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14 Feb 2012
What is Your Capital Raising Speed
There are many questions that are buzzing around in people’s heads when they are about to raise capital. The choices can be overwhelming. To help our clients through the initial phases we might send a ‘brainstorming’/'narrowing-down’ email and then have a follow-up meeting. The benefits of this approach are to focus in on the key tasks, allocate the tasks to right person, and get on with the job – raising capital. Too much procrastination leads to a poorly structured capital raising campaign and the high likelihood of not raising capital.
In advance of our meeting to discuss how you want to work with us, please can you have a think about the following points for further discussion:
- Corporate structure – what would work best is if there was a pure Holding Company and then 100% subsidiaries under that. This may require the formation of new companies and some share for share transfers. My experience is that it is worth getting this right now and before substantial value increases occur in the share price. What were you thinking?
- Debt facilities – many investors will want no debt on the balance sheet before they invest. Any loans are typically converted at a discount to the offer price. Are there any such loans to be aware of?
- Valuation – what financial projections exist to create a discounted cashflow valuation? What comparable companies are there on the ASX or other exchanges globally? What company trade sales have occurred in this space in the last 3 years? What do you believe the future exit value will be and over what time frame?
- Splitting the $1m capital raise – What can be done with $500k to increase share price – this could be Round 1? We can then raise the remaining $500k capital at a higher valuation. From a marketing point of view it tends to avoid the impasse of investors wanting other investors to jump first. It creates scarcity and requires us to think about the milestones to be achieved with the $500k. What is your view on this approach?
- Board non-executives vs. Board advisors – Many companies raising capital choose not to have a board of executives and opt for a board of advisors – mainly for the purposes of letting these people be sales people for the share offer (and opening up their networks of High Net Worth investors). Obviously, the primary non-capital raising reason is to have their input to strategy and to make connections to customers and suppliers or in some other way add value and credibility. What thoughts have you in this regard?
- Share incentive plan – there are many good reasons to put in place a share incentive plan at the same time as sorting the company structure (top holdco and flat 100% subs). It might be a good idea to add $100k to the capital raise to create these incentive plans now. Who would be included in the incentive program? What would their share plans be linked to? Who is needed to join the senior management of the company in the next 2 years that will need to be incentivised with share options?
- Capacity of existing investors to finance the next round – how likely is it that the existing investors would take up a compelling rights issue (e.g. 3 for 1 offer) prior to a capital raising? An example might be raise $200k through this approach, $400k in quick order then $400k or a far higher sum in 6 months time. What would be needed to show existing investors to demonstrate superb value and create that compelling offer?
- Ideal investors – who are the ideal corporate venture partners or individuals that will instantly ‘get it’? My thoughts run down the path of past senior executives of [energy providers]. Would we also want some overseas investors at this time to protect us commercially in the, say, Indonesian market?
- Migration of company to Hong Kong/US for HQ – what is the likelihood of the company needing to be located offshore in the next 2 years? Will the ideal final buyer of the company be overseas rather than domestic? Would it be best to raise capital using Chinese investor monies now and hence we need to think about appointing a Hong Kong based corporate advisor in parallel?
- Scrip acquisitions – what is the possible size if you were to make an acquisition of a company with existing cashflows? If your company had a better corporate governance structure then this could be a selling point for a mainly share for share acquisition. Hence, a listing and capital raise on NSX might be beneficial. What benefits would there be to opening up the shareholder base to the required 50 people minimum for an NSX listing?
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About the Author
Michael Cradock
Michael is a corporate finance advisor with a chartered accountant and management consulting background having worked for both KPMG and PricewaterhouseCoopers. Michael is an owner of Morgan Cradock and part-owner in two startup companies and one property fund.