One of the most common queries we get at LegalVision is how a startup should go about raising capital. We’ve not only assisted hundreds of companies through the capital raising process, but we’ve also raised four rounds of capital ourselves since we launched in late 2012.
To Raise or Not to Raise?
The moment you raise a round of capital, you begin answering to someone other than yourself and your co-founders. Investors are generally looking for a return on their investment, which means a future liquidity event must be on the cards. Before raising any external capital, you need to ask yourself if this is a path you want to go down. Many startups will simply have no chance of succeeding without raising external capital. While external capital has the potential to help you supercharge growth, it is not necessary to build a fast-growing, profitable business.
A great way of working out whether raising external capital makes sense for you is to speak to founders who have raised, either from angel investors, VC or corporate investors.
The Australian startup community is friendly and supportive – if you’re prepared, focused and obviously not a time waster, most founders will be up for a 30-minute chat over coffee. So, reach out through your connections, speak to some founders who have raised external capital, and use those conversations to make a decision. If you’re lucky enough to be working out of an accelerator or other co-working space, there will likely be dozens of other founders around who will be happy to speak with you about this issue and have plenty of tips and tricks which may assist.
Finally, ask yourself, will you increase the value of your shareholding in the company by taking on external investment? External investment will dilute your shareholding in your startup. So, you should only raise capital if you think doing so will increase the value of your stake.
What Are You Looking For In An Investor?
After you’ve decided to raise a round of capital, you need to start thinking about the most appropriate investor.
In many ways, the investment community will dictate this decision. If you’re looking to raise $20 million, a friends and family or angel round isn’t going to make much sense! On the other hand, if you’re looking to raise a $200,000 seed round, you should steer away from VC funds and look to fill out your round in the angel community.
When discussing your round with investors, ask them what they will bring to the table beyond cash. Another consideration is looking for investors who can contribute to the success of your startup beyond just providing cash (also called ‘smart money’).
Within the angel investment community, some of the best investors will open up doors for your startup, whether to VCs for future fundraising rounds or to customers (particularly in the enterprise sales space).
Many people talk the talk but don’t walk the walk. Once you’ve brought an investor on board, they will usually be on your cap table for a long time. It’s also possible that choosing one investor will close the door to a relationship with others. If you’re lucky enough to have more than one option, make sure you take the time to think seriously about who would be the best investor.
Quick Tip: Speak to startup founders who received investment from your potential investors.
Types of Investors and What They’re Looking For
|Type of Investor||What they are looking for||Pitch tips|
|Friends and Family||They want you to succeed! Generally, a financial return is a secondary consideration for friends and family.||Don’t overvalue your startup at this early stage. It’s not fair to you nor future investors.|
|Angel Investors||Very variable. Some are looking for ‘home runs’, others are looking for a good risk adjusted return. Angel investors are a very diverse bunch, and it’s fair to say that Australian Angels are somewhat more conservative than Angels in Silicon Valley.||Angel investors will be looking at your potential as a founder and your key team members. A good idea is nothing without good people behind it.|
|Micro-VC||Micro-VC funds offer smaller scale investment usually in a seed round. Mostly managed by experienced investors looking to get in early with the next big thing (and take more of a risk in doing so).||Micro-VC funds fill a gap in the market for financing early stage companies. Research the investment thesis and areas of focus for different micro-VC funds and find one that aligns with your startup.|
|Institutional VC||Institutional VC funds can participate in any funding round but more commonly get involved post-seed round. They can provide large scale investment but often will ask for a degree of control in return.||Institutional VC funds are looking for startups that have gained traction and are growing fast. Show evidence that highlights your startup’s growth.|
|Corporate VC/ Investors||Many large corporations now have their own VC arms. Others large corporations will simply invest on balance sheet. Corporate VCs are generally looking for the same things as institutional VC funds – to invest in high-growth startups that will generate an outsized return. Having said that, corporate VCs tend to have strategic objectives.||Remember that corporate VCs/investors tend to invest in startups that they might end up acquiring. They may even seek a path to control when initially investing.|
Investment Philosophies from Leading Australian VCs
|Blackbird Ventures||Blackbird is one of Australia’s largest venture capital firms and invests in startups at any stage. Their fund is based around the concept of ‘founders helping founders’ and they look to invest in ‘Australians wanting to be the best in the world, not the best in Australia.’|
|AirTree Ventures||AirTree is a large venture capital firm which invests in disruptive business at both seed and Series A+ rounds. AirTree looks for ‘world-class Australian and Kiwi entrepreneurs’ and has a strong focus on nurturing high-potential founders.|
|Square Peg Capital||Square Peg invests primarily in tech startups from Australia, New Zealand, South-East Asia and Israel. They look for ‘entrepreneurs solving big problems in a differentiated way’ who have the passion and ability to scale their startup effectively.|
|Blue Sky Venture Capital||Blue Sky provides late stage venture capital and early expansion capital to Australian businesses. They look for companies that have begun to establish themselves and can demonstrate rapid, sustainable growth and strong management.|
|Reinventure||Backed by Westpac and sporting a new model of corporate venture capital, Reinventure supports fintech startups and disruptors for the long term. Reinventure looks to ‘unlock maximum synergy value between [their] ventures and Westpac’.|
If you have any questions about raising capital for your startup, get in touch with our startup lawyers. Fill out the form on this page or call us on 1300 544 755.
This article was an extract from LegalVision’s Startup Manual. Download the free 60-page manual featuring 10 case studies from Australia’s leading VCs and startups.
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