How many rounds of fundraising do I need?
Tuesday, March 13, 2012/
I’m looking for funds for my business, but I’m not sure how many “rounds” of fundraising I’ll need to do. Should I get regular, small amounts of funding or one big chunk?
The question about capital raising rounds is a good one and critical to your growth strategy.
Also, sometimes what you want is different to what investors are seeking. Often companies will modify their original plans to complete a deal with the right investor.
If we look at the mining and life science sectors, they are very well drilled in funding rounds and the stages that they require to raise capital.
Some of these companies could potentially be raising capital for up to 10 years as they move closer and closer to revenue, achieving milestones along the way.
In simple terms the different business stages, which growth companies will aim to go through, are seed, proof of concept, commercialisation, early growth and expansion.
Each of these phases has different funding requirements and more importantly… they are likely to provide the company with a different and hopefully increasing valuation.
Below are three different aspects you need to consider when strategising your capital raising rounds.
It is also prefaced with investors are wise enough to know that sometimes if an investee company receives too much money too early… poor decisions about how to invest the capital are often made.
You will also find that the more money you seek from an investor, the more conditions they will seek as part of their own protection.
1) What business stage are you in?
The stage you are at really drives the thinking behind how you should strategise your capital raising.
If you are at the seed or proof of concept stage, then it is highly probable you will require several rounds of capital as you achieve different milestones and progress the business.
It is important to note, that the earlier you raise capital in the businesses life cycle, the more equity you should expect to give up for the funds you are raising. Most companies will raise just enough to get them to the proof of concept or commercialisation phase, to minimise the amount of dilution in their shareholding.
If you are at the commercialisation stage, investors will expect that there will be more than one round of capital raising, especially if your exit strategy includes an IPO to list on the ASX or NSX. Depending on the level of innovation and technology associated with your company, it might be suitable for you to apply for a government grant through Commercialisation Australia.
A tip for this is, top tier accounting groups such as PwC have strong R&D sections in their firm and can provide valuable guidance in the grant application process. Receiving grant money to match your investors funding can help the company move faster through the commercialisation phase.
2) What Sector are you in?
As mentioned previously, mining and life science companies are known for having multiple stages of capital raising as they move through different stages. They are also well versed in making sure that they fund to milestones to demonstrate progress.
Investors who specialise in sectors will have a strategy to their investment and the timing, which they invest. Your role as CEO is to outline a potential path forward to investors and then negotiate a favourable outcome for the company.
Ultimately, any company that experiences a high level of growth will need capital to fund that growth. As CEO, if you start down this path, you should expect to be talking to potential investors, funders or acquirers until the day you exit.
You will find that in turbulent markets, investors tend to want to be more active with their investments and seek ways to add value through their skills and networks.
3) What type of Investor are you seeking?
Typically, if you are seeking smart money for your business, they will look to allocate funds at different stages and have it dependent on certain milestones being achieved.
For example, if you are raising $1million in capital and Sophisticated Investor is interested in your opportunity, they may offer you the funding in two stages. They may provide $300k to fund your next stage and then invest the remaining $700k once certain growth milestones are achieved.
If you are working on an internet based or web application business, there are many incubators such as Pollenizer, Blue Chilli etc. which specialise in building, testing and developing such businesses.
It is worthwhile to approach them with your concept. This is what they specialise in, and can save you a lot of time, money, energy and provide very quick feedback as to the potential of your concept.
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