How to Pitch Raising Capital to Your Board of Directors
Source: Firas Raouf, Founding Member of OpenView Venture Partners
For some founders, the thought of pitching a VC round to their board of directors can incite a fair share of dread. Will the board disagree? Will certain board members stand in your way? Not if you’ve done your homework, writes OpenView partner Firas Raouf.
So, you’re ready to raise capital. Your business is growing, you’ve identified new market opportunities, and you’ve got a plan in place to scale your organization in a way that will more efficiently promote growth. That’s great. But does your board of directors agree with that plan?
More than likely, there will be some board members who have their doubts. Outside capital, after all, can impact the company’s valuation and exit strategy (among other things), and that could leave your board asking questions like these:
· How will this capital dilute our equity stake?
· Do we really need this money to grow?
· Why can’t we drive growth without an infusion of new capital?
· Does our market and growth strategy warrant a VC raise?
· What exactly are you planning to do with this money?
If you’ve done your homework, you should be able to address those concerns with a very clear and compelling analytical analysis that quickly squashes any opposition. If you haven’t, you may as well tuck your tail between your legs and go back to the drawing board.
The last thing your board wants to hear is, “I don’t know.”
Truthfully, most good boards will support a company’s fundraising efforts if they can see the value, purpose, and impact of that capital. And as the founder or CEO of your company, it’s your job to deliver that information.
So, before you engage your board of directors about raising capital, make sure you’ve taken care of these three things.
1) Perform a Market Assessment
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Venture capital can drive your business’s growth, but that’s only if the market opportunity you’re targeting justifies the investment. Therefore, you need to determine:
- The size of your target market
- The needs of that market and whether or not your product aligns with them
- The competitive landscape in that market (i.e., how many competitors are there and how differentiated is your product?).
2) Outline Your Economic Model to Project Growth
By pairing the data above with your company’s economic model, you can determine the potential growth of the business with or without outside funding. This allows you to determine how much capital you need, and perform an analysis that outlines how you would use that funding (i.e., leveraging new marketing channels, adding to headcount, etc.) to fuel better growth.
3) Calculate the Company’s Projected Valuation and the Potential Return on that Investment
Because your board members are likely investors or advisors with an equity stake in your business, they will want to know how the money you plan to raise will impact the valuation of the company. If a new round of capital won’t positively impact existing investors’ return, you won’t have much success convincing them to sign off on it.
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Ultimately, if the three things above deliver a clear and compelling argument for raising capital, you shouldn’t need to do any convincing. The data will speak for itself and the board will have a hard time saying no to your request.
Conversely, if your analysis reveals that raising capital wouldn’t improve your chances of fueling stronger growth or produce a positive long-term outcome, then you need to take a step back and ask yourself a simple question before addressing your board: Why do you really want to raise this money?
Bottom Line
If your market isn’t ready to support rapid growth, or your economic model isn’t dialed in, then you need to have the discipline to know that raising capital will likely cause more harm than good.
Ultimately, the best founders are the ones who combine their desire for building something great with the analytics needed to validate their thinking. If everything points toward raising additional money to fuel growth, then you won’t likely have any trouble convincing your board to go that direction.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 40 professionals serving more than 100 companies throughout the region.
