Raising funds for your business can be an intimidating process and where and when do you start?
The answer, do it before you need the money.
Capital raising is a huge task and will take you away from your day-to-day business because it will always take longer than expected.
When you have your strategy on how to grow your business, the sooner you think about capital raising and the type of structure in which you raise the better.
So, how do you raise that capital? There’s a couple of different ways to successfully get capital.
Traditionally you could go to a bank and get a loan. This is suitable for some businesses but not all businesses.
Other options to get that cash:
Equity financing: This is from a third party investor, they could be family and friends or a venture capitalist. In this instance in exchange for money they will receive shares in the company.
Crowdfunding: There are so many crowdfunding platforms out there where you can tell your story and seek out capital. As a result those providing capital may in return receive your product or service or something as simple as a branded t-shirt.
Debt financing: This is a loan through the form of a convertible note or in start-up circles is also called a SAFF (simple agreement for financing). Here you may go to an investor and they will give you $X and you will need to repay that loan, usually at a point when you raise future equity finance. The loan can be converted into shares in the company instead of cash back.
What if the tables were turned? What should investors look out for?
These are typically high-risk investments with little to no security. The answer, ask yourself, ‘Can I sleep at night knowing I might not get the money back?’.
Because of this investors will ask lots of questions (as they should), request business plans, look at the past of the founder and whether they have experience.
If an investor does want in, the next step is the term sheet. A term sheet is where you negotiate the commercials around the deal. In early stage investing (a company that hasn’t raised money before) you put forward a term sheet with the valuation of the company, and outline the equity in the business in exchange for investor dollars.
Term sheet negotiation may result in possible negotiation around board seats and future dilution, for example if the current valuation in the company goes down in the future their investment may be diluted and may ask to be ‘topped up’ so their investment isn’t lost.
How do you put your best foot forward in capital raising?
- Speak to lawyer to advise on what documents you need and set up a ‘data room’, an electronic file where you can drop all the documents you need for a potential investor
- Speak to an accountant who will help with financial due diligence and any financial paperwork that needs to go into the data room
- Have your term sheet ready to go before meeting with investors so if someone is interested and ready to invest you can just hit send!
Beware, capital raising is a process and on average can take up to 18 months to two years to find the best match aka investor.
This isn’t MAFS, date as many investors as possible.
