The Typical Approach to Capital Formation is Often the Wrong Approach
The architecture of your corporate capital formation strategy should be engineered by design and not something that is evolved to by default over time. However all too common is the enterprise that organizes itself improperly out of the gate by making the wrong choice of entity, issuing the wrong type, class and amount of stock, seeking equity investments either from the wrong sources or at the wrong time, utilizing the wrong form of debt financing and the list goes on
I conducted an informal pole not too long ago with the goal being to try and understand how entrepreneurs choose to organize their companies. The following five questions were posed to a group of bright, successful and sophisticated entrepreneurs and the answers received ranged from the sublime to the ridiculous, to the very enlightened. The answers displayed below are representative of the most common responses:
1. How did you select the your entity structure? I asked my accountant which form of entity to use and he said that a Sub S would be the best choice for minimizing my tax burden.
2. How did you organize your capital structure? My attorney just told me to issue 100 shares of common stock.
3. What was your capital formation plan? I had a little cash saved up and I figured once I had been in business for a while and established some revenue Id get a bank loan.
4. What was your valuation strategy? I didnt really have a valuation strategyI thought it would take care of itself at the right time.
5. What was your exit strategy? I didnt really have an exit plan per se, I just thought Id survey my options when the time was right and see what produced the best return.
The truth is Ive seen companies make all the wrong choices in their formative stages and yet still do well. However these companies that have succeeded in spite of themselves had the luxury of having the time and the money to reengineer their business at a later date. The sad reality is that most companies dont have the time or the capital to unwind critical mistakes in their strategic financial plans.
My advice is simple Do not fall into the trap of working with a small mom and pops accountant or attorney; rather seek out the highest caliber professional advisors when developing your corporate financial plan. Time spent in the development of a sound strategic financial strategy will help your company secure capital at the best terms, rates and conditions thereby allowing your company to scale by leveraging the lowest blended cost of capital into the best valuation resulting in the highest return on equity.
Mike Myatt is the Chief Strategy Officer at N2growth. N2growth is a leading venture growth consultancy providing a unique array of professional services to high growth companies on a venture based business model. The rare combination of branding and corporate identity services, capital formation assistance, market research and business intelligence, sales and product engineering, leadership development and talent management, as well as marketing, advertising and public relations services make N2growth the industry leader in strategic growth consulting. More information about the company can be found at http://www.N2growth.com
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