A young company can have a great business plan, a talented team, and a service its customers want to pay for, but it’ll never make it past the startup phase without adequate capital. And raising capital as a startup is only the first big financing challenge. As a company moves through its lifecycle, maintaining the right relationships and knowing how to leverage debt and equity efficiently is critical for future growth.
Your business advisors are always the best source of specific guidance as your company moves through its lifecycle—but here are five key points to remember as you think about raising capital in the startup phase and beyond.
1. Startups don’t necessarily have to sacrifice equity to get financing.
There’s nothing straightforward about raising capital as a startup. A young company that’s early in its lifecycle isn’t going to have access to the kind of debt and equity that more established businesses have. They just don’t have the leverage to call their own shots. So they might turn to things like crowdfunding and bootstrapping, which are only very short-term solutions for raising capital as a startup. Venture capital might look appealing, especially when a VC firm is throwing money at you, but these deals benefit the investor more than the business. You might get the cash you need to take the company to the next level, but you’ll sacrifice ownership and control.
When advisors work with young companies on issues like raising capital as a startup, there are a couple of things we’re looking for. First, what are creative ways to get financing that doesn’t dilute the owners’ equity? Doing something like taking on expensive debt might not seem ideal in the short term, but ultimately non-dilutive financing may be the best long-term strategy for growing the business while maintaining ownership.
The other key role business advisors can play for startups is helping them identify when they’re ready to move into the next phase of financing. As those startups mature, they have more leverage. More lenders are willing to compete for a piece of the company’s capital stack. So your advisors should be able to say now that you’ve reached XYZ benchmarks, it’s time to move into a more efficient use of your debt and equity to position you for the next level of growth.
2. Be prepared for the economic cycle to affect your lending options.
The experience your business has raising capital this year might be different than the experience it had last year. Where we are in the economic cycle will always shape the lending process for businesses raising capital. There are times when debt and equity are plentiful and others when they’re tight.
It’s not uncommon for a company to fall out of favor with its bank even when the company is doing well. Say you have an existing lending relationship with a bank that’s recently suffered losses in your business sector, for example. The bank’s credit officer might reach out to say, “We’re no longer going to be in this sector.” Through no fault of your own, you now need to find alternative financing. Making sure you have contingent relationships and alternative forms of debt and equity allows your company to nimbly pivot if the bank lets you down.
3. Build debt and equity into your growth projections.
It’s not uncommon for companies to say, “We’re going to grow by X percent by Y date.” But most of the time, they haven’t done the math to account for specifically how their financing obligations fit into those projections. For example, let’s say you’ve set a goal to grow by 40 percent over the next ten years. How much potential debt and equity will it take to support that kind of growth? Also, if you have covenants and other restrictions on your current lending agreements, how are you ensuring you’re going to meet all those terms with your anticipated rate of growth? These are essential conversations to have with your advisors.
4. Confront lending issues head-on.
As your company grows or contracts, there might be times when things aren’t going according to plan and you’re struggling to meet your lending obligations. Your best chance to turn things around is to confront the problems proactively with your stakeholders. Investors don’t like surprises. Get in front of the issue by explaining why things have gone wrong and, more importantly, what the corrective action is that you’re taking to get back on track. Don’t let underperformance keep you from having frank conversations with your lenders and stakeholders.
5. Know what lenders want to see.
Growing companies have to have a clear understanding of how to “speak lender.” Having relationships with investors/lenders is great, but you also have to understand the specific kinds of things that they want to see and hear from you before signing off on an agreement. They’re looking for cogent, independent objective reporting on how an investment is doing, which requires a high level of financial and analytical literacy. Having advisors who can translate “lender speak” for you (and communicate to those lenders in their own language) is imperative for creating and maintaining those valuable relationships.
Unlock the Full Potential of Your Business with LGA’s Advisory Services
If you’re seeking guidance and support to propel your business to new heights, LGA is here to assist you. Our team of experienced advisors is dedicated to helping businesses unlock their full potential. From startups to established enterprises, we offer tailored solutions and strategic insights at every stage of your company’s lifecycle. Whether you need assistance with business development, growth strategies, financial planning, access to capital and debt, developing and/or executing on your exit plan, or operational efficiency, our expertise is at your disposal. Don’t navigate the challenges alone – let LGA be your trusted partner on the path to success. Contact us today and unlock the full potential of your business.
by Kenneth D. Segal, Partner & Managing Director of Business Advisory Services
