“Capital is the lifeblood of a growing business.”
— Andrew J. Sherman, Raising Capital: Get the Money You Need to Grow Your Business, 2nd ed. New York, NY.: American Management Association, 2005
Ask just about any start-up, emerging growth, or expanding business owner or senior executive what issue is constantly on their mind and you will probably hear a response stressing the importance of having enough capital. But, actually, having enough capital is not necessarily the primary issue related to the importance of capital.
While having sufficient amounts of capital are critical for businesses to succeed it is equally important to consider the following points, just to name a few, including:
Should the capital be in the form of debt? Or, equity? Or, both?
If we raise capital in the form of equity what do we give the investor in return?
How do we negotiate terms for debt or equity when our need is critical?
When should our firm begin considering our capital needs?
What is an effective capital formation strategy? What is required to develop such a strategy?
How do things like the age of our firm, the size of our revenues, the nature of our industry and our position in it, influence our ability to raise capital?
Do we treat the raising of capital as a process or an event?
What are the legal issues that we must address, especially, if we determine that our best solution for raising the necessary capital is from private investors?
How much acquired capital, debt or equity, will our business be able to profitably support in light of our history and forecasts?
By no means is this an exhaustive list, but it is a beginning. It will also, hopefully, serve to briefly illuminate the potential hurdles that your firm must successfully negotiate in order to secure the required capital without suffering the devastating consequences associated with making the wrong deal. Deals that, for lack of thorough analysis, include very expensive capital and onerous terms, or, result in the full dilution of your equity as investors take your firm, for a variety of reasons.