Adrie's Blog

Fundraising.....a bumpy road

Apart from raising funds by means of a placement of shares, there are many other financing options - such as bank loans or for instance factoring.
Before you start raising money, it is good to take some time to think about your goals and in which phase your company is, all of which will determine in the end how you should raise money and from whom.

At one time during my life I have had to deal with "Leverage", which is basically borrowing as much money as you can in relation to your assets. I now know how incredibly dangerous that can be. Almost all investors will try and earn as much money as possible on the basis of an as small as possible investment which is possible if you use this type of leverage, where you borrow against your assets which can increase the money available to the organisation a hundredfold.

At first I had a company where the financial shareholders used the maximum borrowing capacity possible of the company via bank credit and factoring. This company was still in its growth phase and had grown in one year to 100 million valuation via acquisition of many other organisations all of which still had to be integrated and where no steady combined revenue stream had yet been achieved. So whilst we had a lot of assets (the companies that had been acquired) we had no steady income with which we could safely pay the interest due on the loans that were taken out. This is an incredible precarious situation which you should avoid at all cost. You should only ever use Leveraging when you can predict what your growth will be and you have a proven cashflow. When you are in the growth phase still - you can only work with assumptions and should be extremely careful lending against those. In general, I believe that you should always cover risks with your assets - otherwise it turns into a gambling operation.

What I often see with companies I have founded myself or where I am an advisor - is the immense difference in realities between the entrepreneur and the financier. Financiers always seem to be looking for complex ways to fund their clients - almost like it's second nature - whether they want to do convertibles, warrants, preferred and non-preferred shares or bonds - never simply: "I will give you 1 million in money and I get so much in shares" - they seem to think that's beneath their level of intelligence or perhaps they are simply bored with the straightforward loans?

Everything that looks complicated uusally is - and designed to hide certain aspects. Make sure whatever type of financing you opt for, that you fully understand the consequences of the constructions proposed to you by financiers.
Keep looking at what your organisation needs and what you can afford and bear, don't just be led by the fact that you need money. A wrong financial set-up will keep haunting you and can even mean your company's demise.

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