Founders seeking cash to back and grow startups face many hurdles to find a workable balance.
It's a common predicament for founders. They find themselves head down, deep in the day-to-day trenches of startup life, trying to find a talented team, getting the foundations in order, and closing early customers.
But, ultimately, they need money.
It can take months (even years) of calls, pitches and countless hopeful meetings.
The lucky ones land a deal.
So what’s the best way to minimise and optimise the time spent raising capital? It’s critical to invest in the investment process.
What type of capital do you need?
Firstly, it’s important to assess the need for outside capital.
An ideal situation is to be able to solve a real problem and have customers willing to pay for it.
Video education platform Lynda.com, later acquired by LinkedIn, did just that. It was able to generate $US70 million ($100 million) in revenue in 2011 and $US100 million in 2012 without a cent from investors.
Founder Lynda Weisman only took on the platform’s first round of funding 17 years later, saying “we’re ready for the next level”.
There are also options such as debt financing, government support or crowdfunding on platforms like Kickstarter.
There are some dumbfounding success stories through crowdfunding, such as the humble desk toy Fidget Cube.
Chasing only $US15,000, the company raised an astounding $US6.5 million in just a few months.
It proves to also be a powerful validation tool.
Bonnie Lin is a Perth adviser and investor, with 20 years of international experience across marketing, lean manufacturing, mergers and acquisitions and research and development grant administration.
Ms Lin says investors will want to know how much of your own money you have put in.
If you have not gone to your own network first, “… many won’t even talk to you”, she says.
If you do decide to raise money through angel investors or venture capitalists, it’s worth noting that angels invest with their own money, so are quicker to do a deal with, while VCs typically take months.
Ms Lin suggests startups be clear on why they are undertaking a raising, and where the money is coming from.
“This will help you to close faster,” she says.
Who are you raising from?
Perth entrepreneur and Functionally co-founder Tim Brewer says raising capital for early-stage companies can be hard if you are not talking to the right people, and not properly prepared.
Functionally, co-founded with Damian Bramanis, completed an oversubscribed capital raising late last year because it was prepared.
“At Functionally we spent months meeting with and getting to know the investors right for our business in the USA and across Australia,” he says.
“We understood their interests, experience, and signals that were needed for us to be of interest.
“When it came time to raise we were lucky to be able to close our round in five business days.”
Functionally’s quick turnaround and the high interest from investors shows the value of researching and laying the groundwork first.
How much should you raise?
There’s a recurrence of entrepreneurs giving away too much, too early, drawn in by a large cheque and the promise of opportunity.
A smart approach is to look at the end game, and consider the dilution that occurs in each investment round.
Founders should determine their financial, career and lifestyle goals, as well as how much they would want on an eventual exit through an initial public offering or acquisition ... then work back from there.
Ms Lin says founders usually want enough funding for an ‘18-month runway’ and to not raise too little.
She warns it indicates proper planning has not been done and most make the mistake, of falling short.
This means people usually spend their time chasing more money, rather than progressing the business.
Why you?
It’s constantly said investors invest in people, not ideas. The founder is the most important piece in the whole discussion.
Marc Andreessen, of private US venture capital firm, Andreessen Horowitz, says many investors learn the hard way.
“Investors who are going to be on the board for the company are just as important as who you get married to,” he says.
It’s true in reverse too, that it is indeed a relationship and one that requires cohesive or complementary personalities to have the best chance at success.
Doug Leone, of venture capital firm Sequoia, says crystal clear thinking is one of the key things his firm looks for in founders.
Others seek relentless learners, imagination, grit and a bias toward action.
This is where a deep understanding of a prospective investor and finding the right fit is advantageous.
While many entrepreneurs don’t mind riding solo, and there are those who can do well, it can be seen as a red flag.
Investors may see it as egotism and question a person’s ability to deliver without a good co-founder and fit-for-purpose team.
Wearing the investor hat, consider what needs to be demonstrated, and put the effort into doing it well.
Value your idea carefully and raise the right amount, from the right people.
Know your numbers, show that the idea is defensible and that it is scalable.
And, above all, give them reason to believe in you.
