Post on 23-Feb-2023
Navangul, Amol | October 11-12, 2013
Author: Amol N. Navangul, Managing Director, Maytra Noesis Advisors, PLC;
PhD Research Scholar in Finance, University of Pune / VAMNICOM Pune
+91-93700-82829 | amolnavangul@gamil.com
Published: SIBAR Journal – ISSN # 2347-4173
Paper Title:
Financing Growth: Importance of Strategic Business Planning and Alignment
ABSTRACT:
In a global competitive environment, of all the factors essential for growth to a middle-market or
emerging growth company, adequate finance is vital. Such companies being on the transition
threshold, experience hesitation and reservation accessing public funds, mainly due to keep
continuing with their innovative working styles and to stay away further from extensive
regulatory framework exposure. Private placement in various ways is the best solution to this
constraint. This paper tries to explain the financing process followed by these financing entities
and focuses on why proper and aligned business strategy plan is most important for being
successful in obtaining such finance.
KEY WORDS:
Emerging Growth Companies, Strategic Planning, Strategic Alignment, Financing Process,
Growth Capital
OBJECTIVES:
As part of the global open market community Indian businesses in the last two decades have seen
tremendous growth, mainly at entrepreneurial enterprise segments, never to neglect the large
organized corporate and government sectors. However the key distinction in this growth story is,
while there is arguably the greatest amount of capital ever focused on such entrepreneurial
Navangul, Amol | October 11-12, 2013
2
enterprises segment, specifically defined as emerging growth and middle-market companies,
rather than the larger organized corporate and government segment; there are higher level
hurdles experienced in accessing this capital by this segment 7. The objective of this discussion
is to make understand the financing process majorly followed by private growth capital funding
companies, popularly known as PE or VC funds and emphasize the critical importance of
Business Strategy Planning and Stakeholder’s Alignment to such Plan, being initial steps in this
process, as the most important and critical steps.
INTRODUCTION:
In spite of any economic turbulence, the middle market companies, which are emerging growth
companies, meaning which are proactive and well-positioned in-terms of credibility, technology,
resources and leadership, there is no dearth of capital to be found. The difference today is one of
gaining access, not just one of getting a better deal or better terms. The same applies to both debt
and equity from a wide range of options: say commercial banks to asset based lenders to
specialty finance companies or from growth equity investors to venture capitalists to strategic
partners 3. It’s all about these hopefuls getting their house in order, strengthening their position
and focus, and most importantly putting across a proper pitch by absolutely understanding how a
financer thinks and values your business rather than how you value yourself and accordingly
how you perceive your financing or business needs 12.
From the perspective of Growth Capital such as Private Equity or Venture Capital funds
providing risk capital funding, the approach is purely process based – considering use of fund,
industry sector and the investor & stakeholder objectives, by keeping a focused eye towards
creating value 10. With an estimated funding rate of business plans submitted to venture
capitalists to be between 0.2 to 0.5 % or 1 out of 500 to 1 out of 200 companies 3, it is important
for companies to pitch very systematically and with a thoughtful strategic approach, by properly
understanding this appraisal process and key basis of ‘go – no-go’ decision.
It’s a common myth that, technology firms are best equipped to access such growth funding.
Although the tech-ventures do work on innovative technology platforms and they do innovate
through application of such technologies, there still is a lack of proven theories and practices
clearly pointing out relationship between innovation and the growth 4. Thus, for a financer they
are just another innovative venture, which may be categorized under the emerging growth
Navangul, Amol | October 11-12, 2013
3
companies. The better rate of financing success in these companies is mainly because of typical
law of average as the applications received for appraisal are highest in these categories 2.
PRIVATE PLACEMENT:
Three periods where business owners are frequently faced with financial challenges are during
the start-up period, through the survival stage and through the initial growth stage. Each stage
raises different challenges and, as might be expected, calls for different solutions.
Existing evidence further indicates that startups and emerging growth companies using growth
capital such as venture capital or private equity are different from the ones using more traditional
financing alternatives. The venture-backed startups follow more innovative strategies and take
shorter time to introduce their products to the market. Further they have presence of vibrant
human resource practices. Similarly since these growth capital firms devote significant
management resources to understanding new technologies and markets, finding promising
startups in those spaces, providing them with financial resources, and coaching them through the
early part of their lives, they contribute substantially as mentors so as to achieve higher growth in
such companies during the period of their presence; and subsequently due to placement of proper
SOPs such companies continue doing very well post exit, provided it is ‘timely exit’4. It is
advisable for emerging growth companies to thus opt for such funding.
