Raising Finance - A Handbook for Managers
Raising Finance - A Handbook for Managers
This book is intended to be a manual (Concise Oxford Dictionary definition: "small book for handy use") to help a manager or entrepreneur steer a course through the perils of raising external finance to develop his or her business. It is designed to answer several questions: whether or not to seek external finance; which financial product is best suited to the business’s needs; how to maximise the chances of raising finance; and, having raised finance, how to make best use of it and sustain a profitable relationship with finance providers.
It has grown out of my experience over the last sixteen years both as an investor and as an adviser. My experience has taught me that it is often the failure of managers to understand the finance provider's perspective (and vice versa, of course) which leads to differing expectations on each side and, all too often, a disappointing outcome. [I believe that managers need a crisp, clear overview of how to raise external finance and what raising it entails]
My experience has also taught me that the gamut of projects to which external finance can be applied is enormously broad and it is unhelpful and simplistic to prescribe a single approach to fund raising. It is, for instance, unrealistic to offer a single pro forma business plan for use in every project. To illustrate the point, take an academic research team trying to exploit a discovery with commercial possibilities, on the one hand, and a management buy out of a large retail multiple, on the other. There is little point in the research team describing in detail the operational and financial systems for their new business, since it does not yet exist and the description would be fiction. In the large buy out, however, the operational and financial systems will be central to an investor's appraisal of the project. Conversely, the investor in a large buy out is unlikely to be interested in patent cover for its retail products, where this could be crucial to the start up's proposed product. The book discusses the important, and varying, investment issues which effect the investor's or lender's view of different kinds of projects seeking external finance.
Let me say that this book is not a substitute for taking professional advice, rather it should seen as an introduction to, and an overview of, the process of raising external finance. It aims to give the reader a base level of knowledge enabling him to choose the adviser most appropriate to his project and enabling him to brief and work with that adviser more effectively.
The book is laid out in three parts. The first deals with basics, describing the implications of raising external finance, the external financing options available and where to go for the best advice on the different aspects of the process. The second part describes the different projects for which a manager might raise external finance, such as development capital, management buy outs and buy ins, other re structurings of shareholding, start ups and seedcorn, technology and innovation projects. It discusses the specific implications of each category of project, and gives guidelines for evolving a strategy which will enhance the project's financial viability, and for reflecting that strategy in a plan which maximise the project's chances of attracting external finance. As I have mentioned, this is one of the central pillars of this book: that a single standard business plan outline is unlikely to lead to a plan which is convincing for the whole range of possible externally financed projects. The final part of the book deals with the investment, or lending, process by which the investor appraises, negotiates and makes his investment and also with the relationship after completing a deal, including the final step of realising his investment and exiting.
The book can be used selectively, by reference to the index or the introductions to each of the chapters. However, referring back to my point about mis matched investor and management expectations, I would urge all users to read Part 1 in its entirety.
The venture capital and banking industries are infested with jargon. There are glossaries at the end of each chapter, as well as a comprhensive glossary among the appendices at the back of the book, which aim to cover all the jargon. However, there are a few conventions which I have followed and which I should explain at the outset. First, I have no particular aversion to the word "entrepreneur" and I recognise that there are entrepreneurial qualities, especially of drive and ambition, which are highly desirable in anyone undertaking a project which needs external finance. However, I see those qualities as a subset of the qualities which every professional manager needs, although their dominance among the other qualities will vary from manager to manager. It is because of this, and because entrepreneurial qualities are not enough on their own to make a success of an externally funded project, that I use the word "manager" or phrase "management team" throughout this book.
Secondly, I have used the phrases "equity finance" and "loan finance" to describe the two basic categories of external finance which a manager, or management team, can seek. Broadly I mean selling shares which participate in profit by the former, and borrowing against assets by the latter. However, these definitions are not comprehensive and there is a detailed discussion of the differences between equity and loan finance, and the variations within them, in Chapter 2.
Thirdly, I have used the word "project" to include all proposals, schemes, developments or projects for which a manager is considering raising external finance.
Finally, I have used "he", "him" and "his" to include "she", "her" and "hers" in the interests of brevity.
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