Raising Capital is a lot like Internet Dating!
Raising capital is stressful and incredibly time consuming. It’s a full time job. So if you embark on a money raising mission, make sure your business is at a stage where it can survive (and hopefully flourish) with minimal input from you. The capital raise will demand most of your time and attention for the next little while.
It’s actually a lot like internet dating. You write a profile (information memorandum) you go on a first date (swipe right), you decide if you’d like to see each other again, (thank-you text), one party plays hard to get (valuation), meet the parents (due diligence), buy a ring (appoint lawyers), ask the question, (term sheet) and get married (settlement).
Once you’ve got a little seed money to work with, it really then becomes an issue of timing. If you go to the market looking for money before you have a concept or product, you don’t have as much leverage with investors and could potentially be beaten down on your valuation. So founders are generally better off building the product and getting as much traction as possible before courting significant further investment to reduce the risk profile of their venture.
The longer you can hold off, the more leverage you have with investors. But the longer you wait, the more risk there is that your competitors will land funds and get the jump on you. And it can be hard to play catch up.
Preparing the business for a capital raise correctly is critical. My advice is to find yourself someone who knows what they are doing, has experience in the area and importantly is respected by the VC community.
A skilled and trusted advisor is worth their weight in gold, they provide invaluable advice on how to groom the business for a capital raise, such as having an attractive shareholders agreement, employment agreements, and commitment from the founders in place.
Once you have a data room prepared with an information memorandum and financial model hit the pavement and talk to investors.
Let your advisor’s line up 10 or so meetings, target verbal commitments from these early potential investors. The best way to describe this part is that no one is ‘in’ until they sign a term sheet. Have one of these prepared and printed in your back pocket. Don’t be afraid to put it in front of them to sign. You’ll quickly work out their position.
If you are aiming to raise $1.5 million the hardest part will be getting that first chunk signed away. No investor wants to be the first $50,000, they want to be the last $500,000. So it’s important to lock down some foundation investors, and use them and their name to secure other investors. It’s all part of the gamesmanship and you need to have your strategy down pat before you got out to market.
Once you’ve locked down the funds, management now becomes a priority. Most investors don’t just hand over cash and then walk away. They will set benchmarks, timelines and other KPI’s. You need to keep them in the loop, so regular corporate updates are critical. Ask them what they want to know and how often if you are unsure. Don’t be afraid to ask advice from them, leverage them and their networks as much as possible. You’ll sometimes be amazed at how much of their time they are willing to give.
By, Neil Steggall
The Barking Mad Blog
Business Advice with Bite