LegalVision’s CEO, Lachlan McKnight, sets out below his 10 Commandments of Capital Raising.
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’s 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’s fair to say that many entrepreneurs and wannabe entrepreneurs think their business is more investible than it actually is. If you’re 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.
3. 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’ve launched a tech startup without a tech co-founder, it’s going to be harder for you to raise capital. Conversely, if you’ve started a business that’s going to require a lot of sales hustle to get it up and running, then you’ll need someone with a sales background on board to convince investors that you’ve got a chance of succeeding.
4. If Possible, Wait Till You’ve Got Some Traction
It’s much easier to raise capital if you’ve got traction. The could mean generating revenue, but doesn’t need to be. If you can show you’ve got users regularly making use of your product, service or app, or you’re 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’s less likely you’ll get the level of consideration you would have gotten if you’d 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’s 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. Don’t 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 can’t 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 doesn’t mean you need to set this out to the nearest cent, you will need to build a basic model outlining where you’re planning on spending the cash you’re raising. Generally you’ll be using the capital to grow your team (payroll) and increase your marketing spend. Make sure you’ve thought this through before pitching.
9. Know Your Numbers – CAC, CLV, etc.
One thing investors hate is speaking to founders who don’t understand their business’ basic metrics. How much does it cost you to acquire customers (if you’re running an e-commerce or SaaS business)? What’s the lifetime value of your average customer? Depending on the type of business you’re 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.
10. Don’t Give Up!
Raising capital is tough. If it were easy everyone would be doing it. You will be rejected – there’s just no way around that. If you really do need to raise a round to grow your company, you’ll need to be persistent. Don’t give up, don’t give in – persist and you’ll have a much better chance of raising than many founders who give up after a few months.
Questions about raising capital for your startup? Let us know.
Working on a startup? Download LegalVision’s Startup Manual – a free 60-page manual featuring 10 case studies and tips and tricks from Australia’s leading VCs and startups.