Jonathan Craig Rich of New York has over 30 years of experience in investment banking and capital markets, having successfully raised over $5 billion in capital for emerging growth companies within the healthcare, technology, and consumer industries. In the following article, Jonathan discusses the different types of capital market pathways, the benefits of accessing them, and how to get the ball rolling on a diverse, well-rounded capital markets strategy and approach.
Capital market pathways are essential for businesses looking to raise capital and grow their operations. but what are capital market pathways?
Capital market pathways provide access to a variety of potential investment types and sources depending on the individual company’s state of operations, industry, assets, cash flow, and future prospects just to name a few. Companies can seek to avail themselves of equity or debt investments, equipment financing, sale of non-core assets, license agreements or joint venture partnerships from a financial or strategic partner, sale of royalty streams, and other options from banks, venture capital firms, hedge funds, family offices, private and public investors and various types of alternative credit providers. Below, Jonathan Craig Rich of New York dives into the options.
Jonathan Rich Explains: What are the first steps?
Jonathan Rich explains that the first and most vital step should be to hire an experienced advisor to diligence and assess the historical, current, and future operations of the company. Capital providers will want to know where the company has been, currently how it is performing, and what its needs are in order to achieve its proposed forward looking business plans. Developing a robust, indexed, and easily accessible diligence folder and checklist which contains the likely requested information not only shows good corporate record keeping but allows interested parties to quickly review and evaluate the most relevant points they use to evaluate the appropriateness and potential interest they have in investing.
What do you need the money for?
It is imperative for companies to have thought through how much money they need, what it will be used for, and what they believe the corresponding outcomes to be as a result. Working alongside their advisor, a company should develop a detailed financial model that represents historical results and uses those results plus the infusion of capital to make forward looking supportable assumptions. Having a clearly defined use of proceeds will also help highlight what the company will use the money for and tie into the model that investors will use for evaluation. Do you need money for research and development? Purchasing equipment? Hiring staff or supporting inventory build? Marketing dollars or working capital? Each use case has not only a different impact on how the business plans to grow but on who the universe of prospective investors will potentially be. For example, you wouldn’t waste the time of an equity investor with an equipment financing need or alternatively seek investment from a cash flow focused credit fund, PO or receivables financing group, or similar for a money losing operation.
How do I determine whether to seek Equity or Debt Financing or Other Forms?
The answer is not a simple one but there are certain factors that one should consider when deciding which form of financing to pursue. The industry you participate in, the stage of your company and its operations, the profitability you have and the type of assets you have now or anticipate to have will all play a role in determining what form of financing might work best for you. If you have an established business, one that generates revenues and more positive cash flow, then your options as to what type of financing will be available to you will be greater. For example, a biotech company that expends meaningful amounts of capital in pursuit of research and development of new therapies has little to no revenue often until they have a product approved after many years of trials. While theoretically possible that they could raise debt, and some do at certain stages, it is likely in this case that they will be serial raisers of equity capital at to be agreed upon valuations to fund those operating losses. Investors will have a willingness to invest equity into ownership based on their assessment of the relative value of the company at that time and as to what they expect the future value to be based on what the company does with those funds to create value. A traditional debt investor who likes to have hard assets to collateralize or cash flow to support repayment of the loan(s) would in turn have less interest in this scenario. In the case of a manufacturer of products with meaningful assets in the form of property, plant and equipment they may seek an asset-based lender to assist with their needs, if that manufacturer also has consistent meaningful cash flow, a lender might consider solutions for them which include both asset-based and more traditional term (maturity based) debt in addition to working capital revolvers and other forms of debt financing.
What types of investors are there to evaluate investment in my company?
While there are countless sources of capital, below are a few of the most likely:
High Net Worth Investors: When appropriate based on investment objectives and risk tolerances, high net worth investors may seek to avail themselves of both private and public equity or debt opportunities. They are usually smaller investments than an institutional investor but helpful in many early stage or smaller company efforts. Many times, people speak to the “friends and family round” or an accredited investor focused private placement as being where many of these investors put money to work.
Family Office(s): An investment vehicle with larger capital than smaller high net worth investors that have been established to invest on behalf of an individual or family that has more money to deploy, oftentimes with specific investment or industry mandates. For example, an entrepreneur who sold their company, an executive with specific industry experience or a person of inherited wealth will seek to diversify their holdings or in turn possibly focus on investments within the industry that created their wealth to begin with. Family offices have been meaningful participants in areas such as real estate, energy and consumer products to name a few.
