In Short
- Only raise capital if necessary, with a strong team and realistic value proposition.
- Show traction and clear plans for funding use to attract investor interest.
- Ensure compliance with all regulations to avoid legal issues.
Tips for Businesses
Prepare for capital raising by developing a solid pitch deck, knowing your business metrics, and reaching out widely to investors. This approach, combined with demonstrating traction and transparency in financial needs, can enhance credibility and attract potential backers.
Table of Contents
- 1. Only Raise if You Need To
- 2. Have an Investment Proposition That Could Potentially Generate a Return (i.e. Be Realistic)
- 3. Have a Team in Place That Can Execute Your Vision
- 4. If Possible, Wait Till You’ve Got Some Traction
- 5. Get a Professional to Design Your Deck
- 6. Spread the Net Wide
- 7. Comply With Relevant Regulations
- 8. Be Clear on How Much You’re Raising and What You’re Going to Use it For
- 9. Know Your Numbers – CAC, CLV, etc.
- 10. Don’t Give Up!
Capital raising can be an exciting but stressful time for your business as you attempt to raise money to fund growth projects. This article explores the 10 commandments of capital raising to help you understand the fundamentals of this process.
Capital raising is a critical time for any startup. Take control of your startup’s equity with this free cap table template.
1. Only Raise if You Need To
When raising a round of funding, the first thing to ask yourself is whether you really need to. Many successful startups never raise outside venture capital. Raising capital takes time, dilutes your ownership stake in your company and can often lead to undisciplined spending. Of course, there are huge upsides to raising capital as well, but it is worth spending the time to think about your business in detail to work out if raising makes sense for you.
2. Have an Investment Proposition That Could Potentially Generate a Return (i.e. Be Realistic)
It is fair to say that many entrepreneurs and wannabe entrepreneurs think their business is more investible than it actually is. If you are looking to raise capital, you need to convince potential investors that they can get a significant capital return from the investment. So many startups (even funded startups) fail, and you then need to convince investors that if your startup does succeed, the potential return will be many times their initial investment.
Continue reading this article below the form3. Have a Team in Place That Can Execute Your Vision
Early-stage investors invest in people, and your team is your most valuable asset. If you have launched a tech startup without a tech co-founder, it will be harder for you to raise capital. Conversely, if you have started a business that is going to require a lot of sales hustle to get it up and running, then you will need someone with a sales background on board to convince investors that you have a chance of succeeding.
4. If Possible, Wait Till You’ve Got Some Traction
It is much easier to raise capital if you have got traction. This could mean generating revenue, but it does not need to be. If you can show you have users regularly making use of your product, service or app, or you are getting traction regarding visitors to your websites, investors will take note. Any customer or user validation you can show reduces investor risk, which is what they’re looking for.
5. Get a Professional to Design Your Deck
This is a simple one, but we see lots of investor decks that are ugly, confusing and overly long. Spend a small amount of money on a professional designer and really think through the structure of your deck. Professional investors get sent hundreds of decks a year. If yours looks ugly or is poorly structured, it is less likely you will get the level of consideration you would have received if you had put some effort into it.
6. Spread the Net Wide
The reality is venture capital funds look at hundreds, if not thousands of opportunities each year. The chances of a fund investing in your particular business are very small. The same goes for angel investors and corporate venture funds. It is then sensible to speak to as many potential investors as possible, knowing that the majority you speak to are not going to proceed with an investment. Do not pin all your hopes on one investor!
7. Comply With Relevant Regulations
There are a number of regulations you need to comply with when raising capital. Suffice to say, you cannot just raise capital from anyone. Complying with the relevant regulations is important.
8. Be Clear on How Much You’re Raising and What You’re Going to Use it For
Investors will want to know what and how you plan on using the capital you are raising. Although this does not mean you need to set this out to the nearest cent, you will need to build a basic model outlining where you are planning on spending the cash you are raising. Generally you’ll be using the capital to grow your team (payroll) and increase your marketing spend. Make sure you have thought this through before pitching.
9. Know Your Numbers – CAC, CLV, etc.
One thing investors hate is speaking to founders who do not understand their business’ basic metrics. How much does it cost you to acquire customers (if you are running an e-commerce or SaaS business)? What’s the lifetime value of your average customer? Depending on the type of business you are running, you might also need to be on top of numbers such as your contribution margin, gross margin and churn rates. The more you know about your numbers, the more confident an investor will feel in investing.
Capital raising is a critical time for any startup. Take control of your startup’s equity with this free cap table template.
10. Don’t Give Up!
Raising capital is tough. If it were easy, everyone would be doing it. You will be rejected – there is just no way around that. If you really do need to raise a round to grow your company, you will need to be persistent. Do not give up, do not give in – persist and you will have a much better chance of raising than many founders who give up after a few months.
For more information, our experienced capital raising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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