After innumerable capital-raising rounds for several businesses over more than three decades, my approach to the process has evolved: wisdom and maturity will do that. What hasn’t changed much is the mindset of the investor to whom the business founder goes, cap in hand, to ask for money to realise a dream. The investor wants things – and what they are depends on the nature of the business and the type of investor. In business, new ground is being broken all the time, but if you’re a start-up founder in need of capital, following these rules will mean avoiding some rookie mistakes:
1. Take the most clear-eyed view of your own business. You have to think about your business in terms of risk, so you can show a potential investor what you have done to mitigate those risks. Any investor is going to be calculating future value – and valuations are hard because of all the variables – so think about your business with an investor’s hat on and work out how to promote what you’ve achieved so far and what you’ve done to clear the path ahead.
2. Set your number. You (and your co-founders, if applicable) are the only one who can determine the capital number you want. Once you’ve settled on it, never shy away from that amount. If you need $10 million, you’re raising $10 million.
3. Target your investor/s based on your number. Cast your net widely but use good aim. Do your homework to identify which investors are writing cheques of the size you are looking for. There’s no point going to an investor who only writes $250,000 cheques if you need $2 million.
4. Perfect your process. By the time you are presenting to potential investors, your process needs to be refined and absolutely robust. Investors will expect a decent due diligence opportunity, which can only be created by you. The timeframe for the process is critical, which leads me to…
5. Think about your ideal timeframe. Six to nine months for a capital-raising round is appropriate, but there are risks – the markets can change on you. Aim for six if you can. Depending where you are in your company’s growth trajectory, you might be able to get away with three months, and if you have a couple of cornerstone investors coming along with you for the next round, expect potential investors to be more comfortable and the whole process to be quicker and easier. (There is a fair bit of luck when it comes to timing, and if there is urgency, venture capital investors can leverage that and start reaching for draconian terms. Beware of any downside protection on valuation that could mean you might not get paid anything – even if the business is a success.)
6. There is no homogeneity in investing. There are types of investors, and not all may suit your company. A strategic investor will work with you to build the company and develop leads, and maybe your business even becomes part of theirs, so you have the strength of a larger entity to get yours off the ground. Conversely, a Venture Capitalist (VC) is like oil to the strategic investor’s water – the VC has a different attitude and set of desires from an investment and will be looking at the proposition and what you can do with their money.
A VC is great to work with on creating as much enterprise as possible, and will be helpful in practical ways, such as: bringing in expertise; exploiting connections and opening doors; and keeping banking relationships honest. But remember, the VC is there for their own return, and comes with terms that can be mindboggling for an entrepreneur, so be careful about what you agree to and what it could cost you. And the downside of the strategic investor is that they can be over-optimistic about what you can achieve together, and can underestimate the challenges of collaboration.
Then there’s the hybrid – the banks with VC arms – which come with other challenges.
7. All documentation must be top-drawer and globally minded. Once you’re ready to go all your promotional materials, and corporate documents such as your constitution and shareholders agreement, must be perfect. Check that your structure really makes sense. Have both brief and detailed versions of your business plan, which saves on the back-and-forth time when you’re answering questions on the fly. If you’re looking for global capital, register your company in Delaware like every onshore US business – it’s the best from a tax perspective, and the documentation that has been developed out of Delaware is standard in the VC world.
8. Turn your mind to promotion. How you plan to promote the brand will be important to investors, and this has a lot to do with the founding team. Early in the Harmoney capital-raising cycle, we worked out how to penetrate the investors we were targeting by coming up with an innovation in a credit algorithm that could underwrite someone in Russia or Africa, and calibrate them so we could do a global scorecard and come back with a similar function to the American FICO score. With this we could show investors we were thinking globally – and without that kind of showpiece, you’ll kiss a lot more frogs before finding your prince.
9. Build an advisory board. This is not your ultimate board of directors but a founding group of expert advisers who will give your nascent business the benefit of their brand, expertise and network. The more senior they are, the better, and Harmoney was lucky to have royalty: a major venture capitalist and the ex-CEO of a global merchant bank, among others. To potential investors, your brand is validated by its association with people of that stature, and that helped us with the competition and generated a lot of interest in our capital-raising round, which made the whole thing smoother.
10. Be tenacious. Just as if you were opening a West End show, it’s all about bums on seats. Get in front of as many (targeted) people as you can – knock on doors, talk to everyone, keep learning, keep the faith. There will be days when every person you meet criticises your creation and telling you why you won’t win, but be tenacious and get up and go again.