Having sufficient capital to grow your business is a very important aspect of your business journey. Knowing when to raise capital and get access to sufficient quantum can be one of the most critical aspects of building a successful business.
Business owners will likely need to seek investment dollars at different points in the life cycle of their business, and from a variety of sources, in order to raise the necessary capital to sustain and grow their business.
Regardless of whether you need additional funding immediately or later, it’s always beneficial to have an understanding of the various avenues of fund raising, the fund raising process, and the importance of building a business that can maximize its valuation.
Various Avenues of Fundraising
Crowdfunding as a Funding Option
Crowdfunding is one of the newer ways of funding a startup that has been gaining lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time.
This is something you can consider in the very early stages of your business. The best thing about crowd funding is that it can also generate interest and allows you to test market acceptance whilst providing some financing.
However, this is not a long term solution for businesses that already have some traction and need to grow in a more sustainable way.
Find Angel Investors for Your Startup
Angel investors are individuals with surplus cash and a keen interest to invest in upcoming startups. They also work in groups of networks to collectively screen the proposals before investing.
They can also offer mentoring or advice alongside capital. Typically, angel investors invest in early stages of a start up.
Get Funding from Business Incubators and Accelerators
Early stage businesses can consider incubator and accelerator programs as a funding option. Incubators are like a parent, it nurtures the business and provides shelter, tools, training and network to a business.
Accelerators are more or less the same thing. However, an incubator helps/assists/nurtures a business to walk while an accelerator helps a business to run/take a giant leap.
Get Venture Capital For Your Business
Venture capitals, are professionally managed funds who invest in companies that typically invest larger quantum but also have higher expectations on growth.
They are institutional investors who often seek to recover their investments within 3-5 years. They usually invest in a business against equity and exit when there is an IPO or an acquisition.
VCs provide expertise, mentorship and acts as a litmus test of where the organisation is going, evaluating the business from a sustainability and scalability point of view.
They typically look for larger opportunities that are a little bit more stable and companies with a strong team of people and good traction.
You also have to be flexible with your business and sometimes give up a little bit more control, so if you’re not interested in too much mentorship or compromise, this might not be your best option.
A venture capital investment is usually more appropriate for businesses that are beyond the startup phase and already generating strong revenue.
Raise Funds Through Fully Regulated Private Exchange
These regulated private exchanges enable businesses to trade their private shares publicly. This could be a great avenue for companies who require funding but do not want to lose the management control of their businesses.
Exchanges like Capbridge’s 1X can enable the trading of private shares, achieve costs effective and faster exits to allow founders, early investors and key employees an avenue to sell their private shares without going through a costly and time consuming IPO.
Raise Money Through Bank Loans
Banks can usually provide two kinds of financing for businesses. One is working capital loan, and other is funding. Qualifying companies can secure a working capital loan from the bank to fund its operations.
Funding from the bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is dispersed for.
Government Programs that Offer Startup Capital
Most governments encourage their SMEs to digitize or innovate and do offer help in the way of grants to encourage the proliferation of start ups.
Companies that are based in Singapore can get access to different government-funded grants like the Enterprise Development Grant (EDG) from Enterprise Singapore or Startup SG by SPRING SEEDS CAPITAL and SGInnovate.
The Fundraising Process
A thorough understanding of the process of raising capital is essential to achieving the best possible funding outcome for the entrepreneur’s business.
Step 1: Develop Your Business Plan
Before you go out there and start speaking with investors about raising funds, first determine how much capital you require to fund the business’s ongoing operations and growth objectives.
Develop a business plan that details the capital requirements (for example, hiring new employees, expanding office space, purchasing or developing new technology) to achieve the growth initiative and how this capital will help the company achieve its overall strategic goals and long-term business plan.
Step 2: Determine the Amount of Capital Needed
Raising the right amount of capital is a careful balance. If too little capital is raised in a fundraising round, additional funds sooner than they expected, diverting attention and resources away from running the day-to-day business.
Conversely, if too much capital up front, you may find it more difficult to fulfil the targets set.
