Capital Raising: 5 Key Tips from the Minds of Lawyers, Entrepreneurs and Investors
By Allon Ledder
28 October 2019
Starting a new venture can be both an exciting and daunting, and is almost guaranteed to bring about waves of highly stressful times.
Given the rapid growth of technological and entrepreneurial advancements around the globe, the right head-start certainly plays a key role in preparing you for the obstacles on the journey to success, and often can be a key determinant in who comes out on top in this entrepreneurial age. As you move towards the capital raising stage, it is important to keep these five key things in mind to lower that stress and move from strength to strength.
1. Build the right business relationships
“It doesn’t matter if you meet someone in a playground or in the boardroom, make the most of the connections you have. Relationships open doors, it’s that simple.” – Linda Jenkinson, Global Entrepreneur
As any successful entrepreneur will tell you, the right business relationships can often be the make or break for a new start-up, and they play a key role in each stage of a start-ups journey to commercialisation, including capital raising.
The primary business relationship for any start-up is the kindred start-up entrepreneur. Most people in the entrepreneurial ecosystem have a great story to tell and have connections to other interesting and useful people that can provide advice or funding. Corporate executives who work in a relevant sector would also be good to speak with as they can help you refine your pitch and business model to suit the specific needs of the industry your start-up is working in, which will then boost your capital raising capabilities.
Another important relationship is the one with venture capitalist (VC) firms. The single reason for this is it’s their job to find and invest in entrepreneurs. It is crucial to make sure that you choose one who knows what they’re good at and what they’re not good at. While the prestige and renown of a name is often indicative of service quality, it is important to remember not to get too caught up with it; pick the right firm for your business based on the VC’s specialty areas and expertise. This will ensure you’re getting the right capital raising advice going forward.
An alternative method of capital raising is through angel investors. An angel investor is an individual who provides capital to start-ups, usually in exchange for convertible debt or ownership equity. Angel investors can be beneficial if their professional backgrounds are a good fit for your industry. If they are well known in that industry, having them as an investor improves your chances of further capital raising by affiliation. Thus, it is crucial to understand the person looking to invest in your business.
You should try to learn as much about investors as possible. Mingle in their networks and peruse their portfolio to ensure you have the best team going forward.
2. Developing the right team composition
“Early stage investors invest in people, and your team is your most valuable asset.” – Lachlan McKnight, CEO at LegalVision
Team composition is a crucial component of any start-up, and is relevant at all stages of a start-up’s journey. Its impact at the capital raising stage is often underestimated.
For example, if you’ve launched a tech start-up without a tech co-founder, it’s going to be harder for you to raise capital since investors will not believe you have the capability. It is better to launch your tech start-up with someone with a strong tech background on board. This will show investors that you not only have capability to develop your start-up, but you also have the right management and forward-thinking mentality that is integral to a start-up’s success. This will assist in gaining access to capital.
Another aspect of team composition that is often not considered at the capital raising stage is sales capacity. The primary goal of any investor is to obtain a return on their investment, and thus they expect any capital they invest in your start-up to return a profit. The more likely your start-up will return a profit, the more they will be willing to invest. Thus it is important to consider the sales aspects of your team. It is usually helpful to show that you have someone with a strong sales background in your team. Investors will look at various factors such as their industry background, their sales experience and their track record. Having a good sales team will convince investors of your start-up’s ability to generate revenue which in turn feeds into a willingness to invest greater amounts.
3. Correctly identifying required capital raising
“In valuation, people get a bit fixated on the number and definitely at the lower end. There is a huge difference between what value you are raising and what your business is actually worth or needs, especially in the early stages.” – Ben Williamson, Co-Founder at dealPad
Generally, it’s best to raise double what you think you need. You need to buy yourself at least 18 months of ‘runway’ so that you have plenty of time to make some mistakes and still have enough time to succeed. It is highly unlikely that a start-up will be immediately profitable and you will need to be prepared to sustain losses for an initial period. Additionally, most first-time entrepreneurs underestimate the time and costs required for builds, particularly in the tech space. Thus it is always recommended to give yourself a buffer.
However, you will also want to take care not to raise more than is necessary. Many successful start-ups never raise outside the necessary amount. This is because raising capital takes time, dilutes your ownership stake in your company and can often lead to undisciplined spending. Of course, there are huge upsides to raising excessive capital as well, but it’s worth spending the time to think about your business in detail to work out what value of raising makes sense for your start-up.
4. Develop a Clear Business and Marketing Plan
“Identifying and staying on top your metrics is important from the beginning. Not only will it help direct which way you should be going, but also help identify red flags along the way.” – Samantha Wong, Partner at Blackbird Ventures
No matter what stage your start-up is at, you need to be able to articulate its value. Have proof points to show when you’ve reached certain business milestones and that you understand the workings of your start-up inside out. This can help you achieve capital raising goals even if you don’t have the perfect numbers to back things up.
One thing investors hate is speaking to founders who don’t understand their start-up’s basic metrics, such as running costs and average consumer lifetimes. Depending on the type of business you’re running, you might also need to be on top of numbers such as your contribution margin, gross margin and churn rates. The more you know about your numbers the more confident an investor will feel in investing. Start-ups who are looking at multiple rounds of capital raising must understand that investors are looking for future growth opportunity beyond the concrete numbers. Business valuation will not be the only determinant factor.
While it’s important to be open about the value of your business and the terms of investment, stick by your valuation and don’t feel pressured to do a deal that is too complex or has confusing terms. It’s your journey. Get people to come on in with you, not take it over. It is important to remember the vision around what you are building and the milestones which you plan to execute.
Investors will want to know how you plan to use the capital you are raising. Although this doesn’t mean you need to set this out to the nearest cent, you will need to build a basic model outlining where you’re planning on spending the cash you’re raising. Make sure you’ve thought this through before pitching.
“Positioning your business with a clear vision and a big aim are essential. Lots of businesses start off with something quite small and generally end up that way.” – Richard Kimber, CEO & Co-Founder of Daisee
The biggest mistake most founders make is not setting the bar high enough and exiting too early when an acquisition is offered. Don’t just accept any offer that comes along, but instead think about your longer term goal, aspirations and potential.
For example, given the rate at which technology is developing to connect countries together, it’s important nowadays to consider whether your start-up is investable from a global perspective. Many Australian start-ups these days find that US VC firms are looking to invest in Australasia. Boosting your business’ appeal to overseas investors can open up global opportunities and capital.
It’s much easier to raise capital or negotiate valuations if you’ve got traction. This could mean generating revenue, but it isn’t necessarily the only determinant factor. Oftentimes, if you can show that you’ve got regular users or that your start-up has an actual impact on existing customers, investors will certainly take note. Any customer or user validation you can show will likely reduce investor risk, which is what they’re looking for. It is then a common technique to do multiple rounds of capital raising, where start-ups use the traction gained from each previous round to boost their negotiating power for the subsequent round.
These five tips cover the capital raising basics. But keep in mind, every business idea, founder, investor and country is different. For more information relating specifically to your situation, please contact Allon Ledder or a member of our Australia-Israel Legal Advice Team.
The material contained in this publication is meant to be informational only and is not to be construed as legal advice. Tisher Liner FC Law will not be held liable or responsible for any claim, which is made as a result of any person relying upon the information contained in this publication.
Fair Work Commission amends 99 Awards during COVID-19 Pandemic
By Amy La Verde
16 April 2020
Funding Your Start-Up or Expanding Your Business
By Felicity Simpson
2 July 2019