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Capital (money) is essential for business growth, and we’ve written a previous blog post about the various capital raising options available to businesses. But once you’ve made the decision to raise capital, how do you ensure your business is investment ready?
Every business is different, so there’s no one-size-fits-all capital raising strategy. Equity capital involves selling part of your business to investors, usually by issuing shares, whereas debt capital involves borrowing money with the promise of repaying it in the future, usually with an agreed interest rate.
Whether you choose a debt or equity raise, or a mixture of both, will depend on a combination of factors unique to your business – each type of capital has advantages and disadvantages.
We’ve covered this in a previous blog post, so for more on your capital raising options, be sure to have a read. The following table describes some of the options available to businesses in New Zealand at different stages of their growth.
Whatever capital raising option you choose, your information memorandum, also known as an investment memorandum, will likely be a key document to provide investors with the information they need on your business, enabling them to make an informed investment decision. A major part of becoming investment ready is collecting the information for this document.
If you’re raising capital on the Catalist Public Market, the stock exchange for SMEs, then your information memorandum must contain all ‘material information’. Material information is defined as any information that would reasonably be expected to have a material impact on the price of your financial products (e.g. shares). It’s up to you how you choose to present this information, so it’s worth considering how you can best summarise your business in a way that will be easy to understand.
An information memorandum should usually be no more than 30-40 pages in length, including any pictures and diagrams, though this will vary from business to business. A typical information memorandum will contain the following information:
Overview and executive summary: In the first few pages, make sure investors understand the basics of what you do and the highlights that make it a great investment. The summary may also introduce the management team, which is key to any SME.
Product or service: Investors need to understand the problem you’re solving for your customers, your solution, the potential size of the market, who your customers are and which competitors are also trying to solve the same problems.
Strategy: What has the business done so far? What will you focus on for growth? Do you have valuable intellectual property, such as internally developed software or processes and how are you protecting it? What metrics are you measuring to determine how well the business is performing? What will you use new money from the capital raise for? What’s your exit strategy? What are the potential risks and mitigations to the business as it grows in the way you’ve described?
Financial and business model: Provide summary information about revenue and cashflow, a balance sheet, forecasts and a valuation. Forecasts and valuations should be linked to a financial model that you can describe and justify. A financial model is essentially a set of assumptions about costs, customer growth and income generated, per product or service sold, that can be used to generate a spreadsheet to forecast future financial performance. This information will feed into the price for your capital raise. Ideally, include more than one method of valuation to justify your current capital raise price. For example, look at comparable businesses and see how their valuations are linked to a multiple of their revenue or EBITDA and use similar multipliers on your forecasts. On top of this, use a discounted cash flow (DCF) to show the present value of your forecast profits.
Offer: Describe the type of financial products being offered (e.g. shares) and any unusual features of those products, give an indication of existing investors (founders and management team or any external investors), list any advisers that are helping with the offer, indicate what information updates investors can expect in the future and say whether there will be any opportunities to exit the investment in future, such as through secondary market trading on Catalist.
The “fair dealing provisions” in the Financial Markets Conduct Act 2013 apply to any offer of financial products (e.g. shares). This means that your business and key people involved in the offer are liable to investors for any false, misleading, or unsubstantiated offer information, so it’s recommended you seek legal advice when preparing your information memorandum. Catalist can also provide you with a suggested structure to help with drafting your information memorandum – get in touch for more
Pitch decks are commonly used when presenting to a group of investors such as Angel Investors or Venture Capitalists (VCs). Pitch decks are a short, concise (generally 5 minute) visual presentation to give an overview of your business and the investment opportunity. A typical pitch deck follows a similar structure to an information memorandum, but in much less detail:
Catalist is a platform that makes capital raising and secondary market trading more efficient and more accessible – and while we don’t provide advice to individual businesses, we do, however, help make sure businesses understand all their options and we provide feedback on what our investors might expect to see in your offer documentation. We also often work with businesses who have their own corporate advisers or can help put you in touch with advisers if you need. If you would like to discuss your capital raising options and the next steps in getting your business investment ready, please feel free to get in contact.
By Michelle Polglase