Start-up lessons: When to raise capital
Here is a question that many start-ups and high growth businesses face - when is the right time to raise capital?Coming up with an idea for a new business is exhilarating, the light bulb switches on, you know exactly why you want to be in business and your motivation kicks into the highest gear. ?The hard work is about to execute is about to begin.The annoying part, an idea is well just an idea - it only becomes an innovation once commercialised. It's the commercialisation process that's scary and it's the commercialisation process that sends millions of good ideas to the depths of our brains, never to reemerge.If those ideas escaped into the real world as seeds for a start-up business the would would change for the better. That's right, the idea could lead to the next Uber,?Atlasssian or AirBnB. Just one problem though, starting a new business requires capital, and sometimes allot of it. Don't worry though, everyone appears to be getting funded these days, Angels are active and VC companies are cashed up. Right?Well, that's what the media would have us believe, but the reality is very different. Did you know that Uber didn't start with VC funding, no for Uber's founders its the second time lucky, they sold very successful businesses that provided millions in start-up capital. It was clever marketing and some clever spin on negative events that turned Uber into the powerful ridesharing business it is today.Our world is full of start-up business success stories, but today, I wanted to share with you an experience of a start-up that failed. I was not the principal founding shareholder, but I was there at the start, putting effort in to get the founders idea out off minds,?off the table and into the real world. The reason I'm sharing this story, its easy to bask in the successes but for many success only came around from failures in the past - often many failures. It's what you do with these failures that counts.For a snippet of the background, the idea was presented to me by an already successful business person who was looking to make a change. The idea was an idea that when pitched to some of the biggest Technology Venture Capital companies in Australia was received well. Some well known business people to join the board and contribute capital right out of the block. So why you ask, am I writing about a start-up failure rather than a start-up success.The answer to that question is simple really. Raising capital if you are the one knocking on the doors can be time-consuming and expensive - especially when your target is in the millions.Having raised capital before, the decision was made to launch an information memorandum that could be provided to high net worth individuals, family offices and managed by our Corporate Advisors.?The process to prepare the documents for this capital raising took a few months to assemble, all of this to create trust and a compelling investment story.Once the documents were out in the market, meetings with all of those professional investors started many extending to two or more rounds. Hopes were raised, considerable interest generated and pivoting was occurring when investors provided their feedback. ?Amongst the exhaustion and what seemed to be a never-ending presentation, we received plenty of yes's too. Just to keep us going.A few respected business people even offered to join our board, putting a face behind the capital and offering us exciting learning opportunities. Armed with some pictures of respected board members in our Information Memorandum, we were ready to close the deal and get the business off paper and into the real world.?Trouble was in the six months to get us to this stage competitor with the early stages of a product in the market began to make moves, a competitor with an inferior solution to our of course.We still held on to the glimmer of hope, despite the news stories of our competitor raising capital, that the last person would say yes - for many of our investors were waiting on the first big more before they would write the cheque.In the seventh month, it all came crashing down - we received our first definite "No". Ouch, people are allowed their opinion, but hang-on why?In the seven months we had been out raising capital for our start-up business, our principle founder spotted the dollar signs. You see despite warnings from his team, the founder with his name behind the business forgot a key aspect of business. An idea is just an idea until it's commercialised.In our case, the VC's were being presented an extensive Information Memorandum, which made them warm and fuzzy, but there was no product. Nothing was available that the VC's could touch and feel - we had no signup list that proved interest.? We didn't even have a developer on our team at the start despite the product being a cloud software that would make small businesses life just a bit easier.With the pleasure of hind site, the writing was on the wall early. ?It's quite easy to see why VC's were eager to get on board but not as the first investor.?We had no product; we were asking VC's to invest in the words of an Information Memorandum (fancy business plan) and to trust our financial projections. Financial projections that are proved wrong on day one. We couldn't point the VC's towards any customers who were already or ready to use our cloud based software tool, and we could give them any comfort that it'll work.Sure our idea had potential - we just executed upside down. Adding weight to our business idea, our competitor who had a similar product but different target and approach raised more than US$40 million all in the time we couldn't firmly raise $1.What's the difference, it's simple, the competitor started out small, created a product, developed a customer base, and then attracted venture capital funding.?They are a living example of the amazing part of growing a business -?once you can show success and potential, you will be recognised - you will even be in the position to say no.Make no mistake capital raising is an important aspect of a founding and then growing business. Just remember, you can have a customer funded business model and the earlier you raise capital the more control you are going to give up. It's just a factor of how Venture Capitalists value a business and reduce their risk.The lesson for any start-up business - if you can scrape together funding to get your Minimum Viable Product (MVP) developed and in the market do it. Your MVP may not be the product of your dreams but you will have a commercialised idea. ?You will be proved that your hypothesis can be converted to a real business,?be able to generate buzz in the market, be in a position test what works and be able to generate trust with investors with a wow factor.Importantly, you'll be confident and be able to explain the reasons for capital funding and what will happen with that funding and prove that you have a commercialised idea.Spending time with the Venture Capitalists, Capital firms, Advisors to Family Offices and more, there is capital out there for the right idea. Most are in the part risk adverse as you don't make money by loosing it - In the dot-com boom era of the late 90's early 2000's the cash was thrown at ideas, today you need a bit more substance.
Who know's, you may be the one with VC's knocking at your door!!!