Private Equity Fundraising: Direct vs. Corporate Advisor
Raising Capital: Private Equity vs. Corporate Advisors - Case Study
In this case study, we compare two common approaches for project owners seeking capital: approaching private equity firms directly or working with corporate advisors. Discover how GreenTech Solutions navigated these paths to secure funding.
Case Study: Raising Capital for GreenTech Solutions
Scenario: James, the founder of GreenTech Solutions, a clean-tech startup, needs $10 million to expand production, invest in R&D, and enter new markets. He explores two strategies for raising capital:
Option 1: Approaching Private Equity (PE) Firms Directly
Option 2: Hiring a Corporate Advisor/Management Consultant
Option 1: Approaching Private Equity Directly
James starts by preparing a comprehensive business plan and financial projections. After researching PE firms, he reaches out with the goal of securing $10 million in funding.
Step 1: Preparation
James creates a detailed business plan, emphasizing market opportunity, product innovation, and financial growth projections. However, he misses critical elements such as a solid exit strategy and a well-structured risk management plan.
Step 2: Reaching Out to PE Firms
James reaches out to several private equity firms, eventually securing a meeting with one that specializes in clean-tech. However, during the pitch, it becomes clear that his business plan lacks key components expected by the firm.
Step 3: Challenges
During due diligence, James faces several challenges:
- The PE firm requests more data on scalability and market risks.
- James’ valuation of $15 million is too high, and the PE firm suggests a much lower valuation.
- The firm asks for a clear 5-year exit strategy, which James doesn't have in place.
Step 4: Outcome
Despite initial interest, James fails to secure funding. The PE firm views the project as too risky without more clarity on growth and an exit strategy.
Option 2: Engaging a Corporate Advisor/Management Consultant
After his experience with PE firms, James hires a corporate advisor to improve his chances of securing funding. The advisor brings expertise in clean-tech investments and a network of relevant investors.
Step 1: Hiring an Advisor
The corporate advisor works with James to refine his business plan, focusing on market scalability, risk management, and a realistic exit strategy. They also adjust the financial projections to make them more credible to investors.
Step 2: Structuring the Deal
The advisor helps James craft a more compelling pitch that resonates with PE firms. They also suggest a valuation of $10 million, which aligns with market standards and increases the business’ attractiveness to investors.
Step 3: Securing the Deal
With the advisor's guidance, James is introduced to the right PE firms—those that specialize in early-stage clean-tech investments. The advisor helps structure the deal, ensuring that the terms are favorable to James while still appealing to the PE firm.
Step 4: Outcome
James successfully raises $10 million from a private equity firm, which agrees to a preferred equity investment. The deal provides capital for expansion without compromising control over the business.
Key Takeaways from the Case Study
Business Plan Readiness: James had a business plan, but lacked clarity in terms of risk management and exit strategy.
Due Diligence and Deal Structuring: The advisor helped prepare James for due diligence and structured the deal to appeal to PE firms.
Valuation: The advisor adjusted the valuation to reflect market norms, increasing credibility.
Investor Alignment: The advisor connected James with PE firms specializing in early-stage clean-tech, improving the likelihood of success.
Negotiation Skills: The advisor negotiated favorable terms, balancing the interests of James and the PE firm.
Outcome: James successfully raised the needed capital and secured favorable terms with expert guidance.
Conclusion
James’ case highlights the importance of expert guidance when approaching private equity. While approaching PE directly may seem like an easy route, working with a corporate advisor can significantly improve the chances of securing capital and structuring a favorable deal. Advisors bring valuable expertise, connections, and negotiation skills, that increase the likelihood of success.
Learn More About Project Readiness Self Assessment for Accessing Capital for Business