The moment you use a term like “capital strategy” it invokes an image of something that feels complicated and hard.
The devil is always in the details, but getting together the framework of your capital strategy? Not nearly as difficult as you would think. I’d like to share a really basic approach to thinking about how you use capital (i.e. “fuel”) to to meet your organization’s goals.
Step 1: Define your goals.
It is easy to skip forward to the “hows” of capital: 1) we need to talk to this type of provider because the rates that they provide fit our goals, or 2) we want to raise this type of capital to use in this way, etc.
The reason we skip to hows is that they can feel more concrete. I can plug a rate into a spreadsheet and model out a result and if that result fits my revenue targets or my cost of capital targets, isn’t that enough?
No. The first thing you need to do is decide what you’re buying or selling. What’s your product? What does your business actually do and how do you want to access, or better yet, be seen in the market? Are you a commodity product? Are you a premium product? Are you a volume leader or a distributor? A service?
This matters because there is capital. There is capital everywhere: equity, debt, some type of hybrid, structured, etc. You can look here, here, and here – everyone is looking to place cash somewhere to produce a type of return. So, the better you can define your business strategy, the better you can decide the type of capital that you want and that wants you.
Step 2: Manage your models, don’t let your models manage you.
Models are a great starting point. It’s a way of looking at the world, safely, and making assessments as to what opportunities exist and how you can access those opportunities using capital. You can assess potential market events, either on the cost or revenue side; you can assess your own companies growth or what it looks like in a no-growth period or downcycle; you can re-shape the world.
But, most importantly, understand that a model is not real. It is a tool for analysis and assessment. It is helpful. But it is not real; no model, no matter how good, no matter how fine-tuned, survives contact with actual reality. We shouldn’t fall in love with our creations and assume that the world will adjust to match it.
Step 3: Turning your capital into fuel for your business
At this point, you know what type of product you want and so you’re able to select the right type of capital for that product / business goal. You have models which are tied to both sides of your equation: the costs (labor, inventory, capital costs from raising to operations) and the revenues (sales, interest margins and fees, if applicable, etc.), and now you need to do the plan that takes into effect:
- The time to raise capital
- The time to turn their capital on
- How to keep the capital running
- How to shut it off
Seems simple, right? Too often, we think only about #2 because that’s the fun part! I have all this cash, let’s use it, great! But, similar to putting gas in a car, you have to go find the station (get the provider), pay the gas attendant (costs to complete due diligence and raise a facility), and after the gas is in there and you’re off driving the car, you need to keep an eye on things (manage the facility, do your periodic maintenance, keep refueling), and depending on how often you’re using that car and what you’re doing with it, sometimes you need to re-up (get a new lease!) or sell/junk it (shut down a facility).
And that right there is the important thing to remember: a strategy is not a single point in time. Capital strategy formulation is a thing that goes from when you start a business all the way through until when it fails (which can happen) or when it gets acquired and becomes part of someone else’s headache or when it continues to be a going concern.
Don’t forget! as long as your business is a going concern, capital is a going concern.
So, keep in mind the easy steps:
- Define your goals. What do you want your business to be? What do you actually do? Find the capital that meets that need.
- Model it out! But don’t mistake models for reality.
- Execute on the plan… and keep executing on the plan. It’s a cycle that needs keep running as long as your business is running.