It might seem obvious that having availability of capital is a critical ingredient to deal success.What might not seem obvious, though, is the how availability can occur. There are numerous macro level, as well as micro level, conditions that impact availability of capital. Investment funds, private equity firms and venture capital sources have limited windows of availability due to timing on their capital raising efforts and liquidity from exits. Investment banks, whether with institutional or retail focus, get affected by broad market conditions and investor sentiment. The more challenging the economic environment, the more difficult it is to get investors to part with cash.
We’ve often seen deals fail for not paying closer attention to the availability of capital. One catastrophic move that CEO’s and CFO’s make is becoming myopic in their everyday business life. They live with an assumption that just because they have a great new mouse trap and huge market opportunity that they will be successful in pulling in capital. But it isn’t that simple. Good ideas don’t just get funded because they are good ideas. They must coincide with availability of capital.
The second trap we see CEO’s and CFO’s fall in to is that when they are fortunate enough to find available capital they don’t take enough of it. We’ve consistently seen company’s raise money and then when it rolls around to needing capital again in the future they find no available capital. Another pitfall assumption these CEO’s and CFO’s make is that just because they have a great idea and they’ve successfully raised capital that they will be able to raise it again whenever they want.
Bottom line lesson is two-fold: 1. Stay aware of macro and micro economic conditions and trends from various pockets of capital sources and 2. When you find money take 50% more than your business plan calls for.
Cash is king in the survivability of any business, regardless of size. We’ve seen incubated startups and well established multi-million dollar public companies face the same fate when capital runs dry. Desperate decisions get made when CEO’s don’t know where else to turn for money. It typically is the beginning of the end once they are chasing dollars at any cost.
We want to emphasize that capital raising is more of an art than science and is significantly influenced by what stage a company is in. Raising capital for the first round of financing in an early stage company is very different than a secondary offering for an established public company, for example.The advice we’re offering here does not contemplate the differences and complexities at each stage.
An entirely separate book could be written on capital raising because of these complexities and considerations that CEO’s and entrepreneurs must endure. We are being somewhat simplistic is saying “take money when you can get it and take more than what you need” to highlight that availability of capital is not always there and CEO’s should seriously contemplate taking what they can when they can. There are obviously other considerations to what taking that capital might mean to a company that should be contemplated.
We were reminded several years ago about the rule of available capital when the stock market crashed in September 2008. Several companies we knew had been working on a capital raise that summer. They had investment banks actively selling the deals and money getting circled. Rather than close and take a smaller round at a reasonable valuation they decided to delay a couple months in hopes of raising a larger round at a higher valuation. We all know what happened with the worst crash seen since the Great Depression. Capital markets froze for nine months and these deals that could have closed were permanently put on hold. We saw one resurface thankfully and still manage to raise money, but at a much lower valuation. But they were the lucky ones – the other deals died for good and the companies went under.
Using extreme terms like always or never is usually a bad idea because things in life rarely fall in to such definitive categories. But in this particular case we are comfortable saying that we have NEVER seen a company ultimately regret having raised capital when they had the chance. We know dozens, if not hundreds, of stories that go the other way and regret not having raised it when they could or raised enough. ALWAYS treat raising capital with a sense of urgency and is if the landscape affecting the raising of money could change at any moment – because it can and probably will!
Deals fail when capital is not available so don’t fall in to that trap.