Some startups complain that early stage funding is scarce but when pressed they admit that they have little expertise or knowledge of how to raise cash for a business.
In the latest Startup Muster, a deep survey of the Australian startup ecosystem, 12.9% admitted they didn’t have the expertise to raise funds.
A successful startup isn’t all about the superficial cliches of all night coding sessions and cool warehouse-style offices.
The essential ingredient is cash to kickstart a business, and get revenue rolling in from customers.
A study by KPMG shows Australian fintech investment is strong with $US675 million invested across 25 deals in 2016 despite an overall global decline in investment in the sector.
But don’t just ask for the cash. Plan a slow, measured approach.
Luke Anear, founder and CEO of SafetyCulture, which uses low-cost mobile products to make workplaces safer, says startups should never go to an investor meeting and ask for money.
“Like dating, you need to get to know your investor ahead of accepting investment,” he says.
“You don’t get married on your first date … you don’t take investment on your first investor meeting.”
Know your numbers
“Ultimately, founders need to be able to work with their investors and they’re not going to get a strong sense of expectations and compatibility without first getting to know them and understanding whether they are aligned to the long-term vision of the company.”
Julie Demsey, General Manager of SBE Australia, which runs Springboard Enterprises Accelerator and E3 programs for women, says founders should do their own homework.
“It is a long-term partnership that you are entering into so make sure you understand all the details,” she says.
“Find VCs that are looking to make investments that you fit the profile for and make sure you know everything there is to know about them. Ensure you are aligned in your values and ideas about how to drive your business forward.
“Be prepared. Make sure you understand your numbers inside and out and that your business case is solid. Anticipate questions that might be asked about milestones and have answers ready.
“Know that you will need to continue to refine your pitch deck again and again and be aware of the key things a specific investor might be interested in knowing and address those.”
There’s cash and then there’s cash
A lot of work goes into capital raising. It’s an intensive process that requires a lot of time, patience and hard work.
But raising capital does not automatically represent success, according to Mick Spencer, founder and CEO of ONTHEGO, a sports clothing maker.
“You need to have a strong grasp on why you need this additional capital and what it is that it’s going to help you achieve,” he says.
Where does ego fit?
“Always be strict on what you need and don’t take on cash that you can’t put to work for the business.
“A favourite saying of mine is that there is ‘capital raising for a reason’ and ‘capital raising for ego’. Do not do it just for the sake of it.”
Founders looking to raise capital need to do their homework and find seed investors who are aligned to their company’s vision and values.
“Be smart when it comes to how much equity you give away,” says Spencer.
“If you bring on investors with too much equity in the early-stage, you’re essentially sacrificing your own wealth for theirs. If you are at a stage of looking to raise capital, you obviously believe in your business and its scalability. Own that confidence in investor conversations and work for the best deal possible. Do not self yourself short.”
Will On, co-founder and joint CEO at Shippit, a delivery system for retailers, says raising capital is a constant process.
“Start the conversations early and regularly be in touch with potential investors,” he says.
“They love to hear about your ability to turn ideas into action and if you’re getting married to them, nothing beats track record. Additionally, a warm introduction from a mutual connection is always a strong avenue.”
Hugh Stephens, co-founder of Galileo, a VC fund targeting emerging founders, says the risk of over capitalisation is frequently ignored but is just as risky as not raising enough cash.
“If you have too much money, you can lose the hunger, and you become too relaxed, or alternatively splash cash when it’s totally unnecessary or potentially dangerous to do so,” he says.
He says the most important thing to remember when capital raising is to know very clearly what you will be doing with the money.
“Don’t just raise it for the sake of raising money,” he says.
“It sounds basic, but the first question a smart founder should ask is whether they need money in the first place and then determining the right amount to avoid over or under capitalisation.
“Consider the costs you will incur in growing your business, including who you need to hire, the day-to-day maintenance of operations, software and hardware purchases and how much revenue you expect to bring in to offset those costs.”
He says the risk of under capitalisation is obvious.
“You will spend more time fundraising and ignoring operational running of the business,” he says.
“You also run the risk of either not having enough capital to grow the business, or running out of money altogether.
“The rule of thumb is that you want to have at least 12 toi18 months of ‘runway’ straight after a raise in the early stages (see’ and maybe series A), with the runway post-raise being longer as the business matures and investment amounts increase.”
The right investor
Ivan Lim, co-founder and CEO of Brosa, a designer homewares startup, says the most important thing to determine is what you’ll get out of the founder-investor partnership.
“You want to set yourself up for a long and fruitful relationship with your investors, not a long and painful one,” he says.
“Be aware that the capital raising process requires a substantial amount of your time and it’s important that you are at a stage where your business is ready for the accelerated growth that comes with this cash injection. Raising capital demands results.
“Founders need to start networking and building relationships as soon as possible, not just wait until they are ready to raise. Investors hear from so many companies every day so the sooner founders can start forming relationships and exposing investors to their business, the better.”
Tony Wu, co-founder of Weploy, an on-demand recruitment platform, says raising funds isn’t just about having a great idea.
“Investors hear about great ideas every day,” he says.
“It’s about bringing the investor on the journey to understand how you’re going to execute, building the confidence and excitement so that they aren’t just giving you money, but they’re partnering with you to build something epic.”
MedAdvisor chief executive Robert Read says there are thousands of companies looking for money at any one time, but it is hard to know where to look.
Traditionally capital pools in Australia have been limited, but the venture market is opening up with more funding coming in, creating a new opportunity.
“In accessing either venture or high net worth funding, it is critical to know what your potential funders are looking for and if you are prepared to provide it,” he says.
“You can’t be all things to all people and you can’t afford to wait for some angel to appear.
“Understanding their investment criteria including required rates of return and control will allow you to tailor your pitch to them.
“In our case we knew that new opportunities would present as we got traction in the market so we didn’t want to raise too much money too cheaply. We also backed ourselves to deliver on our plans so going public was a good option for us.”
MedAdvisor, which connects to a pharmacy to provide automatic details of customer medication, scripts and repeats, initially raised $5 million on the ASX through a listing two years ago at $0.03 a share.
Nearly a year later, the company raised another $8 million at $0.04 to acquire its biggest competitors.
And recently MedAdvisor raised $9.5 million at $0.0575 to accelerate entry into the hospital market and international expansion.
“If you have a clear idea of your path with a team that has a track record of execution, there will be no shortage in people that are willing to invest and today we are blessed with a number of high calibre institutions and some strategic investors on our register who are supportive of where we are taking the business,” Read says.
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