By Colin M. Hannifin, CPA, Business Assurance & Advisory Services Supervisor | Emerging Business Team
As ideas transform into companies through the vision and effort of entrepreneurs, one of the most daunting tasks facing business owners is taking the next step – raising funds to spur the growth of the fledgling company to new heights. Undertaking the process can be a challenging and intimidating project, but one from which the business – and entrepreneur – can learn, grow, and mature.
EmergingRVA: Startup Panel Discussion
On June 2, 2016, Keiter hosted the 4th semiannual EmergingRVA event, a panel discussion on the challenges and decisions faced during growth-phase fundraising of three local businesses. The discussion was moderated by Carroll Hurst, partner with Keiter and the RVA startup panel participants included:
- Avrum Elmakis, Founder and CEO of Best Bully Sticks
- Peter Garahan, CFO and Vice Chairman of Decisiv
- Austin Harris, Vice President of Finance and Operations of Health Warrior
All participants had taken part in one or more equity-based fundraising events at some point over the past three years.
3 Approaches to Raising Funds for Business Growth
Each of the three represented companies had taken a different approach to raising funds – one partnered with a strategic private equity firm with significant domain expertise; another connected with a venture capitalist; the last joined forces with a family office investor with significant business experiences. The paths and practices utilized to arrive at the fundraising event varied widely between the three companies, as explained below.
Approach #1: Private Equity
The first company was engaging in its third round of financing. As company management has a background in investment banking, it approached this round of fundraising in a very professional and targeted manner. Management identified several private equity groups with whom they felt they could successfully work, polished their presentation and timeline, and began reaching out to potential investors. Expectations were clear from the outset and provided directly to the private equity groups, from communicating that only a minority interest was available to providing detailed instructions on how term sheets should be structured. Management met with potential investors and compared term sheets before making their final selection. The most significant factors in the decision were the deal structure, as the company was dedicated to protecting early investors, and the ability of the private equity group to act as a strategic partner. Now that the transaction has closed, on an almost daily basis, the company is in constant communication with the investor, seeking advice and additional insight. The company has achieved significant growth since the investment and is extremely happy with its private equity partner.
Approach #2: Family Office
The next company, profitable since inception, was seeking a strategic business partner and additional resources to grow the company. Company management connected with an investment banker to help guide them through the process. Beyond the investment banker, however, the process was not well defined, in sharp contrast to the first company. Management was open to all classes of investors, and they eventually reached out to 100 potential investors. This list was eventually whittled down to about a dozen potential investors of various methods, including venture capitalists, private equity, and private investors including family offices. After meeting with the potential investors and receiving letter of intent, the company selected one private family office investor, who acts as a strategic partner and provides additional insight and business acumen to the business. Of particular allure to management is the fact that the investor has a very long investment time horizon and is not seeking to get an immediate return, instead hoping to grow its capital and wealth. Management remarked that while a better-defined process would have made the effort less stressful, in the end the fundraising was a success and the entire experience helped spur a professionalization of the business. Additionally, while the other companies of the panel chose not to utilize an investment banker, this company found its investment banker invaluable, particularly when fielding offers from potential investors and negotiating the definitive terms of the transaction.
Approach #3: Venture Capitalist
The most recent fundraising of the final company had the most scant process of all. The company has a history of forming strategic partnerships with its customers and it is these avenues through which the company had previously raised funds. However, in the most recent round of financing, the company connected with a venture capitalist, whom the chairman of the company met by chance. As discussions between the company and the investor were ongoing, it was clear that an investment banker would not be needed to facilitate the deal. The company also made it clear control of the company was not available. The connection proved so strong that to date the investor has provided two tranches of financing and continues to act as an advisor.
After the companies shared their stories, there were several questions from the audience including:
Q: How did the companies choose between debt financing and equity fundraising?
- One company mentioned that they had no desire to take on debt; instead the fundraising was a way for the company’s owners to cash out some equity through a recapitalization transaction and diversify their personal wealth. Additionally, the lack of debt leverage enabled the company to use its balance sheet to pursue growth initiatives.
- The other two companies discussed the difficulties in obtaining debt financing – particularly when the company is light on tangible assets to serve as collateral, which banks prefer for security purposes. These companies were also reluctant to take on obligations to service debt, especially at a time when much of the cash generated by a business should be reinvested in growth initiatives.
Q: What did the companies do about the potential investor(s) who had not been selected?
- One company mentioned that while the investment banker handled communications, the entire process is built on relationships. Several of the potential investors had reached out afterwards, and the company had even worked with one of the private equity firms on a subsequent matter.
- Another company echoed this sentiment, noting that all parties involved were professionals.
Discussion Take Away
An established company that is preparing for growth faces many difficult decisions and significant challenges. As evidenced by the experiences of our panelists, there is no one-size-fits-all solution. Management must understand its own strengths and shortcomings and determine the characteristics for which it is looking in a potential investor and partner. Once that is established, the process can begin in earnest and, with hard work, determination, and newly raised funds, the company can continue to grow and flourish.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.