Knowing what to communicate (or what not to communicate) when you're raising equity or debt is crucial to your success.
Communicating with Capital: Part 1 - Before the Deal Is Done
As management teams prepare to raise equity or debt for their businesses their attention is usually focused on business plans, financial models, ratios, and returns. All of those are important elements of raising capital, but properly communicating with prospective investors and lenders is equally important and needs management attention. The professionals at Waypoint Private Capital have witnessed good and bad communication from entrepreneurs and seasoned executives alike, and the impact differing communication styles have on deals. So, although some of the following may seem obvious, we think it is important and worth a quick read.There are four primary elements of communication material a company should prepare before approaching investors. It takes significant time and effort, but it is an essential part of effectively communicating with capital providers and raising the money.
Investor Outreach Needs
Primary Elements of Communication
There are four primary elements of communication material a company should prepare before approaching investors. It takes significant time and effort, but it is an essential part of effectively communicating with capital providers and raising the money.
1. One-Page Summary
A one-page summary of the company, its financials, and the capital they are seeking from the investor or lender. The summary allows busy investors and lenders to quickly assess the opportunity and decide if it fits their requirements.
2. Offering Memorandum
The offering memorandum describes every aspect of the company in detail. This is similar to a business plan and should be detailed enough to help the investor understand the business and industry. An offering memorandum is helpful for equity investors but is not usually necessary for lenders.
3. Investor / Lender Presentation
This presentation describes every major aspect of the company, industry, and managements plans for deploying the capital they are seeking. Although the presentation should be detailed, it should also be succinct enough to be delivered verbally in twenty minutes or less.
4. Financial Model
The financial model showing the historical performance of the company and the projected results for the next three to five years. The financial model provides numbers used in the other three communication pieces and will often be requested during due diligence.
This presentation describes every major aspect of the company, industry, and managements plans for deploying the capital they are seeking. Although the presentation should be detailed, it should also be succinct enough to be delivered verbally in twenty minutes or less.
Initial Outreach
The initial contact with the investor or lender should be an introductory email with the one page summary attached. This email can come from the CEO or CFO directly, or can be from someone who is introducing both parties. Blindly reaching out to solicit the investor or lender is acceptable, but networking through mutual contacts or advisors to provide an introduction is more effective and demonstrates the resourcefulness of the team.
Follow-Up
Management should follow up with a phone call and/or email if there is no response to the initial communication within a few days. All follow up communication should be polite and have enough time between communications, so it does not appear to be annoying or needy.
The initial goal of the follow-up is to determine if the investor/lender is interested in learning more about the company. If they are interested then a meeting or more lengthy phone call should be scheduled to review the opportunity in more detail. The offering memorandum should be emailed as soon as the meeting is scheduled.
Initial Meeting
Management gets one chance to make a good first impression, and that chance is usually at the first meeting with the investor or lender. Two things are happening while the team is delivering their presentation and answering questions. First, the person on the other side of the table is trying to learn more about the opportunity to determine if they are interested in pursuing it further. Second, they are trying to determine if they want to partner with the CEO and executive team for the next few years. Investors and lenders are looking for the following characteristics in the team that often come through very clearly during their communications in the first meeting:
1. Confidence
2. Sincerity and trustworthiness
3. Transparency
4. Ability to work with partners and advisors
5. Respect for the investors, lenders, and rest of the team.
They do not want to see the following:
1. Arrogance
2. Untrustworthiness
3. Spin and evasiveness
4. Defensiveness and argumentative behavior
5. Disrespect for investor time, opinion, and value.
Due Diligence
If the company is fortunate enough to get to due diligence with the investor or lender, they are close to reaching their goal and receiving funding. However, deals are not done until they have funded and can fall apart during due diligence. Investors/lenders not only need the information they are requesting, but they are also using due diligence as another test of the management team. During due diligence the company needs to respond in a timely manner, answering the questions directly and completely, and being honest and transparent with all information. Delays and evasiveness kill deals.
Although often overlooked, proper communication is an essential part of raising capital from equity investors and lenders. The professionals at Waypoint Private Capital work with our clients to ensure they are properly communicating with capital providers to increase the likelihood of successfully raising capital.
About Waypoint Private Capital
Waypoint Private Capital is an investment banking firm that educates and advises middle-market, privately held companies through critical stages of their business' life cycle. Waypoint helps business owners and entrepreneurs sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from the business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
Steve Sprindis is co-founder and managing director of Waypoint Private Capital. © 2015 Waypoint Private Capital, Inc. All Rights Reserved.
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