subject: Raising Capital For Private Companies, Why Is It So Hard? [print this page] It's said that you have one in four chances of raising capital if you have a private company. The odds are not that good in the long run. In fact, you will succeed so much easier if your company goes public.
The only reason investors are interested in purchasing stock from a publicly traded company is because they can trade with it on the OTCBB and it offers them liquidity that you won't get from investing in a private company.
So why risk it on your stock?
Investors are willing to risk their money on your stock as opposed to your company because it can outperform the business plan by a mile. Also, if you decide to sell your company at a later stage, you will make 25 times plus more than having a private company. A lot of companies buy cash-producing assets with their stocks which will eventually improve the bottom line and 5 years down the line they will gross more than 10 million dollars.
A public company is valued higher than a private company. You can also offer fixed-asset value on stock to current and future employees which will make an attractive package to them, but only if your company is public. Not to mention your public company will have prestige and publicity that can make your company more visible to prospective investors.
There is another aspect to why it's hard for private companies to raise capital. Ever thought of corporate documentation and the benefits or disadvantages it may have on a private company? If the company has non-professional financial statements then it can be detriment to a private company. At least if there are deficiencies in corporate documentation within a public company, it can be overcome, but not so with a private company.
By having a public company you will have access to industry standard compliant financial statements, but a private company will find it that much harder because investors may find themselves reluctant to invest if everything is not up to par.
You also need to be realistic when looking to raise capital. Do you really need to raise capital now and can you justify the need for it? This is where a professional business plan will come in handy, but don't let it be your primary investments material and just try to keep to the basics. It should be short and to the point and not contain too much fluff.
There are other disadvantages to raising capital for a private company, but if you sit down with an experienced attorney, you will find their advice is invaluable as they can guide you on areas of potential funding and their expert knowledge on corporate securities law could help your company to go public, therefore, ensuring that you can raise capital easier.
You have to remember that the current global financial crisis is making things real harder as well. Investors are more careful when investing in start-ups and in small private companies. It doesn't mean you won't be able to find the funding you need, but that it will just become that much harder. You would need a good budget, some time-roughly up to 9 months that you need to allow for raising capital and good financial statements plus documents that explain your opportunity.
It might be better to go public and it will be worth your while to see if this will be more advantageous for your company and potential investors.
