The Art of Capital Raising

I get approached all the time by businesses/entrepreneurs/inventors looking to raise capital, and not understanding that they’re nowhere near ready to go chasing VC/PE/HNWI funds and particularly the current state of the business is best described as “uninvestable”.

So, before we get into the guts of this the very first thing we have to work out is “Are you, and your business, INVESTABLE ?”.

Determining Investability.

To determine the answer to this, you and your business need to be able to pass some important tests:

1. Is your business in a sector/industry/area that can support rapid, and sustainable, growth ?.

2. Can your business achieve a significant size and scale within a maximum of 2-3 years ?.

3. Can your business achieve much higher profitability than equivalent (eg: Competitor or “benchmark”) businesses ?.

4. Do you have the right team in place to make 2 and 3 above realistic ?.

5. What results do you have, in this business or previous businesses, to be considered a “reasonable bet” ?.

What Is The Best Way To Raise Venture Capital?.

[1] Get off to a “Smart Start”

  • Have a simple company structure, with a sensible number of investors (more than 1 but less than 10).
  • Have your employees, consultants, contractors and advisers engaged with well-documented agreements.
  • Get your intellectual property well-protected.
  • Have your “seed investors” and any business loans properly set up.
  • Have good corporate governance practices in place, refer to my blog on this topic https://investoritis.wordpress.com/2010/03/27/what-does-good-governance-look-like/
  • Have the right Legal/Financial providers in place – preferably “brand names” even if not the absolute best in their field.

[2] Be able to tell a Good Story about your business

  • Know how to articulate the fundamentals of your business … all day, every day.
  • Have a good bio on your Team, and how they deliver results for you (and any incoming Investors).
  • What Problem do you solve, and/or what Opportunity are you exploiting.
  • What Technology are you using/creating, and what is it a solution to/for.
  • How can you deliver sustainable advantage (as/when the competition adapt).
  • What is your business model, and how does it deliver value to your Customers and Investors.
  • What sort of Partnership/Network/Leverage arrangements do you have in place to maximise your opportunities.

[3] Make Sure the Numbers Add Up

  • Demonstrate a solid grasp of your business economics
  • Provide long-term financial projections (ie: 2-3 years from now at least)
  • Have a tight near-term operating plan (the current Calendar Year and/or Financial Year).
  • Clearly capture your capital requirements, both in terms of $$$’s and what they’re for.
  • Look to set up a capitalisation structure over multiple rounds, as this benefits Earlier Investors who’ve had to take a higher risk than Later Investors.
  • Understand and Show your Levers of Profitability and Expense.
  • Articulate the Key Business Metrics are, and how they will be Measured.

[4] Find the Right Investors

  • Use (well …. prove) your sales and marketing skills in how you approach potential Investors.
  • Actively generate momentum and interest in your business.
  • Target your Investor contacts – go for the best ones first.
  • Don’t flog your business pitch all around town … Once you’ve had 3 or more knock-backs then everybody gets to hear about it and has to assume your business is a “dog with fleas” and won’t return your calls.

[5] Build Credibility with your Potential Investors

  • There are many factors that enhance/devalue your business. A number of them are covered in the following points.
  • Who your Customers are (assuming you’ve got some).
  • Who your Strategic Partners are.
  • Who your current Investors are.
  • Who your current Board members are (and you’d better have a Board in place).
  • Who your Advisers and industry experts are.
  • What your Milestones are for the next key achievements/targets within the business.
  • How well you’ve been meeting your Milestones in the past 12 months.
  • Being overly defensive about the business model, or the business results.
  • Blaming others for the inability of the business to meet its Targets.
  • Telling Lies that potential Investors can easily research (AND THEY WILL) to prove them untrue.

The Sorts of Entrepreneur Lies That Irritate and Turn Off Potential Investors

10. Our projections are conservative

9. Our target market is $56 billion

8. We have a world class team

7. Our average sales cycle is 90 days

6. We have no direct competition

5. No one else can do what we do

4. All we need is 2% of the market

3. We’ll be cash flow positive in 12 months

2. Our contract with Nokia will be signed next week

1. I’ll be happy to turn over the reins to a new CEO!

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