At WealthForge, we work diligently to set issuers up for success in raising capital. Having reviewed nearly 600 private offerings in the past few years, we have a good sense of what steps issuers should take when promoting their deals.
While unique characteristics of an issuer — location, track record, intellectual property, return profile, etc. — do factor heavily in a successful raise, every issuer should avoid common mistakes and follow best practices to maximize their chances of success. Below are the 5 most common mistakes you should avoid when raising capital as well as some tips to set yourself up for success:
1. Unorganized Documents
Put yourself in the investor’s shoes. Would you, as an investor, want to search through pages and pages of disorganized financial statements or seemingly endless slide decks of past projects? No. Or, if an issuer presented you with promotional materials that look like they were thrown together at the last minute, would you trust them with your money? Probably not.
Remember, in most cases, these documents form the investor’s first impression of the issuer. Investors need to reach a clear understanding of the offering quickly and easily. If they have to read through dozens of different documents, this won’t happen, they won’t invest, and you will not raise money. In the same vein, if an investor doesn’t think you have the professionalism or dedication necessary to succeed, you will neither gain the investor’s trust, nor their capital.
Pro Tips:
2. Complicated Deal Structure
Just because your financial analysts and lawyers can make sense of your deal structure does not mean the average accredited investor can. It all depends on the type of investor you’re seeking, but if you rely on raising funds from accredited investors via general solicitation, then keep the deal structure simple. We’ve seen issuers go back to the drawing board after failing to raise capital using multiple share classes in one offering or a complex schedule of returns. If you can’t explain the deal structure to a potential investor without your CFO on the phone, your deal structure is probably too complex.
3. Unattractive Deal Structure
Consult experts on the standard deal structures in your industry. Offering returns below the industry average will make your deal unattractive. For example, after a return of invested capital and a preferred return, you should aim for the same returns or higher, unless you have other unique factors to offer.
Keep in mind that investors care about the use of proceeds from the capital raise. Most investors probably prefer that proceeds go toward company growth and revenue generation. Proceeds used for buying shares from existing shareholders, paying back debt, or paying returns to existing shareholders may not look attractive to some investors.
4. High Valuation
If an investor deems your valuation unrealistic, they are not likely to invest. While determining the valuation of a start-up can prove difficult, the number you come up with needs to be realistic and based on reasonable assumptions. We advise issuers to keep an open mind regarding valuation. It might be worth it to adjust the valuation for the right type of capital.
5. Timing
Timing might seem like common sense, but many issuers have suffered from failing to realize its importance. Think about the time of the year when you start the capital raise. Raising capital during the holiday season might hurt your chances of reaching the investors you need for your raise. Certain times during the summer can prove just as problematic for the same reason. Some real estate issuers have scrambled to close on their projects because they needed the last few documents from investors during prime vacation time. The investors had no access to phone or email (when they are likely either on a cruise or skiing).
Pro Tips:
We’ve seen a wide range of issuers make these common mistakes. While several other factors can impact an issuer’s capital raise significantly, avoiding these pitfalls prevents you from getting in your own way. By ensuring that you pay attention to these aspects of your capital raise, you can maximize your chances of success.
Download our Sample Marketing Teaser
Marketing a private offering to investors can be challenging. Not only does your collateral need to gain investor interest, it also needs to be compliant. That's why we've developed this sample template to help you get started.
Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice. Private securities offerings may have a long holding period, be illiquid, and contain a high degree of risk. Investors must be able to afford the loss of all of their principal. Projected returns may significantly differ from actual results. Past performance does not indicate future results. Potential investors should consult with a knowledgeable tax advisor prior making an investment.
Securities offered through WealthForge Securities, LLC. Member FINRA/SIPC. This email, including attachments, may include non-public, proprietary, confidential or legally privileged information. If you are not an intended recipient or an authorized agent of an intended recipient, you are hereby notified that any dissemination, distribution or copying of the information contained in or transmitted with this e-mail is unauthorized and strictly prohibited. If you have received this email in error, please notify the sender by replying to this message and permanently delete this e-mail, its attachments, and any copies of it immediately. You should not retain, copy or use this e-mail or any attachment for any purpose, nor disclose all or any part of the contents to any other person. The message does not constitute a research report or recommendation and does not take into account the specific investment objectives, financial situation or particular needs of the recipient. This message is not an offer to sell or the solicitation of an offer to buy any security or interest in any fund, which only can be made through a private placement memorandum that contains important information about the risks, fees and expenses of a fund.