I’ve begun to notice lately, it seems as though almost every other person I speak to has either just started, is midway through or has just finished a capital raise process (and is probably on track for their next one). There are seed rounds, A rounds, B rounds, C rounds; often with overinflated multiples and promises of big things on the horizon. When James and I started out with Au Pair Link, raising funds for the business was something that we didn’t even consider, and yet, today it seems ubiquitous.
Over the course of the past 8 years, we’ve done a few raises and exits. So, today we want to share the things we’ve learnt during the process.
- Ask yourself, “why now?” Getting the timing right for a raise is critical, and getting the timing wrong can mean giving up too much equity in your business for little capital. Understand what are going to be the value drivers in your business. Here are some fundamentals to consider: Do you have a prototype, but haven’t gone to market yet? Do you have a product in market, but not enough money to market it? Have you hit a roadblock but don’t know how to navigate it? Or, is there simply too much risk and you’re unwilling to continue to self-fund? Be honest with yourself and depending on what your answer is, the outcome will be very different. Knowing what you need, when you need it, is critical to a successful raise.
- Ask yourself, “how?” Most people immediately jump to getting outside investors, venture capital or private equity into their business. Our thoughts? Keep in mind that raising money can cost a lot of money (as counter-intuitive as that is), as well as the time and focus spent away from your business. Make sure that you’ve exhausted your other possible funding streams first, e.g. bank loans (debt is cheap currently), re-mortgaging your house, or even, if it’s within the realms of possibility, the Bank of F&F (friends & family).
- Ask yourself, “who?” If you’ve decided to go ahead and raise for your business, develop an idea of who you see as the most appropriate as an investor. When we developed the business plan for My Food Bag, we knew that while we could have executed on the idea ourselves, it was more powerful to bring in Nadia (and her husband Carlos) as well as Theresa Gattung. Having a newborn, another business and no assets to lend against, it was a no brainer. For Project XYZ, we’ve been in the fortunate position to not need external capital (financial freedom is a wonderful thing!), but what we did want was the expertise of people in the sector. Through MFB, we’d learnt that we loved bringing in the right people early on. The benefit of bringing in early stage co-founders/investors is that you can attract the right skillset while sharing in all the upside and downside together.
- Know the true value of your business. When deciding on the value of your company, it can be hard to get the dollar figure right. I’d urge caution when determining value as you want to get the value proposition right both for yourself and the purchaser. If you overinflate the value of your business, you risk burning investors and damaging your reputation long-term. If you undersell the value of your business, you risk looking back at the transaction and feeling as if you gave away too much without enough reward.
- Tread with caution. I’d also recommend a level of caution when dealing with incubators and growth programmes who often take a slice of your company. Just like any other investor, you need to scrutinize the investment closely and rather than feel flattered that they’d contemplate your business – ask yourself what they will truly bring to the table. Remember, not all capital is created equally, there is good and bad money!
- Make sure everyone’s values are aligned! The golden rule. Ensure that there’s value alignment with the shareholders you bring onboard. You must understand each other’s risk profiles as well exit plans. Without having clear and transparent conversations about this early on, you both risk getting burnt down the track.
