Steps to Growth Capital Fast Track

Investment Potential

Investors are looking for three things. You've got to show them how your opportunity will deliver all three:

• excellent growth potential;
  
• exceptional return on investment (up to 25% to 40%); and
  
• a way to get their money out.

Proving Growth Potential

Investors will look for evidence that you can really produce the growth you project. One effective way to show them what you can do is to provide a situation analysis of your company. Analyse your company's:

• external business environment — showing the threats and opportunities; and
  
• internal business operations — covering the strengths and weaknesses of all key business functions.

Measuring Return on Investment

To show investors what return they'll earn on their investment, you need to show them what your company is worth today — and what it will be worth in the future. The reason is, equity investors make their money based on the change in the value of the company. If the company's value increases, their investment value increases.

Measuring a company's value — called "valuation" — is a complex but critical process. You'll probably need the professional assistance of a financial advisor or business valuation expert to determine the company value.

Because the investor won't see any money until some years in the future, the best valuation method is one that assigns a present value to future earnings. The valuation method used most often for purposes of growth capital investing is called the discounted cash flow method. It determines a value by taking revenue forecasts and adjusting them to account for the risk the investor is exposed to and for the opportunity cost of using the money.

The specifics of your deal all hinge on the valuation of your company. The amount the company is worth will determine:

• how much investors will invest;
  
• how large a share they will get in exchange; and
  
• how much they are expected to make from the investment.

Getting the Investor's Money Out

Investors will be looking for assurance that they'll be able to get their money out of your company. You've got to include such an "exit strategy" in your proposal to show them how they can realize their investment. The exit strategy also affects how the valuation is calculated. Exit strategies for equity investment include:

• initial public offerings;
  
• sale of all the shares of the company;
  
• purchase of the investor's shares by a third party; and
  
• buyback of the investor's shares by the company.

Action Items

Use our Show Your Investment Potential Checklist to help you build a convincing case for your investment proposal.

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