Yet another study indicates, almost 66% of fast-growth companies reported that at the initial
market growth stage they were funded primarily by outside sources, including bank loans,
investors and alliances. However, funding from owner resources at this stage totaled less than
1%, a significant drop from 17% at the survival stage and 73% at start-up. This is the stage when
many growth companies begin looking to alternative sources of financing 13. Here as well, it is
advised that companies carefully should consider opting for a private placement i.e., seeking
investors privately rather than in the public market. In many cases, a competitive process
established in such funds can enable a company to dictate many of the terms and conditions of
the new financial relationship, as opposed to the deals these companies are expected to get from
traditional funding sources. This is where they are better off in competitive market.
FINANCING PROCESS:
Navangul, Amol | October 11-12, 2013
4
Figure 1 shown in Annexure provides an overview of financing process from the perspective of
the growth capital issuer: whether it is raising equity or debt will be subset of this process
depending on transaction type. The process is segmented in following categories 10:
A. Assessment: Planning and alignment; evaluation and assessment;
B. Valuation: Acquisitions, recapitalizations and exits acquisitions; forecasting basis;
C. Structure: Capital structure - sources of capital; equity or debt financing;
D. Confirmation: Test market; summary verification;
E. Marketing: Expert support; presentations & prospecting;
F. Closing: Offers weighting; negotiations & due-diligence; closing the deal.
Process category A, above comprises of Steps 1 to 6 and is crucial in forming financer’s opinion.
Through steps 1 through 3, financer understands the financial position of the company, structure
of current balance sheet, specific use of funds, the industry the company operates in, the stage of
the company, shareholder objectives, management’s strengths and weaknesses and
management’s plans and views of the future. Shareholder’s objectives form a special scrutiny as
considering that these are primarily middle market or emerging growth companies, many of the
shareholders are also senior managers of the company, thus the objectives should clearly address,
(1) personal risk management issues while growing the business and (2) shareholder liquidity 11.
This is critical to decide, “typical debt and equity mix” and “how one can avoid personally
guaranteeing the debt”.
Steps 4 through 6 focus on comparing the company to its peers and determining variances. In
steps 7 & 8 the valuation is determined and the assumptions are updated and financial forecast is
agreed upon. This entire analytical process forms a basis of defining and understanding value
proposition, which now will be used in the fund-raising process. The first two (A & B) category
analysis steps are critical, as the ‘value proposition’ outcome is indicative of alignment of
expectations among shareholders, directors, management, and supporting advisers 13, 5.
In step 9 a typical capital structure is determined with some fallback scenarios, and the
presentation tool-kit, called the ‘book’ is ready for fund-raising. Further it’s all about networking,
marketing, taking investors in confidence, assuring them of returns and safety etc. Use of experts
in the financing process is considered, as they can be invaluable in testing the market and
Navangul, Amol | October 11-12, 2013
5
potential alternatives, as well as providing an added perspective. Post due-diligence process the
deal is stuck. (As the objective of this discussion is to understand the critical issue in this process,
the paper does not discuss, valuation models, market analysis, or due-diligence process.)
As may be observed, in entire model, other than step 1 the shareholders or the management do
not really have any control over any other steps, at the time of forwarding funding proposal to
the prospective financer; as all the other steps are controlled by the financer or the market 8.
Secondly, serious ‘go – no-go’ opinion is actually formed during the initial steps, and then the
process goes further. Thirdly, one more critical issue to understand here is how financer defines
value, as the initial analysis is focused purely on estimating value proposition. Although
profitability and growth are the drivers of value as measured by market-to-book (M/B) ratio, the
financer is more interested in knowing three key value propositions 5: (1) Low cost and
operations excellence, (2) innovative products and/or services, and (3) total solutions based on
customer intimacy. Finally, from the point of view of corporate excellence perspective, the
research have proved that, corporate distinctive functional competencies are positively linked to
firm’s performance in terms of profitability or growth or shareholder’s value creation 8, provided
all these functional entities and the other stakeholders objectives are aligned to firm’s grand
strategy.
This entire discussion culminates into a well-designed and well-defined strategic business plan,
which will go for scrutiny at financer’s end. More robust the strategic business plan is for the
company and better the shareholders are aligned to the objectives & goals of the company,
better are their chances to attract the right capital sources 10.
