Summary
As private equity firms are approached by companies seeking a capital infusion, the preparation work completed by the seeking company will most certainly help the VC determine whether they want to invest. Unfortunately most companies do not know how to prepare for an equity raise. Most will put together an investor package and maybe some forecast, but will fall short of providing supporting documents and a detailed forecast that's easily understood. Additionally, most small companies won't afford an investment banker to consult them, so they hit the road on their own.
Analysis
Most companies who are looking for an equity raise are uncertain or unclear about how to present the company's strategy and financials. While this article points to 67% of VC use 'gut feelings' about an investment, the author does not dive into concrete supporting data or explain why VC's don't insist on supporting documents/financials before making a decision.
Companies who approach an equity raise most often do so with little or no experience with dealing with private equity firms. Creating an investor book that describes the product(s), client testimonies, and marketing material is a fairly easy exercise as much of this is intertwined in the company's culture. Creating a detailed forecast with supporting pipeline and market data is a more difficult exercise. Creating a dataroom shows the management has really thought through what they need and can further support their projections. This exercise, however, is very time consuming and is not an exact science. Most small company executive don't know how to approach this task.
If a company has not completed the back office process prior to getting an audience, then the VC's are left with having to use a 'gut feel' for their final deciding factor. Obviously, the more information provided, the lesser degree of gut feel is needed. It would be interesting to see the success rate for those seeking an equity raise that have all relevant information vs. those that present only the executive summary and investor package.
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.
