Taking investment introduces a new set of decisions, trade-offs and expectations for the future of a company. The running of businesses requires a great deal of capital and capital can take different forms, from human and labour capital to economic capital.
Capital raising is the process where an individual or entity obtains money or funds to start the business off the ground, grow the business or help in the daily operations of the business such as the purchase of materials and payment of wages. There are usually two types of capital used by companies to fund such operations: debt and equity.
Debt Capital is usually raised by obtaining bank loans, personal loans, credit loans, bonds and so on. Equity Capital is whereby an investor invests in a stake within a company.
In our quest to understand better the elements of Capital Raising, WIFIN had a Q&A session with Sajeda Affejee, Senior Manager at AXYS Group.
Based on your expertise in capital raising, we would like to have your opinions on the following:
Q. In today’s era where the world is still facing the ill- effects of the global pandemic, why do you think raising capital is important for firms?
The survival of companies rests on sound cash flow management. We have seen that the main reason why businesses fail is cash flow issues. Most businesses have suffered from the lockdown, with nearly no trading while they still had their fixed commitments like salaries and rental. With the lifting of lockdowns, businesses need to review their cash flow for both short-term and long-term operations of businesses.
Most companies have been stuck in a liquidity trap, and to start trading again the raising of capital is essential to allow businesses to revamp their business model, finance their working capital and grow the business.
Q. How important is it to properly value the businesses’ prior to raising capital? If a proper valuation is not conducted, what happens?
Valuation provides a yardstick for the owners and management. Having a proper valuation helps management decide on the right mix of capital for the company, especially when the preferred method of capital raising is the issuance of equity or convertible debt instruments. However, company valuations are not a static figure, but rather a tool that assists the owners in the decision process.
With the pandemic, there is a lot of uncertainty, and history is no more a reference. While valuing a business prior to capital raise is important, how you lead the operations and how quick you make decisions will be key to the business success.
Q. When speaking of the ideal capital raising skills, what is the most cost-effective way of raising capital? Is it through debt capital, equity capital or a mixture of both types?
Any company should strike the right balance between debt capital and equity capital to maximise its market value while minimising its cost of capital. Capital raising is becoming more and more tricky and difficult these days as banks have become more risk-averse and reluctant to lend. Companies traditionally look for finance through banks and with the pandemic, access to capital has become limited. The landscape for capital raise is gradually changing with companies looking for alternative sources of finance like private bonds. I believe there is an opportunity to encourage entrepreneurship through equity investments. The cost of such will obviously depend on the types of businesses and the risk aversion of the investors.
Q. Since different types of investors provide different value to companies, what are the types of investors a business should seek? What are the key criteria investors look at before investing in any business?
Typically, the type of investors will depend on the stage of the life cycle of the company, and what the owners expect from the investors. For instance, are they looking for investors who will participate in the strategic decisions of the company or are they looking for passive investors? For start-ups, it is preferable to have angel investors, who are usually high net worth individuals who want to leverage their wealth by investing in projects that they are passionate about. Start-ups do not usually have access to traditional forms of finance like banks and would turn to alternative investors.
Unlike lenders who focus on interest and capital repayment for the loan, investors will look at the return that they will obtain from the business. They will look at the track record of the company, the governance structure and how the business has been managed over the years, the forecasts and the exit strategy. The company should be able to demonstrate a true storyboard with a clear strategy.
Q. In the context of Mauritius, which is also known as the financial hub of Africa, what forms of external financing dominate the country in the area of financing the development of innovative start-ups?
It is unfortunate to see that start-ups struggle to get access to capital and that’s why we do not see the emergence of a lot of successful innovative start-ups in Mauritius. Start-ups are predominantly funded through their own funds. The ecosystem for start-ups is not mature enough. Investing in start-ups requires a different approach and mindset than traditional businesses. There is a need to encourage investors to take equity stakes in start-ups and promote the entrepreneurial culture. This could be achieved through Private Equity (PE) funds that could invest into viable start-ups and SMEs. Over and above the cash resources, PE firms provide the expertise and relevant governance to the SMEs/start-ups.
Q. A capital-raising strategy is essentially a roadmap for how an organization will pursue and obtain the funds it needs to fuel its growth. What are your final thoughts on developing a capital-raising strategy? What does this process entail?
A capital raising strategy is instrumental for the growth and sustainability of any business. Developing a capital-raising strategy can be a very lengthy process and involves the drafting of a clear vision for the businesses, developing a sound business plan and approaching the right investors for the company. Having the right approach for capital raising is essential and this is where corporate finance advisors come into play. We advise the company in formulating a sound capital raising strategy with a unique value proposition for the investors.
Sajeda has over 18 years of professional experience with extensive exposure carrying corporate finance assignments. Her service expertise includes a broad range of advisory skills including specialist services related to capital raising, corporate strategy development, financial and operational restructuring, valuations, and feasibility studies.
Sajeda holds a Master of Laws (LLM, International Business Law) from the Université Panthéon Assas (Paris II). She holds a BSc (Honours) in Accounting & Finance from the University of Mauritius. She is a Fellow (FCCA) of the Association of Chartered and Certified Accountants and a member (ACA) of the Institute of Chartered Accountants for England and Wales (ICAEW).
Disclaimer: Sajeda’s views are her own and do not represent the views of her employer.**
Thank you for joining us!
(WIFIN Q&A Sessions 2021)