Ways to Improve Investor Confidence and Obtain Private Equity Investments – Part 1
Many businesses attempt to raise capital to finance their current operations, expand their business, or adjust their debt/capital ratios. In order to do so businesses need to tap either public or private equity markets. While public equity markets provide businesses with the ability to generate significant amounts of capital, there are many costs associated with doing so. Being listed on a public exchange requires registration with the SEC (S-1 filing), regular quarterly (10q) and annual (10k) filings, and significant legal, accounting, and administrative costs associated with doing so. Many businesses determine that it is not cost-effective to become publicly listed and instead choose to remain private.
Private businesses obtain capital investments from private investors which may include individual investors or private equity funds. There are limitations on the number of shareholders who can be present in a private business (generally 500, though exceptions are present). Obtaining private equity investments is often difficult for private businesses due to the lack of regulations present on these equities and a lack of financial analysts’ analysis which leads investors to be skeptical regarding the quality of the business and their financial history. There are a number of ways that private businesses can attract equity investments and instill confidence with potential shareholders which is the focus of this article.
Audited or reviewed financial statements are supported by a report from a certified public accounting firm which provides assurance regarding the quality of the information included in the financial statements. The presence of this report allows an investor to reasonably rely on the appropriateness of the financial data being presented in the financial statements which allows private equity investors to perform their own due diligence on this data. As such, if a private company is expected to raise capital through private investment it is a good policy to have audited or reviewed financial statements to provide to potential investors.
Ways to Improve Investor Confidence and Obtain Private Equity Investments – Part 2
One way to improve the probability of an investor to invest in a business is to provide to them a tour of your office and to detail out your planned use of the contributed capital. Provide the potential investor with a detail regarding what you are planning to use their capital for, any competitive advantages your company may have over the competition, and private data regarding what your profit margins are. Provide them with projected budgets and explain to them why you need to raise additional capital, your intended use of this capital, and how they will profit from their investment. Providing this information will assist the individual by putting an in-person experience behind financial data and may assist them in gaining an insight into your business and ultimately making an investment.
If you have a positive relationship with any existing stockholders, have the potential shareholder communicate with these stockholders to gain insight into the business. Invite potential investors to annual financial meetings so that they can see how management communicates with shareholders and provide an open atmosphere for management to communicate with shareholders. This should provide a potential investor with the ability to see how they will be able to communicate their concerns and interact with management after their investment has been made.
Raising private equity is difficult for many private businesses but by adapting some policies and procedures from public businesses such as providing audited or reviewed financial statements and open forums for management and shareholders, you can provide a level of respectability to your business that can increase the likelihood of investment. By providing access to management and company facilities through an on-site tour, you can also provide insight into your business that may lead to an increased investment. Raising funds is about creativity and responsibility towards shareholders and communicating with shareholders in an open and honest manner increases the likelihood of capital investments.
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