The Essential CFO: A Corporate Finance Playbook

Chapter Fifteen

Obtaining Long-Term Financing

ALTHOUGH IT IS BETTER TO HAVE too much than too little capital, this margin of safety comes with a price. Therefore, it is always a delicate balance between the desire to be well-capitalized versus the fear of being over-capitalized.

In striking the right balance, CFOs will consider not only the amount of capital that should be raised, but also the variety of sources from which it can be obtained. Each funding alternative has its unique blend of advantages and disadvantages, which CFOs will factor into their capital structure equation.

VENTURE CAPITAL

For start-ups and young companies, financing traditionally has come from equity investors who are seeking significant upside in exchange for a material risk of loss. Depending on the stage of a company's development and the amount of capital required, these investors can range from “angels” (private individuals) to large venture capital firms (institutions).

Venture capital is usually the most expensive funding and can be difficult to obtain in size; thus, venture capital financing normally is approached with the twin goals of minimizing the amount raised and delaying the funding until it is absolutely required. However, its availability is also the most uncertain, subject not only to the quality of business plans presented, but also to the conditions in the venture capital market, which can fluctuate materially.

Venture capital is typically raised in stages, which allows the investors ...