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Five things to consider when raising growth capital for a startup

30.09.2020
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Businesses need money to grow – that’s just a plain fact. The rise of the success of global startups, and the emergence of a global trend of venture capitalists have created a culture where business owners believe that in order to start a business, they need to raise capital.

While that is certainly a debatable point  – there are many great businesses out there which grew into titans by growing one invoice at a time – raising capital certainly allows a business to launch and scale at a faster rate than self-funding.

With that in mind, let’s take a few minutes to look at a few things to consider when looking to raise capital:

What Capital do you Need?

This is the first question you will be asked by a potential funder and certainly the first thing you should be asking when building a business case for investment. How much money do I need and what would I do with the money we’ve raised?

Too often the raising itself is seen as the metric of success. But in fact, its what you do with that money that will (hopefully) lead to your success. This sounds simple, but it’s often over-looked.

Do you share common vision and values?

In most cases, people that are in the business of lending money are good at making money. If you have excess cash for investment or if you’ve made your business that of making your money work, then we can safely assume you’re not a novice to business.

But what entrepreneurs often overlook (and not at their fault, as things can be stressful when cash is tight) is that there is more to business than just making money. In your mind you have a vision for your business and you have values which create your company’s culture. A funder is essentially a business partner and you need to ensure that all partners share the same vision and values, otherwise the business that you love could start looking like a different animal quickly.

Is your company structure clear?

As I mentioned before, raising capital often means adding a business partner, and adding a business partner always comes with some aspect of complexity on the legal side of things. At its simplest, you will need to issue or sell shares, allocate that capital correctly and evidence the transaction with the correct documentation. Without this process running properly, you’re looking for a dispute down the line.

An all-too-often overlooked aspect of business management is the company secretarial work. You need to ensure your business records and share register are recorded correctly and safely and that everyone is extremely clear on what they own and how they own it. The good news is that there is great software out there such as InfoDocs which can help you through this critical step.

The Due Diligence Process

When someone invests into your company they are going to have questions – lots of them. This process of asking a company questions is called the due diligence process. An investor is going to want to understand how the accounting is structured, any risks associated with the product and if legal compliance has been thought through.

Failing a due diligence process could mean missing out on an investment, so if you’re thinking about raising capital, then its certainly worth starting to get ready for your due diligence early. This can mean ensuring that your accounting is clear, compliance is sorted and even that your founders have employment contracts.

Does your business have scalability?

The key consideration underpinning an investment business model is that investors want to see a return on their capital. Unless it’s a family member (or someone extremely compassionate), an investor is not interested in whether your business works, but whether each Rand which they invested can double be (or hopefully more) from the investment.

For this reason, investors are looking for businesses with scalability potential. That’s one of the reasons that selling software is such a good business model – you create it once, but it can be sold an infinite amount of times with no or very little additional cost.

Unfortunately, not all business models have scalability. Law firms as an example are tough to invest in, as each lawyer can only really sell 8 – 10 hours in a day. In order to sell more hours you need to employ more lawyers. While law firms are certainly businesses with growth potential, they don’t have the same appeal as say Facebook or Dropbox.

A question you need to ask before considering investment, is whether you can actually give your investor a return on their money and how soon. More specifically, can you actually take their money and not just pay it back, but grow it more than they could have by leaving it in the bank. Even if you manage to convince someone to invest, if your business doesn’t have scalability your investor relationship is going to become frustrating fast.

Conclusion

These are 5 things to think about when considering an investment in your business. Raising capital has become a massive trend in business, and rightfully so, because tech-businesses have massive upswing potential. But too often raising capital can be seen as a sign of success instead of an accomplishment on the route to success.

Eitan Stern – 17 September 2020

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