When should start-ups look to pitch for investment?
Thursday, November 22, 2012/
Is there a ‘sweet spot’ in terms of timing for a start-up to pitch to an investor?
Should we look for funding as soon as we’ve got some runs on the board after a year of trading, or wait longer to grow a bit by ourselves to prove we can handle it?
This is a great question.
Over the last three-and-a-half years we have been researching investors to understand what it is they look for when investing in private companies and your question is very relevant to many companies looking to raise money.
Two key aspects you need to evaluate are the type of investor you seek and the equity you are willing to offer.
For this context, I will assume you are looking to raise capital outside of your family and friends networks.
The earlier you seek an investor, the more equity you need to be willing to part with. Investors do want to see runs on the board, even if they are small runs. It shows that you have a business model with potential. On the other side, it is still a high risk investment for them, and their reward for early support is an increased equity stake.
Different investors like to invest at different stages. If you are raising at an earlier stage, you are likely seeking to attract an ‘active’ or ‘strategic’ investor which can add more value than just ‘cash’ to the business.
Reason for raising capital
Sometimes we come across companies that, after talking to them, don’t really need to raise capital at all. They can profitably continue down their commercialisation path and grow the business.
However, for internet companies this could be difficult, as being seen as ‘first to market’ or ‘market leader’ can mean everything. Therefore, raising capital is part of cementing the positioning of the business and its future success.
Recently one of our start-up clients was approached through our platform by a corporate and has since done a deal. What was surprising was that the company had no revenue. The deal was done purely on the impact potential their technology could have to their business. This deal now allows them to develop their technology, with the support of a corporate willing to fund the development and application of the technology.
The question you want to be asked
You may find that as you go about growing the business and selling your story, interest you attract has the potential to turn into an investment into your company.
The key question you will be asked which alerts you to interest being shown is “Who are the shareholders in the company?” This question is a verbal ‘expression of interest’ in your business.
If you want to get a fuller understanding as to what investors are seeking, Wholesale Investor released our Investor Sentiment Index which is targeted at private investors. It goes into detail about sectors of interest to investors and amounts they are looking to invest.
The key questions you need to ask in assessing the timing of your capital raising are:
- What is the reason for raising money?
- If you do raise money, what type of investor do you seek and why?
- What percentage of equity is available if you do go to raise capital?