STRATEGIC PLANNING AND ALIGNMENT:
It is essential to recognize what strategic planning is not. It is NOT a quick fix and neither it is
required to be brilliant. Like many quality management efforts, it is a long-term investment with
payoffs that increase over time. Planning is not a magic wand; saying something does not make
it so. In other words, it should be sound, well conceived, avoids the obvious errors and it should
be honest. Any plan must be accompanied by commitment and action if it is to achieve results 9.
As a step 0 preparation, so as to be seen as highly favourable entity in step 1 in financing process
the funding prospector needs to showcase a proper growth strategy. Here growth strategy
Navangul, Amol | October 11-12, 2013
6
considers major business initiatives in entirety, including strategic and business planning,
mergers and acquisitions, joint ventures, acquisition integration, organizational restructuring,
lean enterprise-based continuous improvement project, new technology and product launches,
and new employee hiring 4.
The study results have shown that the businesses with sustained sales revenue, profits, and employee
growth over many years use the strategies that originally facilitated their growth. Thus, the primary
contributing factors to a company’s continued growth are capital (less debt) as the primary financing
source; research and development investments; overall quality and internationalization 2. It is
expected that, these are some of the factors, which need be properly reflected in strategic business
plan. Figure 2 of Annexure depicts the key elements of the planning process. In the past two
decades emphasis of strategic plan has shifted from structured and controlling nature of
managing business, to the more challenging but liberating and effective emphasis on leading the
business 7. In this shift, the plan needs to outline the following:
1. The direction the business is headed (the value creation targets);
2. Why it is going there (the vision and mission);
3. How it is expected to get there (the competitive strategic initiatives);
4. How we are to behave while executing the plan (the values);
5. Milestones (leading indicators) to guide the journey.
The more visual the strategic plan, vision, values, and leading indicators, the better, and going
forward it should consider, turbulent market conditions, changing customer demands, reactive
competition behavior, and all the external factors influencing industry. Financers will expect
management to have considered through these and have run scenarios. Further they would expect
the plan to be fluid with contingencies and allowance in the event things do not go as expected 12.
To achieve the critical alignment necessary for solid plan implementation, the strategic and
business plans need to be developed in collaborative manner with those stakeholders who will be
responsible for its implementation. In the end the plans must cascade seamlessly across all
business functions 1. The strategic aligning process is indicated in Figure 3 of Annexure. The
plan aligned to value creation target with end in mind and which considers matching personal
and business goals, showcases competency of owner/manager and their ability to delegate, the
Navangul, Amol | October 11-12, 2013
7
quality and diversity of management, systems and controls and ultimately seen as a worthy and
doable. The strategic plan serves as the primary tool to build necessary coalition, both while
developing it as well as in communicating; the blueprint for success lies in the plan development
process 10.
CONCLUSION:
After almost four decades of research, the effects of proper strategic planning on the organization’s
performance are still unclear. Some studies have found significant benefits from planning, although
others have found no relationship, or even small negative effect 6. From the practitioners or
financer’s view point the response to this argument will be same, mixed! However, this discussion is
not to judge relationship between better strategic planning and organization’s performance; it is about
getting the right finance and to have higher chance of being successful in doing so.
For successful fund-raising, it is essential to establish and follow process, start early – even before
one needs it; it is easier to get audience with investors as compared to getting funding, so one needs
to be prepared for tough questioning and for that one has to get his house in order and being well-
acquainted with the business fundamentals; to be selective with financing options and properly
knowing how it plays into the overall capital structure. It’s about building networks and selecting
sources where one matters, though sometimes even with a bitter pill of being criticized harshly; to be
realistic with plans, valuation, issues, strengths, weaknesses, and timing. One should have
alternatives and be creative in that; importantly one should follow the operating principles of “do
what you say you are going to do” and “no surprises”. Summing-up, it’s all about establishing solid
credibility and to be aware that, there is no substitute for strong operational performance 10.
Reflection of these understandings goes into favourable business planning and the alignment of
strategy with available resources, culminating into successful end to financing process.
Navangul, Amol | October 11-12, 2013
9
FIGURE 2 | The Strategic to Business Plan Cycle
FIGURE 3: Aligning Process
Navangul, Amol | October 11-12, 2013
10
KEY TERMS EXPLAINED: 1. Mid-Market Company / Emerging Growth Company: Defined in the Securities Act and
the Exchange Act, USA SEC, as an issuer with “total annual gross revenues” of less than
$1 billion and more than $10 million during its most recently completed fiscal year.
