Refining the art of raising the right type of capital at the right time
Tuesday, December 18, 2018/
The 2017-2018 financial year saw Australian venture capital (VC) investments reach an all-time high, with approximately $848 million pumped into startups. And as the startup scene has evolved significantly over the years, so too has the way investors approach such ventures.
Options such as angel funding, seed funding and the newly legislated equity crowdfunding mean startups now have more choice when determining what type of capital is the ‘right fit’ for opening up opportunities for growth. But with greater choice comes greater responsibility.
Choosing the wrong type of capital, or doing so at the wrong stage of your startup’s maturity, could greatly affect the success and scalability of your venture. So ask yourself these key questions before taking the next steps to raise capital.
What are my options when raising capital, and when do they work best?
Every type of capital has its own set of advantages, restrictions and expectations.
- Angel funding is suited for supporting an individual to see their vision become a reality;
- Seed funding is appropriate when the idea starts to become operationalised; and
- Public listing is perfect for running the startup through its maturity curve.
What growth phase is my business in at the moment?
When raising capital, you should have an idea of what kind of support you need based your current business structure, as well as the strengths, weaknesses, and long-term focus of the business. In particular, the growth phase and structure of your business are major factors when determining what type of capital to pursue.
For instance, a startup that is looking for hyper-growth over the next 12 months is likely better suited to venture capital, which prioritises short-term acceleration. Private equity, on the other hand, places a strong emphasis on compliance and regular reporting. It’s more suited to a startup at a more established growth phase, with more resources, people, time and money to handle these additional activities.
Who has got it right?
Facebook is a great example of a company that matched the type of capital raised with its stage of growth — with great success.
In 2004, Facebook received an angel investment from Peter Thiel, four months after its initial launch. By the end of that year, Facebook had one million users, and in 2005, it made its first of many venture capital investment deals. Reaching maturity in 2012, Facebook then raised an IPO. At each stage of its progression, it sought the type of capital it needed to take it to the next level.
Challenge the capital as much as it challenges you
It can be easy to fall into the trap and feel like you don’t have a choice when it comes to raising capital, and take the first offer that comes your way.
The competing demands between the idea and the funder often mean the startup focuses too much on what they can offer their investors, and forgets to closely examine what the investor can offer the startup in return. So while the investor is dissecting your business and asking you questions, seize the opportunity to challenge them with some key questions.
Ask the investor what else they bring to your startup, other than the money. Ask where and how they will be supporting you on your business journey, beyond providing funds. Have upfront conversations about the risk profile of the venture, and speak to the management teams of the potential investors’ other ventures, taking care to examine their track record and credibility.
It is also important to establish what attributes you wish your investor to have. Are you looking for a company that is large and corporate, or small and quirky? Do you need a first customer, a group that is great at brand promotion, or the credibility that comes with the capital?
Don’t do it alone
As soon as you bring ‘funding’ into the big picture, you are adding another layer to your financial matrix that you need to manage. Establishing a network that can support you throughout the process of raising capital can make the whole process far more empowering and less overwhelming.
Examples of the types of support networks that could be utilised include accelerator hubs that facilitate the sharing of resources and ideas and individuals who coach and mentor startup founders.
There will always be challenges at various touch points of the capital-funding journey, but with the right support network, know-how and foresight, you can overcome these roadblocks and open up new and exciting paths to success.