much of your potential you think you can unlock, and how much equity you’re prepared to relinquish. Although you will instinctively want to give away as little equity as possible, it can in the long term be better to secure greater investment and relinquish more control – and potentially have ten per cent of something worth £50m, as opposed to 50 per cent of something worth £5m.
(2) Securing expert advice
The second stage is to employ a corporate finance specialist who will hold your hand throughout the process. They should be seen as any other business partner and so need to be chosen carefully and trusted. Therefore, do your due diligence – check if they specialise in your sector and the kinds of deals they’ve previously done, undertake a beauty parade to pick the right one, weigh up a few different firms and make a decision only once you have thorough insight.
(3) Maintaining control of the process
Having settled on a corporate finance house, you will be exposed to the private equity firms who may wish to invest in your venture. I would suggest you engage with a number of firms, and initially keep your options open with at least two different potential routes for investment.
It is also vital that you and your corporate finance partner maintain control of the process. Private equity firms can be impressive – with slick, swanky Mayfair offices and a raft of complex anacronyms and terminology designed to impress. The reality, however, is that raising money for your business is no different to raising a mortgage on your house – you are borrowing money and providing the lenders with a stake in your business in return.
If, as a business owner, you don’t have a strong financial background, or don’t have accountancy strength in your team, do not worry – as much of the culture around private equity is quickly learnable and your corporate financial specialist is there to help. Ultimately, don’t allow the investor to control the process and simply drag you along. Remember, this is your venture, and you have the final say on investment.
(4) Raising capital – timing it right
Timing is also crucially important. There’s no point seeking extra capital if your business is heading for a downturn. But, if you anticipate momentum and your sales and profit lines are robust, the time could be right. It can take six, nine or even 12 months between your first meeting with a private equity firm and the investment being completed, so make sure this timescale – and potential events during this period – are planned for.
(5) Looking beyond private equity
Finally, consider alternative forms of raising capital beyond private equity. Crowdfunding can offer the advantages of marketing your business at the same time as raising capital, and investors often tend to become advocates too. Crowdfunding can also be quicker and potentially cheaper than the private equity route, although tends to lead to relatively fewer exits.
Depending on the size and scale of your business, listing on a capital growth market such as the London Stock Exchange’s Alternative Investment Market (AIM) is another alternative.
However listing on a market exposes you in a way that private equity doesn’t, and you will need to spend more time managing the markets and third parties investing in your business than if you had a narrower base of investors. As with any form of raising capital, make sure you thoroughly undertake your due diligence first to ensure this is the right choice for you.