“Lessons learned from our first capital raise.”
We bootstrapped our initial holding company. Starting out in 2011 with a small industrial sales company we grew over the next 10 years using a mix of organic cash flow and debt to over 800 employees and 8-figure revenue.
When we made the decision to build a new Holding Company focused solely on the acquisition of US companies, we knew we wanted outside capital. The market was so big, there were so many opportunities. We wanted the challenge.
We spent 6 months preparing the legal structure of the holding and debating exactly what we would offer our investors. We ended up settling on a convertible debt instrument where our investors receive a fixed coupon from day one and can convert a portion of their debt into equity at a future date under advantageous terms to them.
We assumed this would be an absolute hit and we would be turning people away due to the high demand. We assumed a few family offices would each write us $5m checks and the process would be easy. We were mistaken. It was a grind. The initial round took nearly 6 months to raise. We got average checks of $500k to $1m. As we have acquired more businesses the process has become easier and now, two years in, I consider it a huge success.
How did we come up with our offering? What would I do differently? What lessons did I learn?
1. Know your investor. Spend the time to understand who you will be offering the investment to. This should be based on who you have access to, who you want as an investor, and what terms would be appealing to them. I cannot stress this point enough. Time invested here will pay off in the future.
2. Do not try to please everyone. We thought we were offering the best of both worlds. Fixed income payments with an equity kicker. What we realized is the fixed-income people would rather have a higher coupon and no kicker while the Equity people wanted no coupon and full equity. We thought we were giving them both and in reality, neither group was satisfied. We overcame this by continuing to meet with investors until we found the right fit. Investors who saw the value in receiving a coupon while they waited to watch what we build.
3. It is important to have help. We were lucky to have an excellent M&A team and a world-class law firm helping us along the way. Not only for the detailed work but also for just spitballing ideas and getting a clearer picture of what we were going to offer.
4. Practice your pitch. It is nearly impossible to get your pitch perfect, but practice definitely helps. Do not walk into those first meetings without a clear idea of what will be presented and who will present it.
5. You do not need to talk about everything. Give a big-picture view of what you want to build, why you have the experience to do it, and what the investor will gain if you are successful. Each investor will have different questions. Some will relate to legal protections, others to operating details. Generally, the questions will be a result of the investor’s background and experiences. Rather than bombarding them with information, let them ask the questions that matter to them.
6. Have fun with it. Love the process and be grateful for the time each investor is giving you to see your project. Do not look at this as a chore. If you are attentive in your meetings, you will either get the result you seek or learn how to make slight changes for the next meeting which will ensure future success.