Simply put, a capital raising process will fail for one of three reasons:
- Investors don’t like the valuation
- Investors don’t like the story
- Investors don’t like the management team.
This was one of the key pieces of advice from experienced CEO and Director Al Monro, who was a guest speaker at the Invercargill block course. Al was formaly the CEO of Next Window (acquired by Smart Technology) and is currently a director on a number of New Zealand’s exciting growth stage technology companies.
Al was able to speak with authority on the topic having been involved with Next Window at an early stage and having to raise a number of rounds of capital for the company, as well as supporting the companies he advises.
When we dig down into the detail, here is what these three reasons relate to:
- Valuation: What is the company’s value and is it good value for an investor, when considering a number of factors:
- The size of the market opportunity.
- The current state of the company’s competitive advantage. The weaker it is, the lower the valuation expectation.
- The % of ownership the investor will get for their dollars.
- The further capital required to grow the business in the future and the dilution that will occur their shareholding.
- Story: What is your proposition to the market?
- How well can you articulate the problem?
- How comprehensive is your understanding of the problem…data, data, data!!
- How well does your solution address the problem and what data do you have to prove it solves the problem? HINT: The only data investors care about is ‘CUSTOMER DATA.’
- What do you need the money for and what milestones will it help you achieve?
- Management team
- Presenting a team story is important; who is on the team, what is their background.
- The team should listen and take advice, accepting challenges from investors and be willing to work on issues they identify.
- Does the team communicate well, with genuine intent and clarity?
- Attitude of the team toward investors; any hint of cynesism or disrespect from the team and investors will be wary.
Regarding the finance component of the block course, there were two key messages: CASH IS KING and that companies should develop a milestone based cashflow to support their investment proposition. Cash is king is not a new concept, but the start-up community will hammer this point, no matter where you are in the world. A start-up must be able to manage their cashflow and integrate their cash position into every decision they make.
During Sprout’s weekly calls with companies, we do our best to assess the cash position against the project plan at the start of every meeting. It should be ingrained into weekly and daily thinking.
Raising seed and angel capital
At Sprout we focus a lot on mapping out what a company wants to achieve (milestones) and how much cash they need to achieve it. Investors want to know that their money is going into achieving specific milestones that are inceasing the value of their asset (the shares in a company).
Governance was also discussed at length during the block course. As a general rule, when you raise external capital from investors the company should look to implement strong governance processes.
At Sprout we talk about governance at two levels:
- Advisory boards: Advisory boards can begin as soon as you get started on the entrepreneurial journey. The board can be made of between one to ten members. The key requirement is for start-ups to understand what is the critical expertise the company needs. These could include: product development, intellectual property, customer understanding, capital raising and many other things.
- Formal company boards: These boards have the responsibility to protect and enhance shareholder wealth. The directors have a fiduciary duty of care to shareholders. At the formative stages of a company these boards are normally made up of representatives of the majority shareholders. As new shareholders are added, the board will be reconfigured to represent those shareholders.
We were very fortunate to have Marcel van den Assum, Chairman of the Angel Investment Association and experienced growth company Chairman and Director, share his thoughts on what the focus of governance should be for young companies.
The key take aways were:
- At an early stage, start-up governance should be focused around what the company needs to achieve. The advisors should have the capacity to add value to the company in more ways than just reviewing financial performance. Marcel shared examples of travelling to meet customers with companies, introducing companies to key people, helping review contractual arrangements and helping identify and onboard key people into the company.
- He suggested that start-ups work hard to clearly articulate the specifics of what they need of the advisor in terms of hours involved and activities required, so the advisor or director can make a decision.
- Finding good advisors and directors takes time and wont happen on a first meeting. He suggested that it is never too early to just speak with people about being in governance roles in the business. Someone of a really high quality may take 12-18 months to get to know the founders and the business. A key way to get good people involved is by allowing them to get to know you and your business and demonstrate you listen to them and take their advice on board.
Lots to take in on these topics and we only just scratch the surface of what could be covered, but hopefully this provides an idea of some key considerations and ideas that we offer via the Sprout programme.
If you have any questions on capital raising and governance, feel free to get in contact via firstname.lastname@example.org.