Summary
Preparing for an equity includes having a detailed strategy, solid talent, supportable forecast, and the thorough knowledge of how the equity raise will achieve the company's goals. Without completely thinking through how much money is needed and where the money will be invested causes doubt with the likelihood of success.
Analysis
Many private companies are slowly coming back to the market to find sources of cash, while equity firms are beginning to step-off the sidelines and are lend an ear to the really good stories. If the economy continues to show progress in recovery, the pace of investments most likely will increase in late ’09 and early ’10. In order for a private company to get and keep the attention of potential investors, they must have their house completely in order. Detailing the strategic path, creating a detailed forecast, having the talent, and having the support behind the numbers are only part of the formula of getting an interested audience.
One of the key items needed for a company to raise capital is to have a detailed plan for how the equity is going to be spent. For capital spending, a list of the specific items and the reason they are needed to advance the company; for operating spending, specific heads/talent, marketing programs, facility needs should be detailed in a separate schedule. This lets the equity firm know that the company has their strategic path detailed and the necessary steps required to obtain their objectives have been thoroughly thought through. Many times, companies who have prepared for an equity raise will show the use of funds as “$XXX for operating expenses (mostly heads) and $XXX for capital projects (mostly IT related).” In these cases, the asking company has not thought through their needs and could come up short on their strategic plans. Equity houses are well aware of the thought process that a company needs to go through, and will either discount the forecast, wait for traction, or walk away from companies that have not displayed this aspect of preparation.
As I am familiar with Ooyala, they have great talent, a great product in a great market, have shown they can execute, and have completely prepared for the next funding round. The end result was they got a favorable pricing and added a well respected investor to their board. Raising equity is not a complex exercise, but if a company is not completely prepared, the task becomes a wasted effort.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