Venture Capital Funds: Venture Capital or “VCs” are pools of capital predominantly focused on startup, early stage and emerging growth companies seeking to develop, grow and expand a product or service offering within their preferred industries of interest. VCs are often investing in rounds that are pre-seed, seed or A rounds but can and do continue to invest through additional stages. Their focus is on empowering, enabling and financing what they believe to be high growth, disruptive management teams and companies that can grow quickly and drive outsized investment returns. Investments can be as little as $100,000 to as much as $100 million and are evaluated based on the stage, industry, management teams, capital requirements to get to meaningful inflection points and many other factors. Their time horizons to liquidity events can be as little as 3-4 years and as long as 10 years, with the expectation that funded companies will continue to seek additional capital and investors while growing their valuation based on the execution of their stated business plan. As part of their investment strategy, they will often request Board representation as part of the investment, seek regularly scheduled information and operational updates and seek to cross-pollinate across their portfolio companies.
Hedge Funds: These actively managed private investment vehicles have more flexibility to select the stage, industry, type of security, amount of capital and investment time horizon based on their specific investment strategy. Their goal is to provide capital to companies and make bets on outcomes that will in turn drive better than market returns for themselves and their partners.
Private Equity Funds: These private investment vehicles are focused on making either meaningful minority or majority control investments in companies that fit within their desired investment space and adhere to their preferred criteria. Some funds may be focused on industries, such as consumer, manufacturing, healthcare, etc. while others may be more focused on size, stage or how well a company is performing or not. The stated goal is to identify companies that they can invest in or acquire, by investing equity and often times borrowing large amounts of debt and becoming deeply operationally involved in an effort to grow both organically and through acquisition, become more efficient and profitable, and ultimately seek to exit within 3-7 years at meaningfully higher valuations as a result of their enhanced growth and profitability. Private equity firms can invest anywhere between $5m to $5b and arrange ancillary financing to make the total deal values meaningfully higher.
Institutional Investors: There are various types of institutional investors in addition to the ones referenced immediately above, such as mutual fund companies, pension funds, insurance companies and many other vehicles and groups, Their ability and willingness to invest in various public and private securities (equity, debt, real estate financing, alternatives, etc.) will depend on their investment criteria and focus and how that, in turn, aligns with the preferences or limitations they have as to stage, size of investment, industry, geographic areas of operation, and many other considerations.
Benefits of Accessing Capital Market Pathways
So, what exactly are the benefits of accessing capital market pathways? Jonathan Craig Rich says that the clear and plain answer is 'money', but the reasoning goes so much deeper than that.
Here are a few of the benefits of accessing capital market pathways:
Liquidity
Founders, owners and entrepreneurs can access capital markets in order to access larger pools of capital that they otherwise wouldn’t personally be able to invest, attract and retain employees, and offer founders, employees and stakeholders the ability to realize proceeds or liquidity while not having all their net worth exposed to a singular outcome.
Opportunity for Long-Term Growth
Capital market pathways provide an opportunity for companies to seek out investment in order to meet their projected long-term investment growth expectations. Capital raised to support growth should allow for the company to in turn create higher valuations over time for all stakeholders.
The First Step to Accessing Capital Market Pathways
While all of these benefits are rather impressive, how can one access these pathways? The first step is research and education. Jonathan Craig Rich of New York maintains that investors must familiarize themselves with the different types of pathways and understand the risks and potential returns associated with each. It is also advisable to seek professional advice and guidance, as well as networking with industry professionals.
Compliance with regulations and laws is also crucial when accessing capital market pathways. Laws and regulations vary by country and by the type of investment, so it is important to be aware of and abide by local rules to avoid any legal recourse down the line that might undo months, years, or even decades of hard work.
Summary
In conclusion, Jonathan Craig Rich of New York says that capital market pathways are essential for businesses and investors looking to raise capital and grow their portfolios. These pathways provide smooth access to a variety of investment options, such as stocks, bonds, real estate investment trusts, private equity, venture capital, and crowdfunding.
By reading up and getting educated on the different options, seeking professional advice, networking, and complying with regulations, investors can utilize these pathways and potentially reap the benefits they offer.
