On Raising Equity Capital

It is true that some companies will be able to fund operations from internal cash flow and will never need more than the occasional loan to achieve the objectives of their shareholders.  However, this is the exception and usually only applies to companies where a relatively slow and methodical growth or a sustained level of performance is sufficient to meet the needs of the owners and management.  In the vast majority of growing companies there will be the need to strike a balance in the capital structure between debt and equity at different times during the company’s life cycle.

Once it has been determined that additional capital will be needed to fund the company’s development and that equity is the appropriate form of funding – it is important to take it when you can get it.  Certainly negotiate the best possible terms, but do not be unrealistic about your “promising future.”  Do not fall into the trap of “if we can raise it now, we can always raise it later and probably on better terms.”  Although it is certainly a possibility and you should always explore every opportunity to find the best alternative, there are no guarantees it will happen that way.

In fact, the principals of many very promising companies have been reluctant to take equity capital because it was thought to be too expensive.  The owners/shareholders did not want to be diluted and the belief was that there would always be other opportunities to raise capital at the future date of their choosing.  It was thought that the company could continue to generate sufficient cash to fuel growth or support the current operations until the time they were in a better position to get “a better deal.”  This can be a grave mistake.  Later when it becomes clear the company cannot generate the needed cash and additional funding is truly vital to the company, the world you live in has changed, the possibility for funding is gone and the company is found wanting without the means to fund growth with disastrous results.  More often than not these companies do not survive or at a minimum their growth is impeded and they never achieve their full potential.