- There are five stages in a business fundraising life cycle: the Pre-seed, Seed, Start up, Growing Company and Matured Company stages. Each stage has a variety of sources of funds the business can tap into to facilitate growth
- Private Equity is the financing arrangement where investors provide capital directly to private companies, or they buy-out shares in public companies and cause these to be delisted.
It is no news that the global fundraising landscape is a tough one to navigate. With limited funds available and high investment risks associated with emerging markets, financial institutions are increasingly selective in determining the individuals and companies eligible to receive funds. As a result, companies must be more intentional about how their businesses are run, which financial institutions they target, and how they present their businesses in fundraising efforts.
Different financing options are suitable for each stage of a business. Each of these financing options require that the company has certain structures in place and meets specific criteria to receive funding. The onus then lies on the company founder or CEO to tailor the fundraising approach to meet financiers’ requirements.
Companies that have a proven market as well as a solid menu of goods or services can use private equity (PE) funding to finance the next wave of growth and expansion. In essence, PE firms do not typically fund start-ups or companies in the ideation stage, but established companies with a steady track-record of operations and revenue. However, PE firms are always open to begin the conversation at the seed stage or start-up stage of a business, as this is helpful in lining-up future pipeline opportunities.
For a company, planning for future sources of funding is essential to ensure that there is an almost seamless flow of cash into the business. As an example, for businesses wherein the timing of cash infusion is extremely important to capitalise on seasonal operational opportunities for expansion, these early discussions will be instrumental in getting funding at the right time later down the line.
So, what steps do you take as a company once you have taken the decision to explore PE funds as a source of funding?
First and foremost, do your research. There are many PE funds with different investment strategies that focus on different sectors. It is important to find out the investment thesis of the fund which specifies whether the PE fund is sector-focused or generalist. A sector-focused fund targets its investments to specific sectors – e.g., an agriculture-focused or a tech-focused fund. A generalist fund, on the other hand, has the mandate to make investments in multiple sectors. Typically, generalist funds will not invest in all sectors in the economy; so it is important to find out which sectors are a priority for the fund.
Another area to research is the PE fund’s ticket size per investment. This is a target investment amount and is usually stated as a range of value. If your funding need is outside the ticket size range – that is, either significantly below their lower limit or above their upper limit, the PE fund may probably be unable to assist with your funding needs.
As part of your research, also consider the duration of and steps involved in the PE fund’s investment process. Every PE fund is different but, generally, once a PE fund expresses interest investing in your company, the fund team will have to go through a series of steps to assess the company before coming to a final decision. This usually means different degrees of due diligence, multiple stages of approval as well as creating relevant legal contracts to guide the relationship. This process can take anywhere between 8-18 months before funds are disbursed.
After you have identified the PE fund(s) that aligns with your needs in terms of sector, funding size and disbursement timeline, you should make sure your company meets the general fund requirements. PE funds, in addition to any fund-specific requirements, generally look for companies with well-established corporate governance practices, a good accounting framework, and adequate financial controls. PE funds also look for companies that are law-abiding and have Environmental, Social and Governance (ESG) awareness/compliance.
PE funds are big on the figures. To help a PE fund accurately identify the company’s status, it is important to keep audited accounts. Financial statements are not only indicative of the company’s current health, but also set the basis of what is possible for the company in forthcoming years. A PE fund will not move forward with a company that is not properly organised in its accounting function. Without audited financial statements, you will be impairing your chances of securing PE funds even before the investment assessment begins. Make use of the many accounting firms in the country and have audited financial statements (the statement of financial position; the income statement; and the cash flow statement), with their attendant notes on hand before initiating a conversation.
All limited liability companies require a board, but a company gains brownie points when the board in place is independent from the managers and shareholders of the company. If your company board does not conform to this standard, you must be willing to work with the PE fund to institute a truly independent board post investment.
PE funds generally favour companies that are law-abiding, complying with all tax and statutory obligations and paying employees on time. Furthermore, companies should be ESG compliant in their operations and management practices, with no blatant ESG violations.
Subsequently, companies should ensure that their employees are cognisant of company details and industry insights. The company must also be organised and transparent in sharing information requested by PE funds.
Key persons in the business should be well informed about all aspects of the company, and be knowledgeable about the industry it operates in. One of the first points of insight for a generalist fund into an industry or sub-industry is through initial conversations with the company founder or CEO. As a result, it falls on the company founder or CEO to know enough about the industry to answer high-level questions the PE fund may ask, and to tell a compelling story.
This story must be a fusion of both company and industry insights, and growth opportunities that are attractive to the PE fund; and must be tailored to the fund’s investment strategy. It should also include a well-articulated value proposition and medium- to long-term strategy that maps onto proposed use of the funds being raised to achieve the strategy. Your knowledge of the industry will also aid in formulating a value creation plan – together with the PE fund – that will be feasible for the business.
The first step in the investment process is the company assessment. Throughout the assessment process, it is important that the company remains transparent. PE funds will execute a non-disclosure agreement (NDA) with the company before requesting concrete information. A non-disclosure agreement is a legally binding agreement that establishes a confidential relationship between the parties. Executing an NDA should put you at ease to share the information being requested.
As part of the assessment process, the PE fund will have questions about the company, its operations, and financials. PE funds will particularly be interested in, among other things, the company’s board structure and its relationship with management, the shareholding structure, loan arrangements, trade secrets, and the movement of cash on your financial statements.
It is important, at this point, to not appear unaware of your company’s dealings. If your company is larger or well established, you should have key persons in functional areas of the company who can address all questions asked by the PE fund. At this stage, it is imperative that the company is well organised in the manner and timing by which information is shared. This shows the PE fund that the company has a handle on its affairs and truly understands its operations. It also demonstrates your ability to put the funds you are seeking to good use.
Being evasive at this point will put the PE fund on high alert, as it indicates that there might be something the company is not comfortable revealing. In dealings with potential investors, my advice to you is that honesty is the best policy. The investment process has many stages of investigative legwork. If the PE fund does not spot the issue early in the process, it will most likely come up before final approval for the investment. If, miraculously, this goes unnoticed, it will be uncovered post investment; and starting off an investment on the wrong foot will affect collaboration and value creation.
Private equity investment requires conscious effort from companies to make it successful. PE processes are different from other traditional sources of funding Ghanaian companies might be accustomed to. Companies must therefore prepare adequately before seeking PE investments. This includes doing research on the different types of PE firms, their investment criteria and ticket sizes; establishing good accounting practices and corporate controls; as well as being cognisant of your business and industry. A PE investor also requires total honesty from the entrepreneur. Addressing these considerations in a company’s PE fundraising efforts will increase the likelihood of securing PE funds.
****** About the Author******
Naa is an Investment Analyst at Injaro Investments, a firm focused on using smart capital to help SMEs realise their potential as drivers of Africa’s economic growth. She works primarily on the Injaro Ghana Venture Capital Fund (IGVCF), a fund deploying ~ GH¢15M per investment into sectors such as food and agribusiness, education, healthcare, inclusive financial services, light manufacturing and industrial services. Naa is passionate about programme implementation support for SMEs and holds a BSc in Business Administration from Ashesi University.
****** About the Fund Manager******
Injaro Investment Advisors Limited is an investment advisory firm licenced by the Ghana Securities & Exchange Commission and is part of an international fund management group that manages investments across sub-Saharan Africa. Injaro has expertise in the areas of private capital, corporate finance advisory, asset management, management consulting and project management.