Financing Growth: Importance of Strategic Business Planning and Alignment

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 | [email protected]

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


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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


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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:


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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


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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


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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


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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.


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ANNEXURE

FIGURE 1 | Financing Process Flow Chart


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FIGURE 2 | The Strategic to Business Plan Cycle

FIGURE 3: Aligning Process


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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


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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.


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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

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5. Pandey, IM (2005), What drives shareholder’s value, Research Paper Series, Indian

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6. Myers, Steward (1984), Finance Theory and Financial Strategy, Sloan School of

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8. Hill, Michael, Ireland, Duane (1995), Corporate Distinctive Competence, Strategy,

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10. Marks, Kenneth, Robbins, Larry (2009), Handbook of Financing Growth, Wiley Finance;

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12. Draper, William III (2011), The Startup Game, Palgrave Macmillan;

13. Hitchner, James (2010), Financial Valuation, Application and Models, Wiley Finance

Financing Growth: Importance of Strategic Business Planning and Alignment

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