The Seven Deadly Sins of Raising Capital

Readers and attendees to our conferences have asked us to address what to do and, more importantly, what not to do when raising capital. Dr. Michael McTague has identified seven costly errors, which we call The Seven Deadly Sins of Raising Capital. These critical issues and advice on how to avoid them will be the subject of a recurring column. Feel free to share your experiences as the column unfolds at capitalsins@equitiesmagazine.com.

Borrowing money can scare the wits out of seasoned executives. If your organization plans to enter the capital markets, avoiding these capital sins may help you complete the project successfully. Future articles will go into greater depth on how to successfully navigate the perilous seas of raising capital.

Sin One:
The search for perfect structure.
The problem lies in the haggling over the structure, the search for perfection. Some projects just cannot be funded as quickly or with such favorable terms as the client would like.

Sin Two:
Staying ahead of the curve.
Wall Street firms exhibit an aversion to money shoppers and a financial stigma proves very hard to eradicate.

Sin Three:
Padding the request.
All capital raised needs to generate income and the company must be able to show in detail how that will happen. However, many organizations that launch a capital raise lack a written strategy that defines their mission and the scope of their products and markets.

Sin Four:
Raising money while you are losing money.
True, most organizations possess too much discretion to trek down this dark corridor. Well, maybe not. One CEO who approached us after the fact had already spent several hundred thousand dollars while the organization ran in the red. Then he sought to borrow $35 million. Hard to believe, but he was successful. Of course, the transaction cost more than his competition had to pay.

Sin Five:
Who’s got the inside track?
The best alternative may be trounced by infighting among board members. If the insiders sway the board, a poor alternative remains in place until the organization’s next venture into the capital markets usually several years later. Extra fees and interest and nasty equity terms may sink the company before it has a chance to return to the capital market.

Sin Six:
The nursery rhyme was wrong: the hare really beat the tortoise?
“If we could only have gotten this done a week earlier!” a CEO told us about a previous project he lost because the capital raise took too long. Yes, the race is sometimes to the swift. Acquisition targets may disappear while your company struggles to close on the funding it needs. If the senior team thinks through the critical milestones, they can raise funds and hold onto the acquisition. In raising capital, the tortoise usually loses.

Sin Seven:
Not having a business plan.
Logic suggests that funding sources also want to know why the project coagulated into a decision. But the key elements of those discussions need to be communicated to new sets of ears. And the message must compel them to fund the project.

Be assured, each predicament kills a capital raise. Too often, weak communication, bad timing, or listless preparation sends the project on a downward spiral through a financial inferno.

What can senior management do to avoid disaster?
Here, we offer three principles of success.

First, make sure that the board supports the proposal and the CEO speaks for the corporation. Delay and frustration can be avoided by seeking capital only after the top team concurs.

Second,

Does the plan tell who we are and what we do?
Will the reader see our excellence?
Is the size and scope of the project clear?
Will a skeptical reader see how the capital will improve revenue?
Would you “bet the farm” on this project?

Third, stay open to all options. As the capital raising process progresses, potential partners may propose unattractive configurations. Don’t reject them immediately. Unattractive terms demonstrate the validity of the project; better terms are almost always attainable.

In our experience, the seven deadly sins litter the scrap yards of would-be financings. Yet, they can be avoided. Be aware of these dangers before entering capital markets.

In the Next Issue of EQUITIES: Avoiding Sin One: The search for perfect structure.

By — Michael McTague

About the Author

Michael McTague is Vice President of Corporate Finance at Able Global Partners. He also teaches business at Iona College, Molloy College and Monroe College.