What is the basis for your capital need?

vcfo supports quite a number of companies that are looking to raise equity capital for their business. More times than not, there is very little basis for the dollar amount of the equity capital to be raised. Today’s capital markets are very difficult to begin with, so the more precision you can have around how the equity proceeds will be spent, the better.

The ultimate basis for the amount of capital required to support a business is a detailed business plan and supporting financial model. The financial model should be detailed enough for a reader to not only understand the potential financial return on the investment, but also to determine how the investment will be spent and how it will help the business achieve its business plan. Breaking the capital requirement into specific areas for investment, along with the milestones and measures that will determine success provides the level of detail that most investors will find extremely helpful.

Another pitfall to avoid is telling the investor market that the business could need a range of capital. This could generate a sense of uncertainty for the investor community, giving the impression that the management team is not really sure how much capital is needed and how the capital will be spent. It is often better to be very precise on the amount of capital needed and the way the capital will be spent based on the business plan.

As you enter the market to raise equity capital, the more information you can provide to the potential investors about how the money will be spent, the more you can differentiate the investment opportunity from others in the market. This will hopefully increase the odds of a successful capital raise.