The rules for raising corporate and project finance have changed. Since 2008 the main source of funding has become the many channels through which private wealth flows into the market. See our article ‘Time to Call Time on Shadow Banking’ for further background on the growth of the non-bank finance market
At the outset it is best to flag up that you should forget most of what you ever knew about raising capital for your enterprise. Even leading corporate bankers are now acting more as brokers, assembling funds from a myriad of private sources for corporate and project financing. Be it through a bank, broker or other intermediary, you are dealing with people who are investing their own money. They are overwhelmingly successful entrepreneurs channeling an estimated 20% of their combined $56-trillion (say, $10-trillion) combined wealth into alternative and direct investment opportunities.
Also, non-bankers rarely have the ‘filtering’ resource that traditional banks have. It has long been the practice in the market that you will be dealing mostly with intermediaries or, what we at TheWealthJournal.net (TWJ) prefer to call Capital Raising Advisors (CRA’s). These are the people who sort the wheat from the chaff and ensure that the funder’s time is not wasted.
There are endless opportunities for you to alienate your CRA or funder. Beyond any doubt you will have put in hundreds if not thousands of hours (the ‘sweat equity’) into the project idea and inception. It is therefore saddening to see that a majority of proposals fail upon submission due to simple to avoid mistakes. Read here about the most common mistakes encountered by the market generally on a daily basis.
1. The Executive Summary looks like a sales brochure
It is overflowing with technical jargon, market overviews and fabulous images. But does not enable the funder to make a rapid ‘yes’ or ‘no’ decision. There have been countless books on how to write a business plan and we’re not going to spend time regurgitating all that here. The document that really counts, the door opener, is your executive summary (ES).
The ES, if done right, will open the CRA’s and/or funder’s doors for you. In the author’s experience the ES is, beyond any doubt, the single most important document in the funding process. Yet the vast majority of principals send out incomplete and confusing ES’s, if any at all.
In its most simplistic terms, producing an executive summary as a lethal weapon in your capital raising campaign amounts to utilizing a long established PR principle. Every press release needs to get the five-W’s into the opening paragraph in order to capture the attention of the journalist.
With the same objective, you need to get these five-W’s: Who, What, Where, When and Why into your ES. Add to that a soupçon of ‘H’, i.e.: ‘How much’, which can be presented as one sentence, and you have all the ingredients to ensure that you capture the attention of the CRA and, hence, the funders.
These are the five-W’s in more detail as applied to your ES, which should not run to any more than five pages:
Describe what it is you are planning to do. Be it starting a software company, building a toll-road or solar farm describe it in as few words as possible. The shorter the description the better it will always work. Remember, the best propositions are always the simplest and easiest to explain. There is nothing wrong with including an illustration or other image of your project in this section.
This should come immediately after ‘What’ above. It is absolutely critical to say how much funding is required. This, after all, is what any funder wants to know right up front and, be absolutely assured, no CRA or funder is going to read an entire business plan (or even a poorly produced executive summary) in order to unearth this key piece of information. DO NOT present how you want this funding structured. Always leave the funding structure ‘open to negotiation’. By proposing a funding structure you will immediately close down dialogue with prospective funders whose structure does not match what you are looking for, and who might well be able to offer you an alternative, better deal.
Present how much you’re looking for in just one sentence such as: $5,000,000. Terms subject to negotiation.
Follow this with a five year forecast showing turnover and profit for each year. That’s all the funder wants to see at this stage. If they are interested, they’ll come back and ask for the full business or project plan. Don’t hound them for an answer.
Is your enterprise going to service a particular country, region within a country or is it being prepared for world domination?
Edit your management CV’s from your business plan back to no more than 50 to 100 word bios for each of your key management. Be sure you have the three pillars of any successful enterprise covered: technical/product knowledge, sales/marketing and financial control. If you are an established company, say as much, and give a little about your track record and summarize your most recent years’ financial results and your forecast post-investment performance.
Are you already operating, are you planning a specific start date or is your future growth or launch dependent on funding? Make your time frames clear.
Why do you believe that what you want funded is actually going to produce enough profit to provide an equity investor with attractive enough returns, or a lender to be assured the loan is going to be repaid? Present here the most relevant points of your market research and/or other evidence of the viability of your project.
