When is the right time to raise capital?

  • Written by David Curtis
  • Published on

A question we are often asked by companies is, "When is the right time for my business to raise capital"? Some would say that there's no better time than the present to raise capital. And they'd be right. But it's also important to take into consideration what age and stage a company is at before moving ahead with a raise.

While it may seem like a no-brainer to raise capital to help fund business growth, timing plays a major part in the success of a raise. If a business raises capital too soon, without a strong leadership team, a clear strategy, customer demand, and identifiable market opportunity, it can run the risk of not being successful.

Alternatively, if a business waits too long to raise funds, this can impact its growth, which could even open the door for competitors to gain traction in the market. Waiting too long to raise funds can also mean that when a company does raise capital, they need to access capital quickly, which could lead to investment terms that favour large investors over the founders.

Below are several questions we recommend that companies ask themselves when considering raising capital.

Why does your company need to raise capital?

There are several factors that may prompt a business to raise capital.

These could include raising funds to:

  • Invest in production and business processes in order to improve gross margins;
  • Invest in advertising, marketing and sales resource to exploit market opportunities and accelerate revenue growth;
  • Invest in additional capacity and product development to satisfy the existing demand for product and/or minimum order quantities from large international customers; and/or;
  • Provide additional working capital requirements to support future growth.

Do you have a strong leadership team?

Having a strong leadership team in place, or a clear plan to recruit senior team members or appoint external board members or advisors, is imperative for the success of a capital raise. At Snowball Effect, we've seen first-hand how a strong leadership team and independent board members can positively impact a company's capital raise success and its ongoing business growth. Likewise, we've also seen how an under-skilled and inexperienced team can cause issues further down the road for both a company and its investors.

However, that's not to say that you need to have all your leadership and board roles filled before you raise capital. Several companies that we've raised funds for have used their capital raise to identify and connect with sophisticated investors and external parties who have experience in advisory and board roles.

Do you have a clear business strategy?

Before raising capital, it is important that a company has a clear business strategy in place and can demonstrate how funds raised will be used to accelerate and support growth. Without this, any capital raised runs the risk of being ineffective, and a company could find itself in a place where they need to raise additional funds sooner than anticipated without achieving planned growth.

Spend time with your leadership team mapping out your business strategy for the next few years with different scenarios to map out ideal and worst-case scenarios. These could include:

  • Use of funds
  • Financial modelling and forecasting to help with projections
  • Close examination of new initiatives to ensure return on investment
  • Analysis of additional resourcing required to achieve targets (both in terms of headcount and plant/machinery).

Don't leave capital raising to the last minute

Identifying why your company needs to raise funds and a timeline for when funds are needed will then help you work out the best time to raise capital. Our team advises that companies start preparing for a capital raise and start talking to potential investors well ahead of when funds need to land in their business bank account. Successful capital raises can take several months to prepare for, and we see the best results when important documents such as an Information Memorandum aren't rushed. When planning, you should assume a capital raise will take between three and six months from start to finish.

How will you find investors?

Depending on your company's growth stage and phase, there are several places where you can look for investors. These could include approaching family, friends and employees or, if the business is in an early stage, approaching angel investors. Other options could be to approach Venture Capital firms or, if profitable and later stage, Private Equity firms. Alternatively, you can engage a capital raising specialist, like Snowball Effect.

The benefit of engaging Snowball Effect to support a capital raise includes:

  • Offer preparation: Preparation of high-quality offer material that resonates with target investors.
  • Investor database: Access to our large database of wholesale and retail investors and private wealth investors.
  • Investor identification and management: Access to a wide range of investor options to seek the right investment partners and ensure necessary deal tension.
  • Due diligence and execution: Our deep understanding of capital markets and deal structures to guide due diligence processes and complete a successful transaction.
  • Compliance: We take care of compliance obligations relating to a capital raise, specifically concerning Anti-Money Laundering.

We have raised capital for a variety of companies at various stages of growth and pride ourselves on our high success rate. Our highly-skilled and experienced team can suggest an offer approach that delivers the best outcome for your business and support you throughout the process, including developing the offers legal documents, content and marketing plan. In addition to managing the capital raise, we also offer a nominee service and a stakeholder management platform called Orchestra that both make the post-raise process simple and straightforward.

In conclusion, the right time to raise capital is unique to each business. We recommend that companies consider the key questions outlined above to help guide their decision.

Are you interested in learning more about raising capital for your business? Our team is happy to answer any questions and can be contacted at [email protected] or by calling 0800 SNOWBALL.