After a period of high liquidity and easy money – capital sourcing is becoming more difficult. Transactions which were close to closing are getting renegotiated with better terms for the Capital Providers or cancelled and Transactions which are launching are facing Capital Providers who have higher standards for making capital allocations/investments.
What can a Capital Seeker do to ensure capital raising success and highest possible valuations in current volatile/bear market conditions?
Prepare, Realistic Expectations & Focus
Institutional Capital Providers have a fiduciary responsibility to generate the best risk adjusted returns that fit their investment portfolio within the context of market conditions. The hurdle for this requirement heightens as market conditions become tighter and as the risk-free rate becomes higher. In response to current market conditions and the requirement for generating the highest risk adjusted return – Capital Providers need to reduce risk and/or demand higher returns for risk in order to meet their fiduciary obligations.
Therefore, to raise the most capital and/or obtain highest capital raise valuation, Capital Seekers need to reduce risk or increase returns for the Capital Provider.
In most instances the fundamental business proposition is more risky and higher returns are less likely in tougher economic conditions so a Capital Seeker must convey to a potential Capital Provider that risk is acceptable and/or returns will meet expectations by using the some or all the techniques in the below table.
If a Capital Seeker can support and convey realistic risk/adjusted returns then, despite current market conditions, the probability of desired capital and highest valuations will be enhanced. If a Capital Seeker is not able to support and convey realistic risk/adjusted returns, then, it is likely that, in current market conditions, and valuations will not be maximized.
Most Capital and/or Highest Capital Raise Valuation
|Prepare: Ensure that Materials Present an Investment Proposition Rather than a Product Proposition (Read: Shattering Capital Raising Myths: The Goal of an Investor Presentation is Not a Description of Your Company!).||Capital Providers need to understand how they will benefit from providing capital in concrete terms (ie: what is the expected return for the Capital Provider?).||A solid foundation for understanding the investment thesis which reduces risk and increases capital allocations and/or valuation terms.|
|Prepare: Ensure that Financial Models Clearly Present an Investment Proposition in which there is Concrete Support for Major Assumptions.||Capital Providers analyze assumption support when they want to reduce risk. Best is to ensure that assumptions are built upon track record, concrete pipelines, 3rd party verified data, etc.||Verifiable financial assumptions reduce perceived risk and increases capital allocations and/or valuations.|
|Prepare: Ensure that the Data Room is Well Constructed.||Institutional Capital Providers are required to “look under the hood” during their due diligence. The Data Room needs to be “A+” quality.||An in-depth, supported understanding of the investment which reduces risk and increases capital allocations and/or valuations.|
|Prepare: Ensure that the Team/Governance is Well-Articulated.||Governance of the ongoing company is integral to successfully building value. Leadership needs to be clear about their capabilities and strategy.||Leadership and strategy clarity increases trust and capital allocations and/or valuations.|
|Realistic Expectations: Understand Current Market Terms.||Decide if capital needs require sourcing capital in current market conditions and if so, be prepared to accept current market terms.||An attractive risk adjusted opportunity increases capital allocations and/or valuations.|
|Realistic Expectations: Use Bridging Structures to Bridge any Valuation Mismatches.||There are methods to bridge valuation mismatches – many of which rely upon setting clear milestones. Be prepared to stand behind milestones.||Both the Capital Seeker and Capital Provider can benefit if the Capital Seeker can reach their projected goals.|
|Focus: Ensure that ALL Potential Capital Providers are Contacted.||Now more than ever – use a broad outreach to ensure most interested parties and best chance to have best outcomes.||The highest likelihood of obtaining multiple interested parties thereby creating competition and best outcomes|
|Focus: Try to Close EVERY Interested Capital Provider.||The number of interested parties will likely be less than expected. Work to close every interested party – do not expect there to be a replacement party if negotiations are tough.||A high level of attention and responsiveness increases trust and as well as capital allocations and/ or valuations|
Deer Isle Group
Founded in 2007, Deer Isle Group empowers Capital Seekers with the right tools to ensure transparent, smooth, and efficient capital sourcing. Since our founding, we have successfully transacted over $5 billion in capital for companies and funds in a wide variety of security types, sectors, and geographies.
The foundation of our approach is innovative unbundled capital sourcing capabilities, expertise, and guidance that are customizable depending upon capital seeker requirements.
These include Beacon, a proprietary technology that offers Capital Seekers “Direct Issuance” capabilities, as well as capital markets brand building that helps ensure capital markets success today and, in the future, to a curated set of relevant potential Capital Providers from a universe of 10,000+ institutional capital providing organizations/45,000+ institutional capital providing people. In addition, Deer Isle provides “as needed” Strategic Capital Consulting to prepare for a capital raise/M&A including Capital Positioning, Capital Modeling and Data Room Preparation, as well as Closing Advisory/Guidance, through Deer Isle Capital, LLC (our FINRA registered broker/dealer), for structuring, negotiating and completing a successful capital raise/M&A.