Why Hire an Advisor to Raise Capital?

In today’s environment where there is more capital chasing fewer deals, many PE firms have taken the approach to call companies directly and not wait for a call from an investment banker in a “process”. Consequently, many CEOs are inundated with calls from PE Groups “interested” in investing in their business. As long as the CEO has good competent legal counsel why hire an investment banker? The reality is, not all capital raises require a financial advisor, particularly for early stage capital raises or capital raises of less than $ 5 million, but in other situations it will often be viewed as the best money ever spent.

2 Biggest Myths of Raising Capital

1. Inside Round: “We have current investors with capital who want to invest into my business so I don’t need an advisor.” In this situation perhaps more than any other, the CEO/Founder needs to understand his goals and objectives versus the goals and objectives of existing investors. Do the current investors want to invest at a high valuation on the Company? Is that in the Company’s or CEO’s interest who may not have capital to invest in this subsequent round and thereby will be diluted regardless, but even more so at a lower valuation? The right financial advisor will understand the investor landscape and be able to access various pools of capital and organize a process to optimize the value and terms of any investment. If the existing investors want to participate at the “market clearing” price and terms that is great because everyone is aligned.
2. Pre-existing interest: “I get a call a week from a PE group interested in investing in my business so I don’t need an investment banker?” Most of our clients come to us with some level of recent interest and 90+% of the time the interest does not manifest itself into a deal but rather another investor ends up closing on the transaction. A series of meetings or even a term sheet is a long ways from getting a deal done. Not only will the right financial advisor provide access to a broader set of PE groups and run an efficient process, but they will:
• Help position the business for PE groups and create a tailored story leveraging their experience in the nuances of what drives value and optimal terms for each PE group.
• Access pools of capital unknown to the CEO. In today’s market capital can come from many different sources and in many different forms. Knowing and talking to a local group of VCs is great but the right investor may be a Boston Growth Equity firm or a family office in Europe.
• Find not only the right investor from an economic perspective, but also the right cultural fit. While a Capital Raising event may provide some level of liquidity to the founder/CEO it is not an exit strategy. The Founder’s wealth opportunity is likely in a subsequent sale transaction and he will have to work well with his new investor(s) to help propel the business forward. A shared strategic vision and a good cultural fit are as important as any economic terms. The right advisor will help find the right partner at the right price and terms.
• Take a huge burden off of the CEO. Managing a process is time consuming but if you want to make sure you optimize value and terms it is an imperative. While CEO involvement is critical, their time is better spent focused on driving the business forward.
• Serve as the intermediary to buffer the CEO/Founder. Negotiating terms and value with a prospective investor/partner/board member can put the CEO in a difficult position. It is important that the CEO/Founder always wears the white hat. Each investor wants to feel they are the “preferred” partner and it makes if difficult for a CEO/Founder to negotiate on his own, or even his Company’s behalf.
• Shepherding the deal to conclusion. CEO/Founders are not surprised to learn that a term sheet from an investor puts them on the 20 yard line, but they are surprised when they learn they have 80 yards to go. Getting through diligence, negotiating structure nuances, and managing the entire process to arrive at a closing in an efficient and effective manner is a key role for a good financial advisor. The CEO/Founder and financial advisor are well aligned and focused on getting the deal completed while other advisors are not financially incented to get the deal closed, but rather to spend more hours working on it.