The above ‘five-W’s’ advice has been presented to clients over many years. Some have actually produced their entire ES with these actual five-W headings, with an additional ‘How Much’ heading at the end. It’s been quite a delicate undertaking to direct these clients to simply embed the information inside their own text.
2. E-mail overload.
You send the business plan, ES, drawings, permits, JV agreements, contracts, land leases, etc altogether in the first email, thereby overwhelming the recipient and clogging up their inbox. It will usually be deleted without a second glance.
3. Assigning file names
The icing on the cake in (2) above is not assigning proper file names to documents, zipping them up and then leaving it to the funder and/or CRA to unzip and open each file in turn to see what’s in them, rather than being able to see quickly from the file name.
Although this might seem obvious, it needs to be highlighted. Funders and their CRAs are busy people. Awaken their interest in your project by sending a compelling executive summary, do not overwhelm them with too many attachments and information – they will not spend their valuable time on it. Rest assured, they will not read them and your e-mail will be deleted.
A special touch to get on the right side of your CRA or funder is to prefix every file name with a three-letter code for your company or project name. Ie: Acme Energy Project = AEP, Mycorp Growth Funding = MGF etc. This makes it so much easier for the CRA and funder to manage your files.
4. Insisting on funder references.
You may not have heard of your funder. This is because this is a private market, where investor and investee engage in private transactions. This is one of the reasons why it is so difficult to extract any real data from the market.
When the market was still ‘shaking down’, as far back as five years ago, it was reasonable to ask for references because nobody knew anybody. Everything was brand new and, yes, the market became infested with joker-brokers and downright scammers. But most (definitely not all!) of those have either moved on and are now driving buses or twiddling their thumbs in dark cells around the planet.
You will not get any references from a Hedge, VC or PE fund. Nor will you get any from a multi-family office, private or direct investment fund. Don’t ask. It is usually best to rely on the information provided to you by your capital raising advisor (CRA) and the reason for this is simple. He/she will not get paid their fee until the deal is closed. So they are not going to waste their time on putting you forward to a funder if they are not absolutely sure there’s going to be a pay-off for them at the end of the day.
5. Spelling, grammatical and other errors.
Nothing looks worse than typing errors, misspelled names, unfinished spread sheets, poor layout etc. Don’t just rely on your spell check. Look at the overall presentation and readability. Did you know that it’s easier to read a document on screen that is only justified left? For no apparent reason, it is easier to read in print if justified left and right.
6. Financials are incomplete, inconsistent or don’t add up.
Accurate and properly prepared financials are naturally one of the key components of a successful project. Only include edited forecasts in your executive summary and show the full details in the BP. If either is incomplete or simply incorrect, then your chances are small that the CRA or funder will take you seriously.
To avoid this very common pitfall and if in doubt, or don’t have the in-house resource, hire a professional familiar with the format required for business planning and capital raising.
7. You refuse to pay any fees whatsoever.
This must be one of the biggest obstacles in this market. Principals take a stubborn stance against any kind of fee except the advisors success fee which is rolled into the backend of the funding amount. No consideration is given to the other costs involved in successfully closing the transaction.
It needs to be understood that in non-bank finance, as there has always been in any form of investment banking, fees are a contribution to the expense of the intermediary and/or funder. Due diligence costs money (which some funders will cover themselves) and then, once the transaction is under way the funder is not going to cover legal, banking, collateral and other costs when you can just walk away from the whole deal.
More recently, up-front fees have become less onerous and, in some cases, eliminated. Every process is different and, as in anything, check what you are paying for and what any refund conditions are.
Sometimes the CRA will advise that the executive summary, business/project plan or some other aspect of the submission needs more work. They will not want to spend too much time on it without having their time paid for as, from their standpoint, they can get ‘sucked in’ to countless deals, taking up a great deal of time, with no outcome. For larger financings that is going to burn up real time, the CRA might well ask for a fee to cover anticipated time and costs.
Some CRAs ask for a nominal fee to present the deal to the funder, and here’s why. A good proportion of clients are simply ‘fishing’ around the market and trying out different CRAs and funders. In these instances, the CRA can spend a considerable amount of time getting everything prepared in the way he knows a particular funder wants it before making the submission. Only to find that the client decides they no longer want to move forward, for whatever reason. This imposes great embarrassment on the CRA, and puts stress on the relationship they have with the funder.
Enjoying this article? Read the rest here