Bulls n Bears Entrepreneurship Zone :: Six tips for African entrepreneurs and companies on successfully raising capital

[Bulls n Bears]

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1. Invest time in the preparation of well-prepared transaction materials


After the underlying strength of the investment opportunity, the quality of
the offering materials is the next most important item in ensuring a
successful capital raise. You can’t get to the dinner table if you can’t get
in the door. Funders make an initial assessment of the strength of the
management team and the strength of the transaction based on the quality of
the offering materials.

In many cases, funders will dismiss even strong opportunities if the
offering materials are poorly prepared. Money managers are inundated with
investment requests. The quality and professionalism of the IM and
supporting documentation become an easy way to weed-out transactions. If
your information memorandum (IM) is riddled with typos, doesn’t convey the
essence of the opportunity or fails to answer obvious questions that any
prudent investor would ask, your deal will quickly be tossed in the
recycling bin. At MNCAA, we pride ourselves on this aspect of the capital
raising process and numerous funders have remarked on the quality of our
documentation even when they have declined to fund the deal. As a result, we
are sure that when we share transactions with these funders, they will at
least take a look. We advise that you adopt a similar approach and invest
the time needed to prepare professional transaction materials.


2. Stay flexible


At the beginning of a capital raising exercise, you and your financial
advisor may have an initial idea of what form the transaction will take.
However, as you go to market, you will invariably find that funders have a
different view of the transaction. By remaining flexible, you can align the
transaction structure with the feedback you receive from the market and
increase your chances of success. Additionally, by remaining flexible, you
can spot opportunities that weren’t apparent at the beginning of the
process. For example, we were engaged to raise debt for a South African
leasing company. We eventually learned that the low capital lease rates
available for the client’s South African leasing operations did not make the
transaction viable given the client’s then-current cost of capital. However,
through discussions with the client, we learned of the client’s intentions
to enter other African markets where interest rates were significantly
higher. We subsequently were able to secure funding for their African
expansion at competitive rates.


3. Keep as many horses in the race as possible


We have found a tendency among sponsors and companies to “cherry-pick”
preferred funders. If an advisor is able to generate significant interest,
the company/sponsor may suffer from hubris and try to deflect difficult
investors. It is a human tendency to try to minimise work, and courting and
responding to each potential funder requires a considerable amount of work
and effort. However, it’s never finished until the transaction is funded.
The more players in the race, the more valuable the opportunity seems – it
is human nature to want what people think other people want.

Thus, we always advise clients to take all reasonable steps to keep
discussions open with all viable funders that express interest. A corollary
to this tip is that difficult funders should be viewed as an opportunity to
respond to difficult questions and perfect your pitch. If you are able to
respond effectively to sceptical funders, you will soar when you meet
investors that are more excited about the opportunity. Remember, the
salesperson who accepts the first “no” will have hungry children. If you are
raising capital, you are essentially a salesperson, selling your ideas, your
company’s prospects, your vision and the ability of your team to capitalise
on each of these.


4. View the entire process as diligence


The entire process should be viewed as part of the funder’s diligence of
the professionalism and strength of the management team. The initial process
is like dating for the funder, where it decides whether it wants to get
engaged, i.e., enter into a term sheet. Savvy investors track whether you
arrive at meetings and conference calls on-time; whether you follow through
on deliverables; etc. If you indicate that you will send a document by a
certain date, failure to do so raises questions about the reliability and
professionalism of the company’s management. We advise clients to
“under-promise” and “over-deliver.” If it is expected that a licence will be
received at a certain date, it’s better to give yourself some leeway; and if
it comes in earlier than indicated, then you have over delivered. It is far
worse to create expectations and not meet them. If this happens too often,
it can kill a deal.


5. Keep up the momentum


The importance of momentum to the successful execution of a transaction
cannot be overstated. Often we have clients who do not seem to approach the
transaction with a sense of urgency. They may be slow to respond to
information requests, they may not make themselves available urgently for
calls and meetings; they may not press their advisors to complete required
documentation, e.g., financial statements, etc. However, once an investor
expresses interest in the transaction, it is important to maintain the
momentum on the transaction and make sure the investor remains engaged.

You must keep in mind that investors are being pitched new opportunities on
a daily basis. If the investor expresses interest and excitement in your
transaction, you must keep this excitement alive and keep the investor
engaged. We have had situations, where clients have been slow in the process
and the investor moved on to whatever new opportunity seemed shinier.

As an extension to this, you have to make hay when the sun is out. We
always advise clients that if an investor provides a term sheet and wants to
fund and you are interested in that funding, try to close the deal as
quickly as possible. Do not take time to exhale and take your foot off the
gas pedal. Things can change in a matter of days and failure to push as hard
as possible to close the deal can result in an eleventh-hour failed closing
because of a last minute change in circumstances. Recall that the same deal
that could have closed on September 10, 2001 in New York City, died on
September 12 after the 9/11 terrorist attacks.


6. Capital raising is a marathon not a sprint


When embarking on a capital raising exercise, be prepared for a marathon.
You will likely have to kiss a lot of frogs before you find your funding
prince. Remain enthusiastic and remember every “no” gets you closer to your
“yes”. As a transaction draws on, many sponsors begin to suffer from deal
fatigue. We have seen companies miss potential funding opportunities because
they were clearly tired of responding to prospects and were suffering from
deal fatigue. However, each prospect should be approached with the same
enthusiasm and commitment as the first prospect, and the tips outlined above
should be implemented for each prospect. Hopefully, if you begin the process
with the expectation that it will be a marathon, you will be able to weather
the challenges and cross the finish line.

Mansur Nuruddin is a co-founder and managing partner of MNCapital Africa
Advisors (MNCAA), a financial advisory firm based in Sandton, South Africa.-
Howwem,adeitinafrica 



 

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