While in India, this terminology is applied by the private financing industry to emerging
SMEs, whose business is centered on Innovation and Technology and further have
turnover less than INR 25 Cr, or Capital base maximum up to INR 10 Cr;
2. Strategic Planning: Strategic Planning is a comprehensive process for determining what a
business should become and how it can best achieve that goal. It appraises the full
potential of a business and explicitly links the business's objectives to the actions and
resources required to achieve them. Strategic Planning offers a systematic process to ask
and answer the most critical questions confronting a management team—especially large,
irrevocable resource commitment decisions;
3. Strategic Alignment: Whatever key business purpose and business strategy the company
emphasizes; customer intimacy, technology optimization, cost optimization or disruptive
innovation; workplace practices must reflect and actively drive behaviors to deliver on
that purpose and strategy and corresponding market positioning. Strategic alignment is an
intense hands-on business redesign process, in which strategic goals, business model and
processes are aligned with company culture for key business purpose and core values;
4. Stakeholder Alignment: This is process of identifying all the stakeholders and their
interests and competencies; and through continued dialogue, all their thought processes
and activities are aligned to common strategic goal.
5. Growth Capital: Also called expansion capital and growth equity, is a type of private
equity investment (in-fact it resides between PE and VC intersection), most often a
minority investment, in relatively mature companies that are looking for capital to expand
or restructure operations, enter new markets or finance a significant acquisition without a
change of control of the business. Companies that seek growth capital will often do so in
order to finance a transformational event in their lifecycle. These companies are likely to
be more mature than venture capital funded companies, able to generate revenue and
operating profits but unable to generate sufficient cash to fund major expansions,
acquisitions or other investments. Because of this lack of scale these companies generally
Navangul, Amol | October 11-12, 2013
11
can find few alternative conduits to secure capital for growth, so access to growth equity
can be critical to pursue necessary facility expansion, sales and marketing initiatives,
equipment purchases, and new product development. Growth capital can also be used to
effect a restructuring of a company's balance sheet, particularly to reduce the amount of
leverage (or debt) the company has on its balance sheet.
NOTE: Importantly because ‘growth capital’ is the most difficult option to get as funding.
The same is considered for this paper, as the typical methodology followed in appraising
‘growth capital’ applications, will apply to any other applications such as venture funding,
private equity, seed funding or mezzanine funding.
Navangul, Amol | October 11-12, 2013
12
REFERENCES:
All the 3 Figures in Annexure curtsey, “The Growth Capital Navigator TM” of High Rock
Partners, Inc. USA and Kshroum Capital Venture PLC India, JV;
1. Freeman, Edward, McVea, John (2001), A Stakeholder Approach to Strategic
Management, Working Paper Series, The Darden Graduate School of business
Administration, University of Virginia;
2. Neely, Andy, Adams, Chris, Kennerley, Mike (2002), The Performance Prism: The
Scorecard for Measuring and Managing Business Success, Pearson Education;
3. Davita, Antonio, Foster, George, Mahendra, Gupta (2000), Venture Capital Financing
and Growth of Start-up Firms, Research Paper Series, Graduate School of Business,
Stanford University;
4. Amat, Oriol, Renart, Marcos, Garcia, Maria (2006), Factors that determine the evolution
of high-growth businesses, Research Paper Series, Graduate School of Business, Stanford
University;
5. Pandey, IM (2005), What drives shareholder’s value, Research Paper Series, Indian
Institute of Management, Ahmedabad;
6. Myers, Steward (1984), Finance Theory and Financial Strategy, Sloan School of
Management, MIT, Cambridge, Massachusetts;
7. The World Bank Group Publication (2010), Innovation Policy (A guide to developing
countries);
8. Hill, Michael, Ireland, Duane (1995), Corporate Distinctive Competence, Strategy,
Industry, and Performance, Strategic Management Journal (Jul – Sep 1995);
9. California State, Department of finance Publication (1998), Guidelines to Strategic
Planning;
10. Marks, Kenneth, Robbins, Larry (2009), Handbook of Financing Growth, Wiley Finance;
11. Damodaran, Aswath (2006), Applied Corporate Finance, Wiley Finance;
12. Draper, William III (2011), The Startup Game, Palgrave Macmillan;
13. Hitchner, James (2010), Financial Valuation, Application and Models, Wiley Finance