Step 3: Choose Your Funding Model
Depending on which part phase of growth your business is in, you can choose the type of funding option that best suits you.
If your company is young, you may prefer to go the friends and family, crowdfunding route. However, if your company is more mature, you may prefer to raise larger amounts. In these instances, you could consider raising funds through venture capital firms consisting of institutional investors.
These venture firms will likely seek equity ownership in the company and some degree of control over business decisions (for example, a seat on the company’s board of directors). You could also choose to raise capital from non-institutional investors.
These investments may be structured as convertible debt, which is a hybrid of debt and equity. This can make fundraising simpler, since many of the terms of the investment do not have to be decided until the next formal fundraising round.
Today, more flexible options provided by private exchange for tradeable private equities that allow companies to offer publicly tradable stocks whilst still remaining private companies exists.
Step 4: Conduct Pre- and Post-money Valuation
Valuation is one of the most important negotiating factor when raising capital. Prior to the beginning of the fundraising process, the entrepreneur should determine an estimated valuation for his or her company based on a detailed and defensible set of assumptions.
Private equity and venture capital fundraising typically involve negotiating a “pre-money” and “post-money” valuation of the business in order to determine what percentage of the company investors will receive in exchange for the capital they are willing to provide.
Pre-money valuation is the value of the company before the new capital investment is included. Post-money valuation is the pre-money valuation of the company plus the value of the new capital invested.
Step 5: Pitch to Investors
This process is usually a very concise and sharp pitch deck designed to allow the investor to quickly make a decision on whether to find out more about the investment opportunity.
If there’s an interest in your business, the investor will typically start investing more time to uncover the details of the opportunity.
In general, the investor will present the entrepreneur with a term sheet, which is a short document that covers the basic parameters of the deal including the amount to be invested, the pre-money valuation, the amount of equity the investor will receive and other big picture deal terms. The details will be ironed out by the legal team after the term sheet is agreed upon.
At this stage, the entrepreneur has the opportunity to negotiate and to compare competing offers. Once the term sheet is signed, the negotiation over major deal terms begin.
Building a Business That Can Maximize Valuation
Focus on the Bottom Line, Not the Top Line
When you’re about to sell your company to a buyer, the buyer will determine a company’s worth based on its earnings.
The main thing that will be taken note of is the cash flow through which the value of the company is evaluated. This is used to maximize the business valuation, which is what everyone is looking for.
Earnings gained from the services or products that do not bring any cash flow or profits in the company will eventually hurt the overall value of your business.
Strong Management Team
Companies that have a capable and highly experienced management team without the supervision of the founder are normally viewed as more attractive for the strategic acquirers and the private equity firms.
Develop and Protect the Intellectual Property (IP) That Exists in Your Company
Even if a company has a high revenue flow, it’s important to understand the quality of the revenue and if it is sustainable.
A company that’s in a business like every other business will find it hard to extend its value.
A company that owns intellectual property that can be exploited through franchising or licensing will become more valuable.
A company that owns a platform that can perpetuate future sales or one that is unique in its offerings will be able to command a higher valuation than a company that is dependent on volume of transactions.
Get Your House in Order
If you’re planning to raise funds for your business, it’s important you start planning for the event, so that there is time to maximize the business valuation. This could mean getting the management team in place, realigning margins, curating your proprietary IP and building your net profitability.
Diversify Your Revenues
When speaking to investors, they will typically check if the revenues are expanding and sustaining at a much greater level over the long run.
And this makes it important to bring diversity in the revenue, which means that you need to have many ways by which your company would earn money.
This could mean developing new avenues of revenues through royalties through franchising and licensing, selling new products and services or even acquiring new capabilities to expand into new but related areas.
Get the Right Advise
Preparing your business for fundraising is a full time effort. Preparing yourself for the journey is important and is best done with a team who can help you prepare your journey.
In the end it is not merely about putting your business in front of an investor but more about how much value, both tangible and intangible, you can bring to the table for an investor.
Working with a team with experience in fundraising, branding, IP creation and business strategy development can save business owners a lot of time and disappointment as they embark on this exciting journey!