tactical or strategic capital?

Posted by in Investing, Opinions

In the marketing world a tactical campaign is one that is constructed to seize on an immediate and valuable opportunity (often offer or promotion based) to boost the P&L. Generally from a responsive budget and with short-term defined goals. A strategic campaign is one that is less focussed on short-term gain and more structured in order to build brand values, create awareness and/or permanently shift opinion (e.g. a TV campaign for a new car, Sony or Virgin brand build etc….) over time in order to achieve a longer-term objective.

Recently I have seen a few businesses engaging in equity conversations to raise what I would call tactical capital but that they are calling strategic capital. The difference to me is that strategic capital tends to be deployed across a reasonable time period in a set of clearly defined initiatives, tactical capital goes into one (or few) project(s) where the  capital is deployed rapidly against limited singular effects.

The parallel to the marketing example is that tactical capital is capital against a sensible project that clearly has value, however it is not capital for a project that can be translated into shareholder value growth for either the business or the incoming investor. In other words the capital is for short-term gain with no clear indication of how it leads to sustainable strategic growth within the business.

The challenge with this is, whilst it is a rational application of capital (ideally cash), it is not easy to apply a before (entry) valuation for the deployed capital to make it a growth capital investment as the exit valuation driven by the capital is a) short-term and b) super hard or too incremental to quantify. This leads to a situation whereby the incumbent shareholder(s) has increased risk of being over diluted or the incoming shareholder takes on too much risk for too little definable return.

The answer to me is twofold.

Firstly my fundamental belief that every business is capable of planning for their capital raises and that with a little concerted effort can create a sensible strategy that addresses long-term growth whilst incorporating tactical initiatives. A business plan/strategy where the capital provides the potential for sustainable transformative growth through a series of efforts across an appropriate timescale. This overcomes some of the challenges of entry and exit valuations.

Secondly that if you are really looking to raise capital against a purely tactical initiative, that cannot be supported by existing cashflow, then problems probably run deeper and the issue is more likely to be elsewhere within the business rather than resolved by a tactical campaign. Given, however, that the last statement is clearly going to be incorrect in many circumstances then my advice is to make sure that tactical capital conversations are not equity based conversations but are, as far as possible, conversations around shareholder loans, director loans or suchlike. In reality if a short-term tactical initiative is so absolutely essential for a business then the existing participants should be the ones best placed, rather than a third party, to assess and fund the risk of such (ie. It shouldn’t be equity risk as it should have such imemdiate benefit that the rewards are rapid!).

My counsel (as ever) plan for your capital raises and try not to be precipitous/reactionary. Be honest with yourself as to whether the investment is really just for short-term tactical P&L gain rather than sustainable change. If nothing else it’ll help frame the proposition right to investors.