Fundamentals of Funding
"Raising capital takes twice as long, is twice as hard, and costs twice as much then you think it will so plan for this." - Bridget Unsworth - Investment Director, NZ Venture Investment Fund
This month, we've been working on the A-Z's of startup funding in an attempt to demystify the different options to consider and get some good grounding on the pros and cons of each mode of raising capital. One thing seemed clear and that is that NZ's capacity to fund at an early stage is pretty good as long as the value proposition is strong and founders have good capability.
The other thing that stood out was how fashionable raising capital has become. To loosely paraphrase Ben Kepes, how about we look at good old fashioned ways of growing a business like selling product that people want and pay for and slowly growing your own capital? Bootstrapping is refreshingly honest and is probably the smartest and cleanest way forward for many startups. It ain't glamorous but neither is being heavily in debt, searching for traction, and under great pressure from external funders.
Of course, many startups whose MVP requires R+D, innovation, or physical prototyping may not be able to pursue this course without at least a little peer to peer funding in which case, this newsletter is for you!
: ) Marian and the Ministry of Awesome team.
Ten Takeaways of Funding
We recently caught up with startup investor and influencer, Ben Kepes; Canterbury Angels chairman, Paul Claridge; experienced business banker and financial advisor, Dave Armstrong; and Bridget on the subject of funding.
Here’s their ten takeaways on startup funding:
Before you even think of external funding, consider simply bootstrapping.
Fellow well known bootstrappers include GoPro and Atlassian - it ain’t glamorous or fashionable but growing your business through steady customer acquisition and sales revenue ensures a strong value proposition and means you don’t lose equity.
What is the purpose of the fund raise? Do you need to invest in R&D? Look first at grant options like Callaghan Innovation. Smaller amounts? Consider peer to peer funding or crowdfunding.
Are you at Early stage? Consider angel investors who will want to see a proven value proposition and at least some early traction. Large amounts? Venture capital often means losing equity and control.
Think about your exit strategy and how each funding option can impact that strategy.
Look at the people you are thinking of taking money from - do your due diligence - will they be a strong long term business partners?
Large amounts? Venture capital often means losing equity and control.
Raising capital will always take twice as long, will be twice as hard, and will cost twice as much as you expect.
Don’t raise money too soon - BOOTSTRAP!
Never raise money under pressure - the time to fundraise is not when you’re on your last month of runway.
Funding Advice from a Local Startup
Q: Where are you in your fundraising trajectory and how difficult has this process been?
A: We have just completed our first angel investment round, having previously supported the business through family and friends investment alongside grants. The journey so far has been a long one which brings its unique problems with budgets being strained. Our R&D had to slow during the investment round, so we could make the time to answer various questions for stakeholders.
Q: How did you prepare for your first meeting?
A: Our first meeting was a showcase where we had to present to an audience of 900 investors, so it was a little different to your average pitch presentation. To support our pitch we prepared diligence files detailing our IP, hiring plan, financials, team, technology and company strategy. This was an enormous support as many of the files requested by potential investors following our pitch were ready to hand over straight away, keeping everyone engage and moving towards the ultimate goal of funding the business.
Q: What’s the single biggest challenge you’ve faced in your fundraising journey?
A: We had very little experience of the fundraising process and every 'expert' we turned to had a different recommendation for how to structure shareholder's agreements and other key processes. It took a lot of learning and time to eventually form one that we could be happy with.
Q: What’s been the most helpful solution to your funding challenges? Or are there any choices you wish you had made differently?
A: For us it hasn't come down to just one solution. The most important thing I can recommend is to ensure you are totally prepared. You'll need:
-A good understanding of who you’re talking to and what you’re looking for in an investor
-Full time commitment to the raising of funds (one employee dedicated but supported by others)
-Completely independent mentors who you trust and have been through the funding process
-Strictly observe document deadlines and ensure plenty of time for internal and external review
Q: If you knew what you know now at the start of your funding journey, what would you do differently?
A: We would have a clearer profile and idea of where we want to get the investment from and how that connects with our long term strategy. Additionally, we would set a strict but realistic deadline for the investment round. When the funding process takes 6 months, which it can easily, the company funds start getting slim which obviously impacts every part of the business.
Q: Who or what is your inspiration?