At Equifaira, we work with start-ups and early-stage companies. Through our internal process, we select Founders who lead companies with the potential for exceptional results {see post on Equifaira blog, “How Does Equifaira Select the Companies We Work With?”}. Even for the best of these companies with the most dynamic and compelling of business models, one thing holds consistent for the vast majority, they need outside capital resources to achieve their vision.
One of the initial services Equifaira provides to our clients is to co-develop a comprehensive and cost effective strategic business plan. Through this process we find few companies have a business model that, at the early stages, can generate the revenues and free cash needed to finance exponential growth. We understand that early stage companies need this “hyper growth” to ultimately be successful. One of the most valuable services Equifaira offers is guidance on how to become an “Issuer” so the company can raise its own capital from outside sources. To close the loop we also provide oversight and implementation of the business processes to manage the responsible deployment of the capital to support the strategic business plan.
In guiding the privately held companies that are our clients to raise their own capital, our approach is not so much one of staying private versus going public, but of a multiple channel plan of the right capital sources at the right stage of a business’s development. Through years of experience, we have refined this approach in order to maximize the potential for value for the founders and the stakeholders such as investors and potential acquirers.
When getting started, the Founder’s vision for their business is little more than their personal vision and the passion they bring to work every day. At this stage, “seed” capital is often found amongst their friends and family members. Another source can be from investor “angels”, appropriately named as their support often comes “heaven-sent”. These resources, if well managed, can be sufficient for the Founder to move their business through the development of a minimum viable product and or service and on into proof of concept demonstrating a successful business model and financial repeatability.
As the business moves from consistently generating revenues and into exponential growth, we typically see capital needs move past the available resources of the Founders immediate network of friends, family and angel investors. It is here in the commercialization of the products & services, as well as marketing, primary demand creation, and sales when further capital resources are typically required. The need for expanded sources of outside capital is further driven by the demands of increased accounting, legal, human resource, company culture and administrative supporting activities.
In our experience, it is common for Founders to consider traditional “institutional” capital formation options such as venture capital, private equity, or an early initial public offering (IPO) of the stock of the business. These avenues are legitimate, well proven resources to secure capital and the business may well flourish as a result.
However, it has been our experience that having chosen one of these traditional equity financing strategies, while they may serve the business, all too often the original Founder and early investors become sidelined, marginalized or pushed out. The very people who took the largest risks, and created and supported the business in its early stages, end up diminished in the process with a lesser share of the value created by the company {see post on Equifaira blog, “What is a Liquidity Event?”}.
Equifaira derives its name from the words “fair” and “equity”. We believe in creating fair equity outcomes for founders and their investors. While we see value in the traditional institutional approaches under the correct circumstance and appropriate stage of development, as “Liquidity Event Planners” the strategy we prescribe includes an interim step of securing capital to fund exponential growth through the exempt market as provided by National Instrument 45-106 (NI 45-106) {see post on Equifaira blog, “The Exempt Market – What is it?”}. By pursuing capital from both accredited and private investors through an Offering Memorandum {see post on Equifaira blog, “What is Private Investing?”}, Founders and early stage investors can maintain a controlling equity position in the company while securing the capital needed to drive the business through the critical stages where significant value is created for the stakeholders.
This approach opens up multiple channels of capital including “individuals” such as the previously mentioned family, friends and angel investors. It also opens the door to private investing to a much larger group of accredited and eligible individual investors. Part of the plan is a strategy and tactics to encourage investors from individuals and business relationships made through the regular course of business. We are out there doing business together, so why not encourage investments from strategic partners, suppliers and customers.
Another opportunity with the exempt market in Canada, is the network of brokers who are regulated under provincial securities commissions. These exempt market dealers offer private equity products to their clients and are a large and reliable source of private investment capital.
The individual, business and exempt market channels might be enough to get the company into a position to fund its own growth. If more capital is needed, “institutional” investors can be part of the plan, under the right circumstances and at the appropriate stage of development. The key is to get the company into a position where it doesn’t need the institutional capital to survive and it can negotiate a good deal for larger levels of growth funding.
While a simplified model, the table below illustrates the recommended sources for capital Equifaira guides their clients to pursue as their business progresses.
In summary, early stage companies can benefit tremendously from a detailed, multiple channel plan to raise their own capital. Starting with the Founder’s network and layering in other individuals, expanding the regular course of business investment opportunities and building a private placement offering that is suitable for the exempt market, may put the company into a stronger position. This approach allows the company to raise its own capital and get into a strong position to be either self-funding or to negotiate a good institutional partner and deal.